will be significantly lower than the decommissioning liability itself.
From the above example it is clear that the exemption reduces the amount of effort
required to restate items of property, plant and equipment with a decommissioning
component. In many cases the difference between the two methods will be insignificant,
except where an entity had to make major adjustments to the estimate of the
decommissioning costs near the end of the life of the related assets.
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adoption
301
A first-time adopter that elects the deemed cost approaches discussed in 5.5 above and
elects to use the IFRIC 1 exemption to recognise its decommissioning obligation should
be aware of the interaction between these exemptions that may lead to a potential
overstatement of the underlying asset. In determining the deemed cost of the asset, the
first-time adopter would need to make sure that the fair value of the asset is exclusive of
the decommissioning obligation in order to avoid the potential overstatement of the value
of the asset that might result from the application of the IFRIC 1 exemption.
5.13.2
IFRIC 1 exemption for oil and gas assets at deemed cost
A first-time adopter that applies the deemed cost exemption for oil and gas assets in the
development or production phases accounted for in cost centres that include all
properties in a large geographical area under previous GAAP (see 5.5.3 above) should not
apply the IFRIC 1 exemption (see 5.13.1 above) or IFRIC 1 itself, but instead:
(a) measure
decommissioning,
restoration and similar liabilities as at the date of
transition in accordance with IAS 37; and
(b) recognise directly in retained earnings any difference between that amount and
the carrying amount of those liabilities at the date of transition determined under
previous GAAP. [IFRS 1.D21A].
The IASB introduced this requirement because it believed that the existing IFRIC 1
exemption would require detailed calculations that would not be practicable for entities
that apply the deemed cost exemption for oil and gas assets. [IFRS 1.BC63CA]. This is
because the carrying amount of the oil and gas assets is deemed already to include the
capitalised costs of the decommissioning obligation.
5.14 Financial assets or intangible assets accounted for in accordance
with IFRIC 12
Service concession arrangements are contracts between the public and private sector
to attract private sector participation in the development, financing, operation and
maintenance of public infrastructure (e.g. roads, bridges, hospitals, water distribution
facilities, energy supply and telecommunication networks). [IFRIC 12.1, 2].
IFRS 1 allows a first-time adopter to apply the transitional provision in IFRIC 12. [IFRS 1.D22].
IFRIC 12 requires retrospective application unless it is, for any particular service
concession arrangement, impracticable for the operator to apply IFRIC 12 retrospectively
at the start of the earliest period presented, in which case it should:
(a) recognise financial assets and intangible assets that existed at the start of the earliest
period presented, which will be the date of transition for a first-time adopter;
(b) use the previous carrying amounts of those financial and intangible assets (however
previously classified) as their carrying amounts as at that date; and
(c) test financial and intangible assets recognised at that date for impairment, unless
this is not practicable, in which case the amounts must be tested for impairment at
the start of the current period, which will be the beginning of first IFRS reporting
period for a first-time adopter. [IFRIC 12.29, 30].
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This exemption was used by many Brazilian companies with service concession
arrangements and a typical disclosure of the use of the exemption is given in Extract 5.11
below from the financial statements of Eletrobras:
Extract 5.11: Centrais Elétricas Brasileiras S.A. – Eletrobras (2010)
Explanatory Notes to the Consolidated Financial Statements [extract]
6 Transition
to
IFRS [extract]
6.1
Basis of transition to IFRS
d)
Exemption for initial treatment of IFRIC 12
Exemption for initial treatment of IFRIC 12. The Company has chosen to apply the exemption provided for in
IFRS 1 related to the infrastructure of assets classified as concession assets on the transition date and made the
corresponding reclassifications based on the residual book value on January 1, 2009, due to the concession contracts
of the Company being substantially old without any possibility to perform a retrospective adjustment.
5.15 Borrowing
costs
5.15.1
Borrowing cost exemption
For many first-time adopters, full retrospective application of IAS 23 – Borrowing
Costs – would be problematic as the adjustment would be required in respect of any
asset held that had, at any point in the past, satisfied the criteria for capitalisation of
borrowing costs. To avoid this problem, IFRS 1 allows a modified form of the
transitional provisions set out in IAS 23, which means that the first-time adopter can
elect to apply the requirements of IAS 23 from the date of transition or from an earlier
date as permitted by paragraph 28 of IAS 23. From the date on which an entity that
applies this exemption begins to apply IAS 23, the entity:
• must not restate the borrowing cost component that was capitalised under previous
GAAP and that was included in the carrying amount of assets at that date; and
• must account for borrowing costs incurred on or after that date in accordance with
IAS 23, including those borrowing costs incurred on or after that date on qualifying
assets already under construction. [IFRS 1.D23].
