be used, without being explicit as to which set of financial statements should be used as
the benchmark. However, it seems clear from the context that the IASB intends that the
measurement basis used in whichever set of financial statements first comply with IFRSs
must also be used when IFRSs are subsequently adopted in the other set.
5.9.5
Application to investment entities under IFRS 10
IFRS 10 requires a parent that is an ‘investment entity’ as defined in the standard (see
Chapter 6) to account for most of its subsidiaries at fair value through profit or loss in
its consolidated financial statements rather than through consolidation. This exception
from normal consolidation procedures does not apply to:
• a parent entity that owns a subsidiary which is an investment entity but the parent
itself is not an investment entity; [IFRS 10.33] or
• a parent that is an investment entity in accounting for subsidiary that is not itself
an investment entity and whose main purpose and activities are providing services
that relate to the investment entity’s investment activities. [IFRS 10.32].
In IFRS 1, there are exemptions relating to a parent adopting IFRSs earlier or later than
its subsidiary. Below, we deal with situations where:
• a subsidiary that is required to be measured at fair value through profit or loss
adopts IFRSs after its parent which is an investment entity (see 5.9.5.A below); or
• a parent that is not an ‘investment entity’ adopts IFRSs after a subsidiary which is
an investment entity (see 5.9.5.B below).
5.9.5.A
Subsidiary adopts IFRSs after investment entity parent
In this case, the subsidiary that is required to be measured at fair value through profit or
loss is required to measure its assets and liabilities under the general provisions of
IFRS 1, based on its own date of transition to IFRSs (i.e. option (b) in 5.9.1 above),
[IFRS 1.D16(a)], rather than (as would generally be permitted under option (a) in 5.9.1 above)
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by reference to the carrying value of its assets and liabilities in the consolidated financial
statements of its parent, which is based on the fair value of the subsidiary’s equity. This
effectively prevents the accounting anomaly of the subsidiary measuring its net assets
at the fair value of its own equity on transition to IFRSs.
5.9.5.B
Non-investment entity parent adopts IFRSs after investment entity
subsidiary
In this case, the parent is required to consolidate its subsidiaries in the normal way.
[IFRS 1.D17]. If the provisions in 5.9.2 above were to be applied, the effect would be that
the parent would bring any investments in subsidiaries accounted for at fair value
through profit or loss by the subsidiary into the parent’s consolidated statement of
financial position at their fair value. This result would be contrary to the intention of
the investment entities concept that such an accounting treatment is applied only by a
parent that is itself an investment entity.
5.10 Compound financial instruments
IAS 32 requires compound financial instruments (e.g. many convertible bonds) to be
split at inception into separate equity and liability components on the basis of facts and
circumstances existing when the instrument was issued. [IAS 32.15, 28]. If the liability
component is no longer outstanding, a full retrospective application of IAS 32 would
involve identifying two components, one representing the original equity component
and the other (retained earnings) representing the cumulative interest accreted on the
liability component, both of which are accounted for in equity (see Chapter 43). A first-
time adopter does not need to make this possibly complex allocation if the liability
component is no longer outstanding at the date of transition to IFRSs. [IFRS 1.D18]. For
example, in the case of a convertible bond that has been converted into equity, it is not
necessary to make this split.
However, if the liability component of the compound instrument is still outstanding at the
date of transition to IFRSs then a split is required to be made (see Chapter 43). [IFRS 1.IG35-IG36].
5.11 Designation of previously recognised financial instruments
The following discusses the application of the exemption in D19 through D19C
regarding designation of previously recognised financial instruments to certain financial
assets and financial liabilities.
5.11.1
Designation of financial asset as measured at fair value through
profit or loss
IFRS 9 permits a financial asset to be designated as measured at fair value through profit
or loss if the entity satisfies the criteria in IFRS 9 at the date the entity becomes a party
to the financial instrument. [IFRS 9.4.1.5].
Paragraph D19A of IFRS 1 allows a first-time adopter to designate a financial asset as
measured at fair value through profit or loss on the basis of facts and circumstances that
exist at the date of transition to IFRSs, [IFRS 1.D19A], although paragraph 29 of IFRS 1
would require certain additional disclosures (see 6.4 below).
First-time
adoption
297
5.11.2
Designation of financial liability at fair value through profit or loss
IFRS 9 permits a financial liability to be designated as a financial liability at fair value
through profit or loss if the entity meets the criteria in IFRS 9 at the date the entity
becomes a party to the financial instrument. [IFRS 9.4.2.2].
