Objective and Scope of IFRS 1
IFRS 1 applies to an entity that presents its first IFRS financial statements. It specifies the requirements that an entity must follow when it first adopts IFRS as the basis for preparing its general‐purpose financial statements. IFRS 1 refers to these entities as first‐time adopters. The objective of this standard is to ensure that an entity's first IFRS financial statements, including interim financial reports, present high‐quality information that:
1. Is transparent and comparable over all periods presented;
2. Provides a suitable starting point for accounting in accordance with IFRS; and 3. Can be prepared at a cost that does not exceed the benefits.
First‐time IFRS adopters' financial statements should be comparable over time and between entities applying IFRS for the first time, as well as those already applying IFRS.
Per IFRS 1, an entity must apply the standard in its first IFRS financial statements and in each interim financial report it presents under IAS 34, Interim Financial Reporting, for a part of the period covered by its first IFRS financial statements. For example, if 20XX is the first annual period for which IFRS financial statements are being prepared, the quarterly or semiannual statements for 20XX, if presented, must also comply with IFRS.
According to the standard, an entity's first IFRS financial statements refer to the first annual financial statements in which the entity adopts IFRS by making an explicit and unreserved statement (in the financial statements) of compliance with IFRS (with all IFRS!).
IFRS 1 clarifies that an entity, which in a previous period fully complied with IFRS, but whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with IFRS, and in the current period makes an explicit and unreserved statement of compliance with IFRS, has the choice of either applying IFRS 1 (in full) or to retrospectively apply IFRS in accordance with the provision of IAS 8, Accounting Policies, Changes in Estimates and Errors (application of this is discussed in more detail in Chapter 7). Under both options an entity needs to disclose the reason it stops to apply IFRS and the reason it is resuming applying IFRS and when IAS 8 is applied, the reason for electing to apply IFRS as if it had never stopped applying IFRS.
An entity, in its first IFRS financial statements, has the choice between applying an existing and currently effective IFRS or applying early a new or revised IFRS that is not yet mandatorily effective, provided that the new or revised IFRS permits early application. An entity is required to apply the same version of the IFRS throughout the periods covered by those first IFRS financial statements. Early adoption is, however, possible and entities are permitted to early adopt any individual amendment within the cycle without early adopting all other amendments.
IFRS‐compliant financial statements presented in the current year would qualify as first IFRS financial statements if the reporting entity presented its most recent previous financial statements:
Under national GAAP or standards that were inconsistent with IFRS in all respects;
In conformity with IFRS in all respects, but without an explicit and unreserved statement to that effect;
With an explicit statement that the financial statements complied with certain IFRS, but not with all applicable standards;
Under national GAAP or standards that differ from IFRS but using some individual IFRS to account for items which were not addressed by its national GAAP or other standards;
Under national GAAP or standards, but with a reconciliation of selected items to amounts determined under IFRS.
Other examples of situations where an entity's current year's financial statements would qualify as its first IFRS financial statements are when:
The entity prepared financial statements in the previous period under IFRS, but the financial statements had been identified as being “for internal use only” and had not been made available to the entity's owners or any other external users;
The entity presented IFRS‐compliant financial reporting in the previous period under IFRS for consolidation purposes without preparing a complete set of financial statements as mandated by IAS 1, Presentation of Financial Statements; and
The entity did not present financial statements for the previous periods at all.
Example to illustrate the implications of the standard
Excellent Inc., incorporated in Mysteryland, is a progressive multinational corporation that has always presented its financial statements under the national GAAP of the country of incorporation, with additional disclosures made in its footnotes. The supplementary data included value‐added statements and a reconciliation of major items on its statement of financial position to IFRS. Excellent Inc. has significant borrowings from international financial institutions, and these have certain restrictive financial covenants—such as a defined upper limit on the ratio of external debt to equity, and minimum annual return on investments. To monitor compliance with these covenants, Excellent Inc.
also prepared a separate set of financial statements in accordance with IFRS, but these were never made available to the international financial institutions or to the shareholders of Excellent Inc.
In 202X it was publicly announced that IFRS would be adopted as Mysteryland's national GAAP from 202X.
