While IFRS creates a need for new financial data, calculations and reporting, the IT systems and processes should also be reviewed, modified, reconfigured, or even new systems implemented.

With each change that is made in the IFRS an entity needs to assess the impact it will have on the collection of the data for financial reporting purposes and the other control processes.

For example – on adopting the Property, Plant and Equipment most of the entities will result in additional componentization or change in the depreciation methodology.  So any entity transitioning to IFRS will need to assess if their current systems can actually capture the information on a go-forward basis for IFRS reporting / disclosures.  In addition, the entity will also need to consider the process that will be carried out for its future impairment testing.

Read The Impact of IFRS on Technology – A Practical Introduction from KPMG website

References: KPMG publication

The differences set out in this material have been compiled after comparing Canadian GAAP as it exists in 2010 with IFRSs at the same date and after considering a sample of companies’ expectations of the nature and effects of major changes. It should be recognized, however, that differences will vary from entity to entity, even within the same industry. Accordingly, the examples of differences in the accompanying material do not purport to represent an exhaustive list of all the changes that may be encountered.

You can access this guide by clicking here (PDF).

This is one of the problems with the IFRS  - the IFRS standards in many ways are subject to interpretation, which means that each country and even each company has an ability to develop their own interpretations of the IFRS standards. Further, to add icing on the cake, the IFRS standards are not yet finalized, they are a moving target. So the companies might reach a consensus on a standard as it is written today, but these standards might change by the time the company actually adopts the accounting standards.  Hence, for the implementation of the accounting standards suggest that all the companies operating in the same economic sector should brainstorm the issues together and reach a consensus as to the interpretation of the IFRS standards that they collectively intend to follow.

Click here to see this PWC  publication:

A_practical_guide_to_new_IFRSs_for_2010 (PDF – 49 pages)

[Reference:  PWC website and the above guide]

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).

The key advantage for adopting IFRS is to financial results more transparent and comparable for the ultimate users of financial statements. However, till the time IFRS is fully adopted across the globe, it would be hard to determine the impact that IFRS would have on an entity.

For the users of the financial  statements, there are many key shareholders who have a vested interest in an enterprise’s performance who need to understand what reporting financial information under IFRS will mean for them.  These key stake holders are not limited to — the shareholders, research analysts, potential investors, regulators, lenders, and others.  All the entities need to include in their transition plans a communication strategy with the external stakeholders.

The key questions that an entity has to ask itself are as follows:

• Do external stakeholders understand the IFRS-related changes that are coming?
• Do the analysts understand the impact of IFRS?

KPMG conducted a survey to assess the understanding of IFRS and its impact on the external stakeholders. The results of this survey suggest that external stakeholders still have a lot to learn about IFRS and how it will affect the financial reporting of specific enterprises.

KPMG publication: Preparing your stakeholders for IFRS

The reconciliations in the financial statements are unlikely to highlight key matters, however. Accordingly, this guidance sets out examples of ways to provide a succinct MD&A discussion of the impact of the changes in a way that highlights significant differences, including how changes will impact an entity’s future financial reporting.

In assessing the effects of the changeover, investors will want to understand the impact of any elections that were made, such as the elimination of the Cumulative Translation Adjustment that would otherwise have been carried forward to affect future income. As well, investors may want to separately identify the effects of reclassifications and any pervasive changes that result in significant differences in reporting, for example the effect of consolidating previously non-consolidated entities where investors may not have a sufficient historical perspective to formulate expectations. Therefore, the guidance suggests ways to summarise the effects of various categories of changes.

You can access this guide by clicking here (PDF).

However, under step-by-step method of consolidation the financial statements of the foreign operation are first translated into the functional currency of any intermediate parent/(s) and then translated into the functional currency of the ultimate parent (or the presentation currency if different).

IFRIC 16, Hedges of a Net Investment in a Foreign Operation, which was released in July, 2008 provides guidance states that you can either use either direct or step-by-step method of consolidation.

The cumulative translation amount (CTA) derived under either direct method or step-by-step method of consolidation is the same.

First time adopters of IFRS would need to determine and document which method of consolidation they would follow on IFRS adoption.  This selection would primarily depend upon the current general ledger systems of the company.