Accounting Policies to First IFRS Financial statements

An entity must use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements1. Those accounting policies must comply with each IFRSs effective at the end of its first IFRS reporting period, unless there is a mandatory exception to retrospective application or an optional exemption from the requirements of IFRSs.

[IFRS 1, paras 7 – 9]

Note that:

  • An entity may apply a new IFRS that is not yet mandatory if that IFRSs permits early application.
  • The transitional provisions in IFRSs do not apply to a first-time adopter’s transition to IFRSs.

Mandatory Exceptions to Retrospective Application and Optional Exemptions from the Requirements of IFRSs

[IFRS 1, para IN5]

Mandatory exceptions prohibit the retrospective application of IFRSs in some areas, particularly where retrospective application could involve the use of hindsight. Optional exemptions grant relief from the requirements of IFRSs in specified areas where the cost of complying with IFRSs would likely exceed the benefits to users of financial statements.

The following table provides a summary of mandatory exceptions and optional exemptions.

Mandatory exemptions

Optional exemptions

IFRS 1 prohibits retrospective application in relation to the following:

  • Estimates
  • Derecognition of financial assets and financial liabilities
  • Hedge accounting
  • Non-controlling interests
  • Classification and measurement of financial assets;
  • Embedded derivatives; and
  • Government loans.

For example, an entity is prohibited from applying hindsight to estimates in accordance with IFRSs at the date of transition to IFRSs (or at the end of a comparative period presented in its fi st IFRS financial statements).

IFRS 1 does not permit these to be applied by analogy to other items.

An entity may elect to use one or more of the following exemptions, which provide specific relief, on adoption of IFRSs:

  • Business combinations
  • Share-based payment transactions
  • Insurance contracts
  • Fair value or revaluation as deemed cost
  • Use of revalued amount as deemed cost for ‘event driven fair values’ between transition date and date of the first IFRSs reporting period
  • Deemed cost for assets used in operations subject to rate regulation
  • Leases
  • Cumulative translation differences
  • Investments in subsidiaries, jointly controlled entities and associates
  • Assets and liabilities of subsidiaries, associates and joint ventures
  • Compound financial instruments
  • Designation of previously recognised financial instruments
  • Fair value measurement of financial assets/liabilities at initial recognition
  • Decommissioning liabilities included in the cost of property, plant and equipment
  • Financial assets or intangible assets accounted for in accordance with IFRIC 12 Service Concession Arrangements
  • Borrowing costs
  • Transfers of assets from customers accounted for in accordance with IFRIC 18 Transfers of Assets from Customers
  • Extinguishing financial liabilities with equity instruments accounted for in accordance with IFRIC 19 -Extinguishing Financial Liabilities with Equity Instruments
  • Joint arrangements
  • Severe hyperinflation
  • Government loans
  • Stripping costs in the production phase of a surface mine in accordance with IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine.

MANDATORY EXCEPTION

[IFRS 1 13]

Mandatory Exception to

Retrospective Application

Implications

ESTIMATES [IFRS 1, 14, IFRS 1 16 – 17]

An entity is prohibited from applying hindsight to estimates in accordance with IFRSs at the date of transition to IFRSs (or at the end of a comparative period presented in its first IFRS financial statements). Therefore, these estimates must:

  • be consistent with estimates made for the same date in accordance with previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error; or
  • reflect conditions that existed at the date of transition to IFRSs, if previous GAAP did not require such estimates at that date.

For example, for an entity with a calendar year end that presents only one comparative period and has adopted IFRSs for 20X3 with a transition date of January 1, 20X2, this means that:

  • estimates in accordance with IFRSs at the transition date must:
    • be consistent with estimates made at December 31, 20X1 in accordance with previous GAAP, or
    • reflect conditions that existed at December 31, 20X1 if previous GAAP did not require such estimates at that date;
  • estimates in accordance with IFRSs at December 31, 20X2 must:
    • be consistent with estimates made at December 31, 20X2 in accordance with previous GAAP, or
    • reflect conditions that existed at December 31, 20X2 if previous GAAP did not require such estimates at that date.
DERECOGNITION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES [IFRS 1 B2 – B3]

A first-time adopter must apply the derecognition requirements in IAS 39 (or IFRS 9 if adopted) prospectively for transactions occurring on or after the date of transition.

If a first-time adopter derecognized non-derivative financial assets or non-derivative financial liabilities in accordance with previous GAAP as a result of a transaction that occurred before the date of transition, it cannot recognize those assets and liabilities in accordance with IFRSs (unless they qualify for recognition as a result of a later transaction or event).

Despite this mandatory exception, an entity may choose to apply the derecognition requirements in IAS 39 (or IFRS 9 if adopted) retrospectively from a designated date, provided that the information needed to apply IAS 39 (or IFRS 9 if adopted) to financial assets and financial liabilities derecognized as a result of past transactions was obtained at the time of initially accounting for those transactions.

HEDGE ACCOUNTING [IFRS 1 B4 – B6, IG60]

Transactions entered into before the date of transition to IFRSs are prohibited from being retrospectively designated as hedges.

Accounting Policies to First IFRS Financial statements

Accounting Policies to First IFRS Financial statements

Accounting Policies to First IFRS Financial statements

Accounting Policies to First IFRS Financial statements

Accounting Policies to First IFRS Financial statements

Accounting Policies to First IFRS Financial statements

If, before the date of transition to IFRSs, an entity had designated a transaction as a hedge, but the hedge does not meet the conditions for hedge accounting in IAS 39, the entity must apply the requirements of IAS 39 to discontinue hedge accounting.

Therefore, the designation and documentation of a hedge relationship must be completed on or before the date of transition to IFRSs if the hedge relationship is to qualify for hedge accounting from that date. Hedge accounting can be applied prospectively only from the date that the hedge relationship is fully designated and documented.

Note that:

  • an entity must not reflect in its opening IFRS statement of financial position a hedging relationship of a type that does not qualify for hedge accounting in accordance with IAS 39; and
  • at the date of transition to IFRSs, an entity must measure all derivatives at fair value.
NON-CONTROLLING INTERESTS [IFRS 1 B7] Accounting Policies to First IFRS Financial statements

A first-time adopter must apply the following requirements in IFRS 10 prospectively from the date of transition to IFRSs:

  • the requirement that total comprehensive income is attributed to the owners of the parent and to the NCI even if this results in the NCI having a deficit balance;
  • the requirements for accounting for changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control; and
  • the requirements for accounting for a loss of control over a subsidiary, and the related requirement in IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, to classify all the assets and liabilities of a subsidiary as held for sale when an entity is committed to a sale plan involving loss of control of that subsidiary (and certain other criteria are met). Accounting Policies to First IFRS Financial statements

Changes in accounting policies during first year of IFRS Accounting Policies to First IFRS Financial statements

If, between the date of an entity’s interim financial report (prepared in accordance with IAS 34 Interim Financial Reporting) and the issue of its first annual IFRS financial statements, and entity changes accounting policies and/or adopts exemptions:

  • The requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors do not apply
  • The reconciliation between IFRSs and previous GAAP has to be updated.

 

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