exceeded repayments to the facilities.
●
Under Canadian GAAP, inflows from government refundable advances were netted against additions to PP&E
and intangible assets and classified as cash flows from investing activities, with any repayments classified as
cash flows from operating activities. Under IFRS, all transactions related to the government refundable
advances are classified as cash flows from operating activities. During the fiscal year ended January 31, 2011,
$52 million in government refundable advances was received and classified as cash flows from operating
activities under IFRS.
7.2 IAS
8 – Accounting Policies, Changes in Accounting Estimates
and Errors
Normally when an entity that is already using IFRS changes an accounting policy, it
should apply IAS 8 to such a change. IFRS 1 requires that a first-time adopter should
apply the same accounting policies in its opening IFRS statement of financial position
and throughout all periods presented in its first IFRS financial statements. [IFRS 1.7].
Therefore, the change in accounting policies should be treated as a change in the entity’s
opening IFRS statement of financial position and the policy should be applied
consistently in all periods presented in its first IFRS financial statements.
7.2.1
Changes in IFRS accounting policies during the first IFRS reporting
period
A first-time adopter may find that it needs to change IFRS accounting policies after it
has issued an IFRS interim report but before issuing its first IFRS financial statements.
Such a change in accounting policies could relate either to the ongoing IFRS accounting
policies or to the selection of IFRS 1 exemptions.
IAS 8 does not apply to the changes in accounting policies an entity makes when it
adopts IFRSs or to changes in those policies until after it presents its first IFRS
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financial statements. [IFRS 1.27]. Therefore, ‘if during the period covered by its first
IFRS financial statements an entity changes its accounting policies or its use of the
exemptions contained in this IFRS’, it should explain the changes between its first
IFRS interim financial report and its first IFRS financial statements in accordance
with paragraph 23 of IFRS 1 (see 6.3.1 above) and update the reconciliations required
by paragraphs 24(a) and (b) of IFRS 1 (see 6.3.1 above). [IFRS 1.27A]. A similar
requirement applies to the disclosures in a first-time adopter’s interim financial
reports (see 6.6 above). [IFRS 1.32(c)].
The distinction between changes in accounting policies and changes in accounting
estimates is discussed in detail in Chapter 3.
7.2.2
Changes in estimates and correction of errors
An entity that adopts IFRSs needs to assess carefully the impact of information that has
become available since it prepared its most recent previous GAAP financial statements
because the new information:
• may be a new estimate that should be accounted for prospectively (see 4.2
above); or
• may expose an error in the previous GAAP financial statements due to
mathematical mistakes, error in applying accounting policies, oversights or
misinterpretations of facts and fraud. In the reconciliation from previous GAAP to
IFRSs such errors should be disclosed separately from the effect of changes in
accounting policies (see 6.3.1 above).
7.3 IAS
12 – Income Taxes
There are no particular provisions in IFRS 1 with regard to the first-time adoption of
IAS 12, although the implementation guidance notes that IAS 12 requires entities to
provide for deferred tax on temporary differences measured by reference to enacted or
substantively enacted legislation. [IFRS 1.IG5-6].
The full retrospective application of IAS 12 poses several problems that may not be
immediately obvious. First, IAS 12 does not require an entity to account for all
temporary differences. For example, an entity is not permitted under IAS 12 to
recognise deferred tax on:
• taxable temporary differences arising on the initial recognition of goodwill;
[IAS 12.15, 32A] and
• taxable and deductible temporary differences arising on the initial recognition of
an asset or liability in a transaction that is not a business combination and that, at
the time of the transaction, affected neither accounting profit nor taxable profit.
[IAS 12.15, 24].
In addition, a change in deferred tax should be accounted for in other comprehensive
income or equity, instead of profit or loss, when the tax relates to an item that was
originally accounted for in other comprehensive income or equity. [IAS 12.61A].
Therefore, full retrospective application of IAS 12 requires a first-time adopter to
establish the history of the items that give rise to temporary differences because,
depending on the type of transaction, it may not be necessary to account for
First-time
adoption
337
deferred tax, or changes in the deferred tax may need to be accounted for in other
comprehensive income or equity.
The main issue for many first-time adopters of IFRSs will be that their previous GAAP
either required no provision for deferred tax, or required provision under a timing
difference approach. They also need to be aware that many of the other adjustments
made to the statement of financial position at transition date will also have a deferred
tax effect that must be accounted for – see, for example, the potential deferred tax
consequences of recognising or derecognising intangible assets where an entity uses the
business combinations exemption, described at 5.2.4.A and 5.2.5 above. Entities that
reported under US GAAP must also bear in mind that IAS 12, though derived from
FASB’s Accounting Standard Codification 740 – Income Taxes, is different in a number
of important respects.