Excellent Inc. had always presented its financial statements under its national GAAP but had also voluntarily provided a reconciliation of major items on its statement of financial position to IFRS in its footnotes, and “for internal purposes” had also prepared a separate set of financial statements under IFRS. Despite these previous overtures towards IFRS compliance, in the year 202X—when Excellent Inc. moves to IFRS as its national GAAP and presents its financial statements to the outside world under IFRS, with an explicit and unreserved
statement that these financial statements comply with IFRS—it will nonetheless be considered a first‐time adopter and will have to comply with the requirements of IFRS 1.
In cases when the reporting entity's financial statements in the previous year contained an explicit and unreserved statement of compliance with IFRS, but in fact did not fully comply with all accounting policies under IFRS, such an entity would not be considered a first‐time adopter for the purposes of IFRS 1. The disclosed or undisclosed departures from IFRS in previous years' financial statements of this entity would be treated as an “error” under IFRS 1, which warrants correction made in the manner prescribed by IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. In addition, an entity making changes in accounting policies as a result of specific transitional requirements in other IFRS is also not considered a first‐time adopter.
IFRS 1 identifies three situations in which IFRS 1 would not apply. These exceptions include, for example, when an entity:
1. Stops presenting its financial statements under national requirements (i.e., its national GAAP) along with another set of financial statements that contained an explicit or unreserved statement of compliance with IFRS;
2. Presented its financial statements in the previous year under national requirements (its national GAAP) and those financial statements contained (improperly) an explicit and unreserved statement of IFRS compliance; or
3. Presented its financial statements in the previous year that contained an explicit and unreserved statement of compliance with IFRS, and its auditors qualified their report on those financial statements.
Key Dates
In transition to IFRS, two important dates that must be clearly determined are the first IFRS reporting date and transition date. “Reporting date” for an entity's first IFRS financial statements refers to the end of the latest period covered by the annual financial statements, or interim financial statements, if any, that the entity presents under IAS 34 for the period covered by its first IFRS financial statements. This is illustrated in the following examples.
Examples to illustrate the reporting date
Example1: Xodus Inc. presents its first annual financial statements under IFRS for the calendar year 202X, which include an explicit and unreserved statement of compliance with IFRS. It also presents full comparative financial information for the calendar year 202X‐1. In this case, the latest period covered by these annual financial statements would end on December 31, 202X, and the reporting date for the purposes of IFRS 1 is December 31, 202X (presuming the entity does not present financial statements under IAS 34 for interim periods within calendar year 202X).
Example2: Similarly, if Xodus Inc. decides to present its first IFRS interim financial statements in accordance with IAS 34 for the six months ended June 30, 202X, in addition to the first IFRS annual financial statements for the year ended December 31, 202X, the reporting date would be June 30, 202X (and not December 31, 202X).
“Transition date” refers to the beginning of the earliest period for which an entity presents full comparative information under IFRS as part of its first IFRS financial statements. Thus, the date of transition to IFRS depends on two factors: the date of adoption of IFRS and the number of years of comparative information that the entity decides to present along with the financial information of the year of adoption. In accordance with IFRS 1, at least one year of comparative information is required. The “first IFRS reporting period” is the latest reporting period covered by an entity's first IFRS financial statements.
The financial reporting requirements under IFRS 1 are presented below.
Example of IFRS 1 reporting requirements
Assume that Adaptability Inc. decides to implement IFRS in 202X and to present comparative information for one year only. The end of
Adaptability's first IFRS reporting period is December 31, 202X. The last reporting period under previous GAAP is 202X‐2. The example below illustrates reporting requirements under IFRS 1 applicable to this entity.
Date of transition >Reporting date
I‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐I‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐I‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐I
1/1/202X‐1 31/12/202X‐1 31/03/202X 31/12/202X
Adaptability Inc. must prepare and present an opening IFRS statement of financial position at the date of transition to IFRS, that is the beginning of business on January 1, 202X‐1 (or, equivalently, close of business on December 31, 202X‐2). Its last reporting period under
“previous GAAP” is 202X‐2 and end of comparative period is on December 31, 202X‐1.
Adaptability Inc. will produce its first IFRS financial statements for the annual period ending December 31, 202X. The first IFRS reporting period is 202X.
Adaptability Inc. will prepare and present its statement of financial position for December 31, 202X (including comparative amounts for December 31, 202X‐1), statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ending December 31, 202X (including comparative amounts for 202X‐1) and disclosures (including comparative amounts for 202X‐1).