If a first-time adopter established a deemed cost for an asset (see 5.5 above) then it
cannot capitalise borrowing costs incurred before the measurement date of the deemed
cost (see 5.15.2 below). [IFRS 1.IG23].
5.15.2
Interaction with other exemptions
An entity that uses the ‘fair value as deemed cost exemption’ described at 5.5 above
cannot capitalise borrowing costs incurred before the measurement date of the deemed
cost, since there are limitations imposed on capitalised amounts under IAS 23. IAS 23
states that when the carrying amount of a qualifying asset exceeds its recoverable amount
or net realisable value, the carrying amount is written down or written off in accordance
with the requirement of other standards. [IAS 23.16]. Once an entity has recognised an asset
at fair value, in our view, the entity should not increase that value to capitalise interest
incurred before that date. Interest incurred subsequent to the date of transition may be
capitalised on a qualifying asset, subject to the requirements of IAS 23 (see Chapter 21).
First-time
adoption
303
5.16 Extinguishing financial liabilities with equity instruments
IFRIC 19 – Extinguishing Financial Liabilities with Equity Instruments – deals with
accounting for transactions whereby a debtor and creditor might renegotiate the terms<
br />
of a financial liability with the result that the debtor extinguishes the liability fully or
partially by issuing equity instruments to the creditor. The transitional provisions of
IFRIC 19 require retrospective application only from the beginning of the earliest
comparative period presented. [IFRIC 19.13]. The Interpretations Committee concluded
that application to earlier periods would result only in a reclassification of amounts
within equity. [IFRIC 19.BC33].
The Board provided similar transition relief to first-time adopters, effectively requiring
application of IFRIC 19 from the date of transition to IFRSs. [IFRS 1.D25].
5.17 Severe
hyperinflation
If an entity has a functional currency that was, or is, the currency of a hyperinflationary
economy, it must determine whether it was subject to severe hyperinflation before the
date of transition to IFRSs. [IFRS 1.D26]. A currency of a hyperinflationary economy has
been subject to severe hyperinflation if it has both of the following characteristics:
• a reliable general price index is not available to all entities with transactions and
balances in the currency; and
• exchangeability between the currency and a relatively stable foreign currency does
not exist. [IFRS 1.D27].
The functional currency of an entity ceases to be subject to severe hyperinflation on
the ‘functional currency normalisation date’, when the functional currency no longer
has either, or both, of these characteristics, or when there is a change in the entity’s
functional currency to a currency that is not subject to severe hyperinflation. [IFRS 1.D28].
If the date of transition to IFRSs is on, or after, the functional currency normalisation
date, the first-time adopter may elect to measure all assets and liabilities held before the
functional currency normalisation date at fair value on the date of transition and use
that fair value as the deemed cost in the opening IFRS statement of financial position.
[IFRS 1.D29].
Preparation of information in accordance with IFRSs for periods before the functional
currency normalisation date may not be possible. Therefore, entities may prepare
financial statements for a comparative period of less than 12 months if the functional
currency normalisation date falls within a 12-month comparative period, provided that
a complete set of financial statements is prepared, as required by paragraph 10 of IAS 1,
for that shorter period. [IFRS 1.D30]. It is also suggested that entities disclose non-IFRS
comparative information and historical summaries if they would provide useful
information to users of financial statements – see 6.7 below. The Board noted that an
entity should clearly explain the transition to IFRSs in accordance with IFRS 1’s
disclosure requirements. [IFRS 1.BC63J]. See Chapter 16 regarding accounting during
periods of hyperinflation.
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5.18 Joint
arrangements
A first-time adopter may apply the transition provisions in Appendix C of IFRS 11 – Joint
Arrangements (see Chapter 12) with the following exception:
• A first-time adopter must apply these transitional provisions at the date of
transition to IFRS.
• When changing from proportionate consolidation to the equity method, a first-
time adopter must test the investment for impairment in accordance with IAS 36
as at the date of transition to IFRS, regardless of whether there is any indication
that it may be impaired. Any resulting impairment must be recognised as an
adjustment to retained earnings at the date of transition to IFRS.5 [IFRS 1.D31].
5.19 Stripping costs in the production phase of a surface mine
In surface mining operations, entities may find it necessary to remove mine waste
materials (‘overburden’) to gain access to mineral ore deposits. This waste removal
activity is known as ‘stripping’. A mining entity may continue to remove overburden and
to incur stripping costs during the production phase of the mine. IFRIC 20 – Stripping
Costs in the Production Phase of a Surface Mine – considers when and how to account
separately for the benefits arising from a surface mine stripping activity, as well as how
to measure these benefits both on initial recognition and subsequently. [IFRIC 20.1, 3, 5].