7.3.1
Previous revaluation of plant, property and equipment treated as
deemed cost on transition
In some cases IFRS 1 allows an entity, on transition to IFRSs, to treat the carrying
amount of plant, property or equipment revalued under its previous GAAP as its
deemed cost as of the date of revaluation for the purposes of IFRSs (see 5.5.1 above).
Where an asset is carried at deemed cost on transition but the tax base of the asset
remains at original cost, or an amount based on original cost, the previous GAAP
revaluation will give rise to a temporary difference which is typically a taxable
temporary difference associated with the asset. IAS 12 requires deferred tax to be
recognised at transition on any such temporary difference.
If, after transition, the deferred tax is required to be remeasured, e.g. because of a
change in tax rate, or a re-basing of the asset for tax purposes, the entity elects the cost
model of IAS 16 and the asset concerned was revalued outside profit or loss under
previous GAAP, the question arises as to whether the resulting deferred tax income or
expense should be recognised in, or outside, profit or loss.
In our view, either approach is acceptable, so long as it is applied consistently.
The essence of the argumen
t for recognising such income or expense in profit or loss is
whether the reference in paragraph 61A of IAS 12 to the tax effects of ‘items recognised
outside profit or loss’ means items recognised outside profit or loss under IFRSs, or
whether it can extend to the treatment under previous GAAP. [IAS 12.61A].
Those who argue that it must mean solely items recognised outside profit or loss under
IFRSs note that an asset carried at deemed cost on transition is not otherwise treated as
a revalued asset for the purposes of IFRSs. For example, any impairment of such an
asset must be accounted for in profit or loss. By contrast, any impairment of plant,
property or equipment treated as a revalued asset under IAS 16 would be accounted for
outside profit or loss – in other comprehensive income – up to the amount of the
cumulative revaluation gain previously recognised.
Those who hold the contrary view that it need not be read as referring only to items
recognised outside profit or loss under IFRSs may do so in the context that the entity’s
previous GAAP required tax income and expense to be allocated between profit or loss,
other comprehensive income and equity in a manner similar to that required by IAS 12.
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It is argued that it is inappropriate that the effect of transitioning from previous GAAP
to IFRSs should be to require recognition in profit or loss of an item that would have
been recognised outside profit or loss under the ongoing application of either previous
GAAP or IFRSs. The counter-argument to this is that there are a number of other similar
inconsistencies under IFRS 1.
A more persuasive argument for the latter view might be that, whilst IFRSs do not regard
such an asset as having been revalued, it does allow the revalued amount to stand. IFRSs
are therefore recognising an implied contribution by owners in excess of the original
cost of the asset which, although it is not a ‘revaluation’ under IFRSs, would nevertheless
have been recognised in equity on an ongoing application of IFRSs.
7.3.2
Share-based payment transactions subject to transitional provisions
of IFRS 1
While IFRS 1 provides exemptions from applying IFRS 2 to share-based payment
transactions that were fully vested prior to the date of transition to IFRSs, there are no
corresponding exemptions from the provisions of IAS 12 relating to the tax effects of
share-based payment transactions. Therefore, the provisions of IAS 12 relating to the
tax effects of share-based payments apply to all share-based payment transactions,
whether they are accounted for in accordance with IFRS 2 or not. A tax-deductible
share-based payment transaction is treated as having a carrying amount equivalent to
the total cumulative expense recognised in respect of it, irrespective of how, or indeed
whether, the share-based payment is itself accounted for.
This means that on transition to IFRSs, and subject to the restrictions on recognition of
deferred tax assets (see Chapter 29), a deferred tax asset should be established for all
share-based payment awards outstanding at that date, including those not accounted for
under the transitional provisions.
Where such an asset is remeasured or recognised after transition to IFRSs, the general
rule regarding the ‘capping’ of the amount of any tax relief recognised in profit or loss
to the amount charged to the profit or loss applies (See Chapter 29 at 10.8.1). Therefore,
if there was no profit or loss charge for share-based payment transactions under the
previous GAAP, all tax effects of share-based payment transactions not accounted for
under IFRS 2 should be dealt with within equity.
7.3.3
Retrospective restatements or applications
The adjustments arising from different accounting policies under previous GAAP and
IFRS should be recognised directly in retained earnings (or, if appropriate, another
category of equity) at the date of transition to IFRSs. [IFRS 1.11].
