Guide for first time adopters of IFRS

In 2003, IFRS 1, First-time Adoption of International Financial Reporting Standards (IFRS 1) was issued by International Accounting Standards Board (IASB). IFRS 1 has since been updated to make it more user friendly, with the most recent revision in July 2009 that introduced additional exemptions.

Why was IFRS 1 issued?

Let’s take an example of ABC Inc., which is currently reporting under local GAAP (e.g. U.S. GAAP) and wants to start reporting under International Financial Reporting Standards (IFRS) in the year 2011.  So what GAAP do you think should be followed to produce the comparative information for 2010?  Should it be the local GAAP that the company has always been following or should the comparative information should be produced using IFRSs. For comparability purposes, it would make logical sense to produce the comparative information using IFRS.

IFRS 1 was issued to assist and establish the rules for an entity’s first financial statements prepared in accordance with IFRSs, particularly regarding the transition from the accounting principles previously applied by the entity (previous GAAP).

Prior to the issuance of IFRS 1, first-time adopters were expected (in most cases) to retrospectively apply all IFRS requirements in their first IFRS-compliant financial statements. Recognising that this often resulted in costs that exceeded the benefits of the financial information generated, the IASB revised the approach to first-time adoption to include limited exemptions from the principle of retrospective application. As a result, IFRS 1 significantly eases the burden for first-time adopters.

How is IFRS 1 applied?

The general principle underlying IFRS 1 is that “IFRSs effective at the date of an entity’s first IFRS financial statements” should be applied retrospectively in the opening IFRS statement of financial position, the comparative period and the first IFRS reporting period.

In practical terms, this means that if an entity adopts IFRSs for the year ended 31 December, 2011, it must apply all IFRSs effective at that date (i.e. 31 December, 2011) retrospectively to the 2010 reporting period, and to the opening statement of financial position on 1 January 2010 (assuming only one year of comparative information is provided). Hence, in this case the entity’s date of transition to IFRSs is January 1, 2010 and its changeover date is January 1, 2011. Effectively, this general principle would result in full retrospective application of IFRSs as if they had been the framework for an entity’s accounting since its inception.

IFRS 1 adapts to the general principle of retrospective application by adding a limited number of very important “exceptions” and “exemptions”. The “exceptions” to retrospective application (of which there are four) are mandatory.

There are a total of 16 “exemptions” are optional – a first-time adopter may choose whether and which exemptions to apply.  It is best to review these strategic choices for a company very carefully as it is required to fully understand the nature and impact of the strategic choices made by the company. Each company has to properly document all the strategic choices made by them and the reasons of making one choice over the other.  Some of these strategic choices

A word of caution that an entity may only apply IFRS 1 in its “first” IFRS financial statements. IFRS 1 provides specific examples as to when would an entity would qualify to use IFRS 1.

IFRS 1 consists of explanatory text as well as implementation guidance. While there is never a substitute for a complete reading of the Standard and discussing with your internal advisors, the summaries provided by the Big 4 accounting firms provides a reasonable starting point from which to build a more thorough understanding of the steps required in preparing an entity’s first IFRS financial statements.

What information does these strategic choices provide to the analysts?

The analysts should carefully review the various strategic choices made by the companies to understand the motivations of the companies of making one strategic choice over the other as these strategic choices would have a material impact of the future IFRS reported results.

Where do I find more detailed information about IFRS 1?

Click below to download the implementation guidance issued by the Big 4:

Download Deloitte’s Guide to IFRS 1

PWC:  Mapping the change: IFRS implementation guide.

(References:  IFRS 1, Deloitte and PWC  implementation guides for IFRS 1 implementation).