First-time adopters may apply the transitional provisions set out in IFRIC 20,
[IFRIC 20.A1-A4], except that the effective date is deemed to be 1 January 2013 or the
beginning of the first IFRS reporting period, whichever is later. [IFRS 1.D32].
5.20 Regulatory deferral accounts
IFRS 14 allows a first-time adopter that is a rate-regulated entity the option to continue
with the recognition of rate-regulated assets and liabilities under previous GAAP on
transition to IFRS. IFRS 14 provides entities with an exemption from compliance with
other IFRSs and the conceptual framework on first-time adoption and subsequent
reporting periods, until the comprehensive project on rate regulation is completed.
First-time adopters, whose previous GAAP prohibited the recognition of rate-regulated
assets and liabilities, will not be allowed to apply IFRS 14 on transition to IFRS. We
discuss the requirements of IFRS 14 in detail below.
5.20.1
Defined terms in IFRS 14
IFRS 14 defines the following terms in connection with regulatory deferral accounts.
[IFRS 14 Appendix A].
Rate regulated activities: An entity`s activities that are subject to rate regulation.
Rate regulation: A framework for establishing the prices that can be charged to
customers for goods or services and that framework is subject to oversight and/or
approval by a rate regulator.
Rate regulator: An authorised body that is empowered by statute or regulation to
establish the rate or a range of rates that bind an entity. The rate regulator may be a
third-party body or a related party of the entity, including the entity`s own governing
First-time
adoption
305
board, if that body is required by statute or regulation to set rates both in the interest of
the customers and to ensure the overall financial viability of the entity.
Regulatory deferral account balance: The balance of any expense (or income) account
that would not be recognised as an asset or a liability in accordance with other standards,
but that qualifies for deferral because it is included, or is expected to be included, by the
rate regulator in establishing the rate(s) that can be charged to customers.
5.20.2 Scope
An entity is permitted to apply IFRS 14 in its first IFRS financial statements, if the entity
conducts rate-regulated activities and recognised amounts that qualify as regulatory
deferral account balances in its financial statements under its previous GAAP.
[IFRS 14.5].The entity that is within the scope of, and that elects to apply, IFRS 14 should
apply all of its requirements to all regulatory deferral account balances that arise from
all of the entity`s rate-regulated activities. [IFRS 14.8].
The entity that elected to apply IFRS 14 in its first IFRS financial statements should
apply IFRS 14 also in its financial statements for subsequent periods. [IFRS 14.6].
5.20.3
Continuation of previous GAAP accounting policies (Temporary
exemption from paragraph 11 of IAS 8)
In some cases, other standards explicitly prohibit an entity from recognising, in the
statement of financial position, regulatory deferral account balances that might be
recognised, either separately or included within other line items such as property, plant
and equipment, in accordance with previous GAAP accounting policies. However, in
accordance with paragraph 9 and 10 of IFRS 14, an entity that elects to apply this
standard in its first IFRS financial statements applies the exemption from paragraph 11
of IAS 8. [IFRS 14.10]. In other words, on initial application of IFRS 14, an entity should
continue to apply its previous GAAP accounting policies for the recognition,
measurement, impairment, and derecognition of regulatory deferral account balances
except for any changes permitted by the standard and subject to any presentation
changes required by the standard. [IFRS 14.11]. Such accounting policies may include, for
example, the following practices: [IFRS 14.B4]
• recognising a regulatory deferral account debit balance when the entity has the
right, as a result of the actual or expected actions of the rate regulator, to increase
rates in future periods in order to recover its allowable costs (i.e. the costs for
which the regulated rate(s) is intended to provide recovery);
• recognising, as a regulatory deferral account debit or credit balance, an amount
that is equivalent to any loss or gain on the disposal or retirement of both items of
property, plant and equipment and of intangible assets, which is expected to be
recovered or reversed through future rates;
• recognising a regulatory deferral account credit balance when the entity is required,
as a result of the actual or expected actions of the rate regulator, to decrease rates in
future periods in order to reverse over-recoveries of allowable costs (i.e. amounts in
excess of the recoverable amount specified by the rate regulator); and
• measuring regulatory deferral account balances on an undiscounted basis or on a
discounted basis that uses an interest or discount rate specified by the rate regulator.
306 Chapter
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The accounting policy for the regulatory deferral account balances, as explained above,
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 61
