financial statements. For example, under IAS 16 the subsidiary may carry property
at cost while the group uses the revaluation model, or vice versa. [IFRS 1.D16].
IFRS 1 does not elaborate on exactly what constitutes ‘consolidation adjustments’ but in
our view it would encompass adjustments required in order to harmonise a subsidiary’s
accounting policies with those of the group, as well as purely ‘mechanical’ consolidation
adjustments such as the elimination of intragroup balances, profits and losses.
The following example, which is based on the guidance on implementation of IFRS 1,
illustrates how an entity should apply these requirements. [IFRS 1.IG Example 8].
First-time
adoption
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Example 5.32: Parent adopts IFRSs before subsidiary
Entity A presents its (consolidated) first IFRS financial statements in 2012. Its foreign subsidiary B, wholly
owned by Entity A since formation, prepares information under IFRSs for internal consolidation purposes
from that date, but Subsidiary B will not present its first IFRS financial statements until 2019.
If Subsidiary B applies option (a) above, the carrying amounts of its assets and liabilities are the same in
both its opening IFRS statement of financial position at 1 January 2018 and Entity A’s consolidated
statement of financial position (except for adjustments for consolidation procedures) and are based on
Entity A’s date of transition.
Alternatively, Subsidiary B may apply option (b) above, and measure all its assets or liabilities based on its
own date of transition to IFRSs (1 January 2018). However, the fact that Subsidiary B becomes a first-time
adopter in 2019 does not change the carrying amounts of its assets and liabilities in Entity A’s consolidated
financial statements.
Under option (b) a subsidiary would prepare its own IFRS financial statements,
completely ignoring the IFRS elections that its parent used when it adopted IFRSs for
its consolidated financial statements.
Under option (a) the numbers in a subsidiary’s IFRS financial statements will be as close
to those used by its parent as possible. However, differences other than those arising
from business combinations will still exist in many cases, for example:
• a subsidiary may have hedged an exposure by entering into a transaction with a
fellow subsidiary. Such transaction could qualify for hedge accounting in the
subsidiary’s own financial statements but not in the group’s consolidated financial
statements; or
• a pension plan may have to be classified as a defined contribution plan from the
subsidiary’s point of view, but is accounted for as a defined benefit plan in the
group’s consolidated financial statements.
The IASB seems content with the fact that the exemption will ease some practical
problems, [IFRS 1.BC62], though it will rarely succeed in achieving more than a moderate
reduction of the number of reconciling differences between a subsidiary’s own
reporting and the numbers used by its parent.
More importantly, the choice of option (a) prevents the subsidiary from electing to apply
all the other voluntary exemptions offered by IFRS 1, since the parent had already made
the choices for the group at its date of transition. Therefore, option (a) may not be
appropriate for a subsidiary that prefers to use a different exemption (e.g. fair value as
deemed cost) for property, plant and equipment due, for example, to a tax reporting
advantage. Also, application of option (a) would be more difficult when a parent and its
subsidiary have different financial years. In that case, IFRS 1 would seem to require the
IFRS information for the subsidiary to be based on the parent’s date of transition to
IFRSs, which may not even coincide with an interim reporting date of the subsidiary;
the same applies to any joint venture or associate.
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Example 5.33 below explains interaction between D16 (a) of IFRS 1 (i.e. option (a) above)
and the business combination exemptions in Appendix C of IFRS 1 applied by its parent.
Example 5.33: Interaction between D16 (a) of IFRS 1 and the business
combination exemptions applied by its parent
Entity S is a subsidiary of Entity P. Entity G was acquired by Entity S in 2014 and Entity S accounted for the
acquisition under its previous GAAP. Entity P transitioned from previous GAAP to IFRS in 2015 and decided
to apply the business combination exemption in Appendix C of IFRS 1 to this acquisition. Entity S adopted
IFRS from its transition date of 1 January 2018 and chose to apply D16 (a) of IFRS 1.
Can Entity S apply IFRS 3 retrospectively to the acquisition of Entity G in its first IFRS financial statements?
In our opinion, Entity S cannot apply IFRS 3 to the acquisition of Entity G because, applying D16 (a) of
IFRS 1, a subsidiary which becomes a first-time adopter later than its parent measures its assets and liabilities
at the carrying amount that would be included in the parent`s consolidated financial statements, based on the
parent`s date of transition to IFRS. Therefore, Entity S cannot apply IFRS 3 retrospectively, meeting the
primary objective of using the D16 (a) election in keeping one set of books.
A subsidiary may become a first-time adopter later than its parent, because it previously
prepared a reporting package under IFRSs for consolidation purposes but did not present a
full set of financial statements under IFRSs. The above election may be ‘relevant not only
when a subsidiary’s reporting package complies fully with the recognition and measurement
requirements of IFRSs, but also when it is adjusted centrally for matters such as review of
events after the reporting period and central allocation of pension costs.’ [IFRS 1.IG31].