Adaptability Inc. has quarterly reporting requirements; the entity will comply with IAS 34 and present the first IFRS‐compliant interim report—the March 31, 202X quarterly report. Consequently, the first IFRS reporting date is March 31, 202X.
If Adaptability Inc. would be required (or choose) to present two years of comparative information under IFRS, the transition date would be January 1, 202X‐2.
Steps in Transition to IFRS
Transition to IFRS involves the following steps:
Selection of accounting policies that comply with IFRS standards effective at the reporting date.
Preparation of an opening IFRS statement of financial position at the date of transition to IFRS as the starting point for subsequent accounting under IFRS. Recognise all assets and liabilities whose recognition is required under IFRS:
Derecognise items as assets or liabilities if IFRS does not permit such recognition;
Reclassify items in the financial statements in accordance with IFRS; and
Measure all recognised assets and liabilities according to principles set forth in IFRS.
Presentation and disclosure in an entity's first IFRS financial statements and interim financial reports.
Selection of Accounting Policies
IFRS 1 stipulates that an entity should use the same accounting policies throughout all periods presented in its first IFRS financial statements, and also in its opening IFRS statement of financial position. Furthermore, the standard requires that those accounting policies must comply with each IFRS effective at the “reporting date” (as explained before) for its first IFRS financial statements, with certain exceptions. It requires full
retrospective application of all IFRS effective at the reporting date for an entity's first IFRS financial statements, except under certain defined circumstances wherein the entity is prohibited by IFRS from applying IFRS retrospectively (mandatory exceptions) or it may elect to use one or more exemptions from some requirements of other IFRS (optional exemptions). Both concepts are discussed later in this chapter.
If a new IFRS has been issued on the reporting date, but application is not yet mandatory, although reporting entities have been encouraged to apply it before the effective date, the first‐time adopter is permitted, but not required, to apply it as well. As stated before, an entity's first reporting date under IFRS refers to the end of the latest period covered by the first annual financial statements in accordance with IFRS, or interim financial statements, if any, that the entity presents under IAS 34. For example, if an entity's first IFRS reporting date is December 31, 202X, consequently:
First IFRS financial statements must comply with IFRS in effect at December 31, 202X; and
Opening statement of financial position at January 1, 202X‐1, and comparative information presented for 202X‐1, must comply with IFRS effective at December 31, 202X (at the end of the first IFRS reporting period).
On first‐time adoption of IFRS, the first most important step that an entity has to take is the selection of accounting policies that comply with IFRS.
Management must select initial IFRS accounting policies based on relevance and reliability as these choices will affect the company's financial reporting for years to come. While many accounting policy choices will simply reflect relevant circumstances (e.g., method of depreciation, percentage of completion vs. completed contract accounting), other choices will result from IFRS flexibility.
The several areas where a choice of accounting policies under IFRS exists include:
IFRS 1—Optional exemptions from the full retrospective application of IFRS for some types of transactions on first‐time IFRS adoption (see optional exemptions from other IFRS);
IFRS 3—In acquisitions of less than 100%, the option to measure non‐controlling interest at fair value or proportionate share of the acquiree's identifiable net assets (this choice will result in recognising 100% of goodwill or only the parent's share of goodwill);
IFRS 4—Remeasure insurance liabilities to fair value during each accounting period;
IAS 1—
1. Present one statement of comprehensive income or separate income statement and comprehensive income statement;
2. Presentation of expenses in the income statement by nature or by function;
IAS 2—
1. Value inventories at FIFO or weighted‐average;
2. Measure certain inventories, for example agricultural produce, minerals and commodities, at net realisable value rather than cost;
IAS 7—
1. Direct or indirect method for presenting operating cash flows;
2. Classify interest and dividends as operating, investing or financing;
IAS 16—Measure property, plant and equipment using the cost‐depreciation model or the revaluation through equity model;
IAS 19—Many options available for recognising actuarial gains and losses (immediately in profit or loss, immediately in equity or different methods of spreading the cost);
IAS 20—Various options of accounting for government grants;
IAS 23—Borrowing costs;
IAS 27, IAS 28, IAS 31—Cost or fair value model for investments in subsidiaries, associates and joint ventures in the separate financial statements;
IAS 31—Equity method or proportionate consolidation for joint ventures;
IAS 38—The cost‐depreciation model or revaluation through equity model for intangible assets with quoted market prices;
IFRS 9—
1. Optional hedge accounting;
2. Option to designate individual financial assets and financial liabilities to be measured at fair value through P&L;
3. Option to designate non‐trading instruments as fair value through other comprehensive income;
4. Option to reclassify out of fair‐value‐through‐profit or loss, and out of other comprehensive income categories;
5. Option to adjust the carrying amount of a hedged item for gains and losses on the hedging instrument;
6. Option of trade date or settlement date accounting; and
7. Option to separate an embedded derivative or account for the entire contract at fair‐value‐through‐profit or loss;
IAS 40—
1. The cost‐depreciation model or fair value model for investment property; and 2. Option to classify land use rights as investment property.