IAS 12 requires current tax and deferred tax that relates to items that are recognised, in
the same or a different period, directly in equity, to be recognised directly in equity.
However, as drafted, IAS 12 can also be read as requiring any subsequent
remeasurement of such tax effects to be accounted for in retained earnings because the
amount to be remeasured was originally recognised in retained earnings. This could give
rise to a rather surprising result, as illustrated by Example 5.40 below.
First-time
adoption
339
Example 5.40: Remeasurement of deferred tax asset recognised as the result of
retrospective application
An entity’s date of transition to IFRSs was 1 January 2018. After applying IAS 37, its opening IFRS statement
of financial position shows an additional liability for environmental remediation costs of €5 million as an
adjustment to retained earnings, together with an associated deferred tax asset at 40% of €2 million.
The environmental liability does not change substantially over the next accounting period, but during the year
ended 31 December 2019 the tax rate falls to 30%. This requires the deferred tax asset to be remeasured to
€1.5 million giving rise to tax expense of €500,000. Should this expense be recognised in profit or loss for
the period or in retained earnings?
We question whether it was really the intention of IAS 12 that these remeasurements be
recognised in retained earnings. There is a fundamental difference between an item that
by its nature would always be recognised directly outside profit or loss (e.g. certain
foreign exchange differences or revaluations of plant, property and equipment) and an
item which in the normal course of events would be accounted for in profit or loss, but
when recognised for the first time (such as in Example 5.40 above) is dealt with as a
‘catch up’ adjustment to opening retained earnings. If it had done so, all the charge for
environmental costs (and all the related deferred tax) would have been reflected in
profit or loss in previous income statements. Therefore, it is our view that subsequent
changes to such items recognised as a ‘catch-up’ adjustment upon transition to IFRSs
should be recognised in profit or loss.
7.3.4
Defined benefit pension plans
IAS 19 requires an entity, in accounting for a post-employment defined benefit plan, to
recognise actuarial gains and losses relating to the plan in other comprehensive income.
At the same time, service cost and net interest on the net defined benefit liability (asset)
is recognised in profit or loss.
In many jurisdictions, tax relief for post-employment benefits is given on the basis of
cash contributions paid to the plan fund (or benefits paid when a plan is unfunded).
This significant difference between the way in which defined benefit plans are treated
for tax and financial reporting purposes can make the allocation of tax between profit
or loss and other comprehensive income somewhat arbitrary.
The issue is of particular importance when a first-time adopter has large funding shortfalls
on its defined benefit schemes and at the same time can only recognise part of its deferred
tax assets. In such a situation the method of allocat
ion may well affect the after-tax profit
in a given year. In our view (see Chapter 29), these are instances of the exceptional
circumstances envisaged by IAS 12 when a strict allocation of tax between profit or loss
and other comprehensive income is not possible. Accordingly, any reasonable method of
allocation may be used, provided that it is applied on a consistent basis.
One approach might be to compare the funding payments made to the scheme in a few
years before the adoption of IFRS with the charges that would have been made to profit
or loss under IAS 19 in those periods. If, for example, it is found that the payments were
equal to or greater than the charges to profit or loss, it could reasonably be concluded
that any surplus or deficit on the statement of financial position is broadly represented
by items that have been accounted for in other comprehensive income.
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7.4 IAS
16 – Property, Plant and Equipment – and IAS 40 –
Investment Property (cost model)
The implementation guidance discussed in this section applies to property, plant and
equipment as well as investment properties that are accounted for under the cost model
in IAS 40. [IFRS 1.IG62].
7.4.1
Depreciation method and rate
If a first-time adopter’s depreciation methods and rates under its previous GAAP are
acceptable under IFRSs then it accounts for any change in estimated useful life or
depreciation pattern prospectively from when it makes that change in estimate (see 4.2
above). However, if the depreciation methods and rates are not acceptable and the
difference has a material impact on the financial statements, a first-time adopter should
adjust the accumulated depreciation in its opening IFRS statement of financial position
retrospectively. [IFRS 1.IG7]. Additional differences may arise from the requirement in IAS 16
to review the residual value and the useful life of an asset at least each financial year end,
[IAS 16.51], which may not be required under a first-time adopter’s previous GAAP.
If a restatement of the depreciation methods and rates would be too onerous, a first-
time adopter could opt instead to use fair value as the deemed cost. However,
application of the deemed cost exemption is not always the only approach available. In
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 68