Adjustments made centrally to an unpublished reporting package are not considered to be
corrections of errors for the purposes of the disclosure requirements in IFRS 1. However, a
subsidiary is not permitted to ignore misstatements that are immaterial to the consolidated
financial statements of the group but material to its own financial statements.
If a subsidiary was acquired after the parent’s date of transition to IFRSs then it cannot apply
option (a) because there are no carrying amounts included in the parent’s consolidated
financial statements, based on the parent’s date of transition. Therefore, the subsidiary is
unable to use the values recognised in the group accounts when it was acquired, since push-
down of the group’s purchase accounting values is not allowed in the subsidiary’s financial
statements. However, if the subsidiary had recognised those amounts in its previous GAAP
financial statements, it may be able to use the same amounts as deemed costs under IFRSs
pursuant to the ‘event-driven’ deemed cost exemption (see 5.5.2 above).
The exemption is also available to associates and joint ventures. This means that in many
cases an associate or joint venture that wants to apply option (a) will need to choose which
shareholder it considers its ‘parent’ for IFRS 1 purposes if more than one investor/joint
venturer have already applied IFRS and determine the IFRS carrying amount of its assets
and liabilities by reference to that parent’s date of transition to IFRSs.
5.9.1.A
Cumulative
translation differences
The IFRS Interpretations Committee considered whether, applying paragraph D16 of
IFRS 1, a subsidiary that becomes a first-time adopter later than its parent and has
foreign operations, on which translation differences are accumulated as part of a
separate component of equity, can recognise the cumulative translation differences at
an amount that would be included in the parent`s consolidated financial statements,
based on the parent`s date of transition to IFRS.
First-time
adoption
293
In September 2017, the Committee reached the conclusion that the cumulative
translation differences are neither assets nor liabilities while the requirement applies to
assets and liabilities and hence the requirement does not permit the subsidiary to
recognise the cumulative translation differences at the amount as above. The
Committee also concluded that the requirement cannot be applied to the cumulative
translation differences by analogy because paragraph 18 of IFRS 1 clearly prohibits an
entity from applying the exemptions in IFRS 1 by analogy to other items.
Accordingly, in this circumstance the subsidiary accounts for the cumulative translation
differences applying paragraphs D12 – D13 of IFRS 1 (see 5.7 above).
However, in December 2017 the Board discussed the Committeès recommendation to
propose an amendment to IFRS 1 to require a subsidiary that applies paragraph D16 (a)
of IFRS 1 to measure cumulative translation differences using the amounts reported by
its parent, based on the parent`s date of transition to IFRS (subject to any adjustments
made for consolidation procedures and for the effects of the business combination in
which the parent acquired the subsidiary). This amendment will be included in the next
annual improvements to IFRS.
5.9.2
Parent becomes a first-time adopter later than its subsidiary
If a parent becomes a first-time adopter later than its subsidiary, the parent should, in
its consolidated financial statements, measure the subsidiary’s assets and liabilities at the
carrying amounts that are in the subsidiary’s financial statements, after adjusting for
consolidation and for the effects of the business combination in which the entity
acquired the subsidiary. The same applies for associates or joint ventures, substituting
equity accounting adjustments. [IFRS 1.D17].
Unlike other first-time adoption exemptions, this exemption does not offer a choice
between different accounting alternatives. In fact, while a subsidiary that adopts IFRSs
later than its parent can choose to prepare its first IFRS financial statements by
reference to its own date of transition to IFRSs or that of its parent, the parent itself
must use the IFRS measurements already used in the subsidiary’s financial statements,
adjusted as appropriate for consolidation procedures and the effects of the business
combination in which it acquired the subsidiary. [IFRS 1.BC63]. However, this exemption
does not preclude the parent from adjusting the subsidiary’s assets and liabilities for a
different accounting policy, e.g. cost model or revaluation model for accounting for
property, plant and equipment.
The following example, which is based on the guidance on implementation of IFRS 1,
illustrates how an entity should apply these requirements. [IFRS 1.IG Example 9].
Example 5.34: Subsidiary adopts IFRSs before parent
Entity C presents its (consolidated) first IFRS financial statements in 2019. Its foreign subsidiary D, wholly
owned by Entity C since formation, presented its first IFRS financial statements in 2014. Until 2019,
Subsidiary D prepared information for internal consolidation purposes under Entity C’s previous GAAP.