Paragraph D19 of IFRS 1 allows a first-time adopter to designate, at the transition date,
a financial liability as measured at fair value through profit or loss provided the liability
meets the criteria in paragraph 4.2.2 of IFRS 9 at that date, although paragraph 29A of
IFRS 1 would require certain additional disclosures (see 6.4 below).
5.11.3
Designation of investment in equity instruments
At initial recognition, an entity may make an irrevocable election to designate an
investment in an equity instrument not held for trading or contingent consideration
recognised by an acquirer in a business combination to which IFRS 3 applies as at fair
value through other comprehensive income in accordance with IFRS 9. [IFRS 9.5.7.5].
Paragraph D19B of IFRS 1 allows a first-time adopter to designate an investment in such
an equity instrument as at fair value through other comprehensive income on the basis
of facts and circumstances that exist at the date of transition to IFRSs.
5.11.4
Determination of an accounting mismatch for presenting a gain or
loss on financial liability
IFRS 9 requires a fair value gain or loss on a financial liability that is designated as at fair
value through profit or loss to be presented as follows unless this presentation creates
or enlarges an accounting mismatch in profit or loss. [IFRS 9.5.7.7].
• the amount of change in the fair value of the financial liability that is attributable
to changes in the credit risk of that liability should be presented in other
comprehensive income
• the remaining amount of change in the fair value of the liability should be
presented in profit or loss.
Paragraph
D19C of IFRS 1 requires a first-time adopter to determine whether the
treatment in paragraph 5.7.7 of IFRS 9 would create an accounting mismatch in profit or
loss on the basis of facts and circumstances that exist at the date of transition to IFRSs
(see Chapter 44).
5.11.5
Designation of contracts to buy or sell a non-financial item
IFRS 9 allows some contracts to buy or sell a non-financial item to be designated at
inception as measured at fair value through profit or loss. [IFRS 9.2.5]. Despite this
requirement, paragraph D33 of IFRS 1 allows an entity to designate, at the date of
transition to IFRSs, contracts that already exist on that date as measured at fair value
through profit or loss but only if they meet the requirements of paragraph 2.5 of
IFRS 9 at that date and the entity designates all similar contracts at fair value through
profit or loss.
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5.12 Fair value measurement of financial assets or financial liabilities
at initial recognition
First-time adopters are granted similar transition relief in respect of the day 1 profit
requirements of IFRS 9 as is available to existing IFRS reporters. [IFRS 1.BC83A].
Consequently, first-time adopters may apply the requirements of paragraph B5.1.2A(b)
of IFRS 9 about a deferral of day 1 gain/loss prospectively to transactions entered into
on or after the date of transition to IFRSs. [IFRS 1.D20].
5.13 Decommissioning liabilities included in the cost of property,
plant and equipment
5.13.1
IFRIC 1 exemption
Under IAS 16 the cost of an item of property, plant and equipment includes ‘the initial
estimate of the costs of dismantling and removing the item and restoring the site on
which it is located, the obligation for which an entity incurs either when the item is
acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.’ [IAS 16.16(c)]. Therefore, a
first-time adopter needs to ensure that property, plant and equipment cost includes an
item representing the decommissioning provision as determined under IAS 37.
[IFRS 1.IG13].
An entity should apply IAS 16 in determining the amount to be included in the cost
of the asset, before recognising depreciation and impairment losses which cause
differences between the carrying amount of the decommissioning liability and the
amount related to decommissioning costs to be included in the carrying amount of
the asset.
An entity accounts for changes in decommissioning provisions in accordance with
IFRIC 1 but IFRS 1 provides an exemption for changes that occurred before the date of
transition to IFRSs and prescribes an alternative treatment if the exemption is used.
[IFRS 1.IG13, IG201-IG203]. In such cases, a first-time adopter should:
(a) measure the decommissioning liability as at the date of transition in accordance
with IAS 37;
(b) to the extent that the liability is within the scope of IFRIC 1, estimate the amount
that would have been included in the cost of the related asset when the liability
first arose, by discounting it to that date using its best estimate of the historical risk-
adjusted discount rate(s) that would have applied for that liability over the
intervening period; and
(c) calculate the accumulated depreciation on that amount, as at the date of transition
to IFRSs, on the basis of the current estimate of the useful life of the asset, using
the entity’s IFRS depreciation policy. [IFRS 1.D21].
