Financial Reporting Standards  

IFRS for SMEs
What is IFRS?
IFRS 1-First-time Adoption of International Financial Reporting Standards
OBJECTIVE

IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the procedures that an entity must follow when it adopts IFRSs for the first time as the basis for preparing its general purpose financial statements. A restructured version of IFRS 1 was issued in November 2008 and applies if an entity's first IFRS financial statements are for a period beginning on or after 1 July 2009.

Definition of first-time adoption

A first-time adopter is an entity that, for the first time, makes an explicit and unreserved statement that its general purpose financial statements comply with IFRSs. An entity may be a first-time adopter if, in the preceding year, it prepared IFRS financial statements for internal management use, as long as those IFRS financial statements were not made available to owners or external parties such as investors or creditors.

If a set of IFRS financial statements was, for any reason, made available to owners or external parties in the preceding year, then the entity will already be considered to be on IFRSs, and IFRS 1 does not apply. An entity can also be a first-time adopter if, in the preceding year, its financial statements: asserted compliance with some but not all IFRSs, or included only a reconciliation of selected figures from previous GAAP to IFRSs. (Previous GAAP means the GAAP that an entity followed immediately before adopting to IFRSs.)

However, an entity is not a first-time adopter if, in the preceding year, its financial statements asserted: Compliance with IFRSs even if the auditor's report contained a qualification with respect to conformity with IFRSs. Compliance with both previous GAAP and IFRSs.

Overview for an entity that adopts IFRSs for the first time in its annual financial statements for the year ended 31 December 2009.

Accounting policies

Select accounting policies based on IFRSs effective at 31 December 2009. IFRS reporting periods Prepare at least 2009 and 2008 financial statements and the opening balance sheet (as of 1 January 2008 or beginning of the first period for which full comparative financial statements are presented, if earlier) by applying the IFRSs effective at 31 December 2009.

Since IAS 1 requires that at least one year of comparative prior period financial information be presented, the opening balance sheet will be 1 January 2008 if not earlier. This would mean that an entity's first financial statements should include at least:

  • Three balance sheets (statements of financial position)
  • Two statements of comprehensive income
  • Two separate income statements (if presented) two statements of cash flows
  • Two statements of changes in equity and related notes, including comparative information
  • If a 31 December 2009 adopter reports selected financial data (but not full financial statements) on an IFRS basis for periods prior to 2008, in addition to full financial statements for 2008 and 2009, that does not change the fact that its opening IFRS balance sheet is as of 1 January 2008.

    Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption Derecognition of some previous GAAP assets and liabilities The entity should eliminate previous-GAAP assets and liabilities from the opening balance sheet if they do not qualify for recognition under IFRSs. For example:
    IAS 38 does not permit recognition of expenditure on any of the following as an intangible asset: *research, *start-up, pre-operating, and pre-opening costs *training, *advertising and promotion *moving and relocation If the entity's previous GAAP had recognised these as assets, they are eliminated in the opening IFRS balance sheet.

    If the entity's previous GAAP had allowed accrual of liabilities for "general reserves", restructurings, future operating losses, or major overhauls that do not meet the conditions for recognition as a provision under IAS 37, these are eliminated in the opening IFRS balance sheet If the entity's previous GAAP had allowed recognition of contingent assets as defined in IAS 37.10, these are eliminated in the opening IFRS balance sheet

    Recognition of some assets and liabilities not recognised under previous GAAP The entity should recognise all assets and liabilities that are required to be recognised by IFRS even if they were never recognised under previous GAAP.

    For example: IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded derivatives. These were not recognised under many local GAAPs. IAS 19 requires an employer to recognise a liability when an employee has provided service in exchange for benefits to be paid in the future. These are not just post-employment benefits (eg, pension plans) but also obligations for medical and life insurance, vacations, termination benefits, and deferred compensation. In the case of 'over-funded' defined benefit plans, this would be a plan asset.

    IAS 37 requires recognition of provisions as liabilities. Examples could include an entity's obligations for restructurings, onerous contracts, decommissioning, remediation, site restoration, warranties, guarantees, and litigation. Deferred tax assets and liabilities would be recognised inconformity with IAS 12.

    Reclassification

    The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS classification.
    Examples:
    IAS 10 does not permit classifying dividends declared or proposed after the balance sheet date as a liability at the balance sheet date. If such liability was recognised under previous GAAP it would be reversed in the opening IFRS balance sheet. If the entity's previous GAAP had allowed treasury stock (an entity's own shares that it had purchased) to be reported as an asset, it would be reclassified as a component of equity under IFRS.

    Items classified as identifiable intangible assets in a business combination accounted for under the previous GAAP may be required to be reclassified as goodwill under IFRS 3 because they do not meet the definition of an intangible asset under IAS 38. IAS 32 has principles for classifying items as financial liabilities or equity. Thus mandatorily redeemable preferred shares that may have been classified as equity under previous GAAP would be reclassified as liabilities in the opening IFRS balance sheet.

    Measurement -Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption should be recognised directly in retained earnings or, if appropriate, another category of equity at the date of transition to IFRSs. Estimates In preparing IFRS estimates at the date of transition to IFRSs retrospectively, the entity must use the inputs and assumptions that had been used to determine previous GAAP estimates as of that date (after adjustments to reflect any differences in accounting policies).

    The entity is not permitted to use information that became available only after the previous GAAP estimates were made except to correct an error.

    Disclosures in the financial statements of a first-time adopter

    IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS affected the entity's reported financial position, financial performance and cash flows. This includes:

    • Reconciliations of equity reported under previous GAAP to equity under IFRS both (a) at the date of the opening IFRS balance sheet and (b) the end of the last annual period reported under the previous GAAP. (For an entity adopting IFRSs for the first time in its 31 December 2009 financial statements, the reconciliations would be as of 1 January 2008 and 31 December 2008.)
    • Reconciliations of total comprehensive income for the last annual period reported under the previous GAAP to total comprehensive income under IFRSs for the same period.
    • Explanation of material adjustments that were made, in adopting IFRSs for the first time, to the balance sheet, income statement and cash flow statement
    • If errors in previous GAAP financial statements were discovered in the course of transition to IFRSs, those must be separately disclosed.
    • If the entity recognised or reversed any impairment losses in preparing its opening IFRS balance sheet, these must be disclosed.
    • Appropriate explanations if the entity has elected to apply any of the specific recognition and measurement exemptions permitted under IFRS 1 – for instance, if it used fair values as deemed cost.