IFRS 1 requires a first‐time adopter to use the current version of IFRS (or future standards, if early adoption permitted) without considering the superseded versions. This obviates the need to identify varying iterations of the standards that would have guided the preparation of the entity's financial statements at each prior reporting date, which would have been a very time‐consuming and problematic task. This means that the comparative financial statements accompanying the first IFRS‐compliant reporting may differ—perhaps materially—from what would have been presented in those earlier periods had the entity commenced reporting consistent with IFRS at an earlier point in time. Entities can early adopt new standards if early adoption is permitted by the standards but cannot apply standards that are not published at the first IFRS reporting period.
The IASB's original thinking was to grant the first‐time adopter an option to elect application of IFRS as if it had always applied IFRS (i.e., from the entity's inception). However, to have actualised this, the first‐time adopter would have had to consider the various iterations of IFRS that had historically existed over the period of time culminating with its actual adoption of IFRS. Upon reflection, this would have created not merely great practical difficulties for preparers but would have negatively impacted comparability among periods and across reporting entities. Thus, IFRS 1, as promulgated, offers no such option.
The amendment to IFRS 1 as part of the 2010 Improvement to IFRS clarified that, if a first‐time adopter changes its accounting policies or its use of the exemptions in IFRS 1 after it has published an interim financial report in accordance with IAS 34, Interim Financial Reporting, but before its first IFRS financial statements are issued, it should explain those changes and update the reconciliations between previous GAAP and IFRS. The requirements in IAS 8 do not apply to such changes.
Opening IFRS Statement of Financial Position
A first‐time adopter must prepare and present an opening IFRS statement of financial position at the date of transition to IFRS. This statement serves as the starting point for the entity's accounting under IFRS. Logically, preparation of an opening statement of financial position is a necessary step to accurately restate the first year's statements of comprehensive income, changes in equity and cash flows.
Example to illustrate the date of the opening statement of financial position
Adaptability Inc. decided to adopt IFRS in its annual financial statements for the fiscal year ending December 31, 202X, and to present comparative information for the year 202X‐1. Thus, the beginning of the earliest period for which the entity should present full comparative information under IFRS would be January 1, 202X‐1. Accordingly, the opening IFRS statement of financial position for purposes of compliance with IFRS 1 would be that as of the beginning of business on January 1, 202X‐1 (equivalent to the closing of business on December 31, 202X‐2).
Alternatively, if Adaptability Inc. decided (or was required, e.g., by the stock listing authorities) to present two years of comparative information (i.e., for both 202X‐2 and 202X‐1), as well as for the current year 202X, then the beginning of the earliest period for which the entity would present full comparative information would be January 1, 202X‐2 (equivalent to close of business on December 31, 202X‐3). Accordingly, the opening IFRS statement of financial position for purposes of compliance with IFRS 1 would be that as of January 1, 202X‐2, under these circumstances.
The opening statement of financial position, prepared at the transition date, must be based on standards applied at the end of the first reporting period. This implies that advance planning will be required for several items, including hedging, and that the opening statement of financial position cannot be finalised until the end of the first IFRS reporting period (reporting date).
Example to illustrate IFRS to be applied in the opening statement of financial position
ABC entity's first IFRS reporting period will end on December 31, 202X, and its transition date is January 1, 202X‐1, since only one comparative period will be presented. In the first IFRS financial statements ABC will apply IFRS 7, as amended in 2010, in all periods presented in the first IFRS financial statements. The amendment in question clarifies the intended interaction between qualitative and quantitative disclosures of the nature and extent of risks arising from financial instruments and removed some disclosure items which were seen to be superfluous or misleading and was effective for all accounting periods beginning on or after January 1, 202X‐1.