First-time
adoption
299
Example 5.36: Decommissioning component in property, plant and equipment
Entity A’s date of transition to IFRSs is 1 January 2018 and the end of its first IFRS reporting period is
31 December 2019. Entity A built a factory that was completed and ready for use on 1 January 2013. Under
its previous GAAP, Entity A accrued a decommissioning provision over the expected life of the plant. The
facts can be summarised as follows:
Cost of the plant €1,400
Residual value
€200
Economic life
20 years
Original estimate of decommissioning cost in year 20
€175
Revised estimate on 1 January 2015 of decommissioning cost in year 20
€300
Discount rate applicable to decommissioning liability
(the discount rate is assumed to be constant)
5.65%
Discounted value of original decommissioning liability on 1 January 2013
€58
Discounted value on 1 January 2013 of revised decommissioning liability
€100
Discounted value on 1 January 2018 of revised decommissioning liability
€131
If Entity A applies the exemption from full retrospective application, what are the carrying amounts of the
factory and the decommissioning liability in A’s opening IFRS statement of financial position?
The tables below show how Entity A accounts for the decommissioning liability and the factory under its
previous GAAP, under IFRS 1 using the exemption and under IFRS 1 applying IFRIC 1 retrospectively.
Decommissioning liability
Retrospective
Previous
Exemption
application of
GAAP
IFRS 1
IFRIC 1
1 January 2013
100
58
Decommissioning costs €175 ÷ 20 years × 2 =
17.5
Decommissioning costs €100 × (1.05652 – 1) =
12
Decommissioning costs €58 × (1.05652 – 1) =
7
1 January 2015
17.5
112
65
Revised estimate of decommissioning provision
12.5
47
1 January 2015
30
112
112
Decommissioning costs €300 ÷ 20 years × 3 =
45
Decommissioning costs €112 × (1.05653 – 1) =
19
Decommissioning costs €112 × (1.05653 – 1) =
19
1 January 2018
75
131
131
Decommissioning costs €300 ÷ 20 years × 2 =
30
Decommissioning costs €131 × (1.05652 – 1) =
16
Decommissioning costs €131 × (1.05652 – 1) =
16
31 December 2019
105
147
147
300 Chapter
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In calculating the decommissioning provision, it makes no difference whether Entity A goes back in time and
tracks the history of the decommissioning provision or whether it just calculates the decommissioning
provision at its date of transition to IFRSs. This is not the case for the calculation of the related asset, as can
be seen below.
Factory
Retrospective
Previous
Exemption
application of
GAAP
IFRS 1
IFRIC 1
1 January 2013
1,400
1,500
1,458
Depreciation (€1,400 – €200) ÷ 20 years × 2 =
(120)
Depreciation (€1,500 – €200) ÷ 20 years × 2 =
(130)
Depreciation (€1,458 – €200) ÷ 20 years × 2 =
(126)
1 January 2015
1,332
Revised estimate of decommissioning provision
47
1 January 2015
1,379
Depreciation (€1,400 – €200) ÷ 20 years × 3 =
(180)
Depreciation (€1,500 – €200) ÷ 20 years × 3 =
(195)
Depreciation (€1,379 – €200) ÷ 18 years × 3 =
(197)
1 January 2018
1,100
1,175
1,182
Depreciation (€1,400 – €200) ÷ 20 years × 2 =
(120)
Depreciation (€1,500 – €200) ÷ 20 years × 2 =
(130)
Depreciation (€1,379 – €200) ÷ 18 years × 2 =
(131)
31 December 2019
980
1,045
1,051
As can be seen above, a full retrospective application of IFRIC 1 would require an entity to go back in time
and account for each revision of the decommissioning provision in accordance with IFRIC 1. In the case of a
long-lived asset there could be a significant number of revisions that a first-time adopter would need to
account for. It should also be noted that despite the significant revision of the decommissioning costs, the
impact on the carrying amount of the factory is quite modest.
At its date of transition to IFRSs (1 January 2018), Entity A makes the following adjustments:
• the decommissioning liability is increased by €56 (= €131 – €75) to reflect the difference in accounting
policy, irrespective of whether Entity A applies the exemption or not; and
• if Entity A applies the exemption it increases the carrying amount of the factory by €75. Whereas
if Entity A applies IFRIC 1 retrospectively, the carrying amount of the factory would increase
by €82.
It is important to note that in both cases the decommissioning component of the factory’s carrying amount
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 60