The carrying amounts of Subsidiary D’s assets and liabilities at 1 January 2018 are the same in both Entity C’s
(consolidated) opening IFRS statement of financial position and Subsidiary D’s own financial statements
(except for adjustments for consolidation procedures) and are based on Subsidiary D’s date of transition to
IFRSs. The fact that Entity C becomes a first-time adopter in 2019 does not change the carrying amounts of
Subsidiary D’s assets and liabilities in the consolidated group financial statements.
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When a subsidiary adopts IFRSs before its parent, this will limit the parent’s ability to
choose first-time adoption exemptions in IFRS 1 freely as related to that subsidiary, as
illustrated in the example below. However, this does not mean that the parent’s ability
to choose first-time adoption exemptions will always be limited. For example, a parent
may still be able to deem a subsidiary’s cumulative translation differences to be zero
because IFRS 1 specifically states that under the option ‘the cumulative translation
differences for all [emphasis added] foreign operations are deemed to be zero at the
date of transition to IFRSs’ (see 5.7 above). [IFRS 1.D13].
Example 5.35: Limited ability to choose first-time adoption exemptions
Entity E will adopt IFRSs for the first time in 2019 and its date of transition is 1 January 2018. Subsidiary F
adopted IFRSs in 2014 and its date of transition was 1 January 2013:
(a) Subsidiary F and Entity E both account for their property, plant and equipment at historical cost under IAS 16.
Upon first-time adoption, Entity E may only adjust carrying amounts of Subsidiary F’s assets and
liabilities to adjust for the effects of consolidation and business combinations. Entity E can therefore not
apply the exemption to use fair value as deemed cost for Subsidiary F’s property, plant and equipment
as at its own date of transition (1 January 2018);
(b) Subsidiary F accounts for its property, plant and equipment at revalued amounts under IAS 16, while
Entity E accounts for its property, plant and equipment at historical cost under IAS 16.
In this case, Entity E would not be allowed to apply the exemption to use fair value as deemed cost of
Subsidiary F’s property, plant and equipment because paragraph D17 of IFRS 1 would only permit adjustments
for the effects of consolidation and business combinations. Although a consolidation adjustment would be
necessary, this would only be to adjust Subsidiary F’s revalued amounts to figures based on historical cost.
(c) Subsidiary F may have deemed the cumulative translation difference for all its foreign subsidiaries to be
zero at its date of transition (i.e. 1 January 2013).
When Entity E adopts IFRSs it can deem Subsidiary F’s cumulative translation differences to be zero at
its date of transition (1 January 2018).
5.9.3
Implementation guidance on accounting for assets and liabilities of
subsidiaries, associates and joint ventures
The requirements of IFRS 1 for a parent and subsidiary with different dates of transition
do not override the following requirements of IFRS 1: [IFRS 1.IG30]
• the parent’s election to use the business combinations exemption in Appendix C
discussed at 5.2 above, which applies to assets and liabilities of a subsidiary
acquired in a business combination that occurred before the parent’s date of
transition to IFRSs. However, the rules summarised at 5.9.2 above (parent adopting
IFRSs after subsidiary) apply only to assets acquired and liabilitie
s assumed by the
subsidiary after the business combination and still held and owned by it at the
parent’s date of transition to IFRSs;
• to apply the requirements in IFRS 1 in measuring all assets and liabilities for which
the provisions in paragraphs D16 and D17 of IFRS 1 are not relevant (for example,
the use of the exemption in D16(a) to measure assets and liabilities at the carrying
amounts in the parent’s consolidated financial statements does not affect the use
of the exemption in D12-13 to deem the cumulative translation differences for all
foreign operations are zero at its date of transition, discussed in 5.7 above); and
• a first-time adopter must give all the disclosures required by IFRS 1 as of its own
date of transition to IFRSs – see 6 below.
First-time
adoption
295
5.9.4
Adoption of IFRSs on different dates in separate and consolidated
financial statements
An entity may sometimes become a first-time adopter for its separate financial
statements earlier or later than for its consolidated financial statements. Such a situation
may arise, for example, when a parent avails itself of the exemption under paragraph 4
of IFRS 10 from preparing consolidated financial statements and prepares its separate
financial statements under IFRSs. Subsequently, the parent may cease to be entitled to
the exemption or may choose not to use it and would, therefore, be required to apply
IFRS 1 in its first consolidated financial statements.
Another example might be that, under local law, an entity is required to prepare its
consolidated financial statements under IFRSs, but is required (or permitted) to prepare
its separate financial statements under local GAAP. Subsequently the parent chooses,
or is required, to prepare its separate financial statements under IFRSs.
If a parent becomes a first-time adopter for its separate financial statements earlier or
later than for its consolidated financial statements, it must measure its assets and
liabilities at the same amounts in both financial statements, except for consolidation
adjustments. [IFRS 1.D17]. As drafted, the requirement is merely that the ‘same’ amounts
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 59
