IFRS 1 - First Time Adoption of International Financial Reporting Standards (detailed review)

Objective

This standard prescribes the guidelines for the preparation and presentation of first IFRS financial statements and interim financial reports of the entity for the period they cover and which entails the high quality information which:

• Is Comparable and transparent for all the periods presented
• Provides an appropriate point for the first time application of IFRS
• Can be produced with cost effectiveness

Scope

The requirements of this standard are applicable to the first annual IFRS financial statements and interim financial reports of an entity. The financial statements of the entity as per IFRSs will be treated as its first IFRS financial statements if it has prepared most recent financial statement:

• In accordance with national GAAPs which are not consistent with all IFRSs in all respects
• In accordance with the requirements of all IFRSs but without giving the explicit and unreserved statement of compliance with all IFRSs
• In accordance with the requirements of some IFRSs only
• In accordance with national requirements
• In accordance with the requirements of all IFRSs but for internal use only and these were not available to owners or external users
• Which do not constitute to a complete set of financial statements as required by IAS 1 Presentation of Financial Statements
• Which did not present the financial statements in the previous accounting periods

However, the requirements of this standard are not applicable to:

• The financial statements of an entity which has presented the financial statements in the previous year in accordance with national requirements and those financial statements contained anexplicit and unreserved statement of compliance with IFRSs

• The financial statements of an entity which has presented the financial statements in the previous year and those financial statements contained an explicit and unreserved statement of compliance with IFRSs even if auditor has qualified the report on those financial statement

• The financial statements of an entity which has presented the financial statements in the previous years in accordance with national requirements along with a separate set of financial statements containing an explicit and unreserved statement of compliance with IFRSs and in the current year entity has ceased preparing the financial statement as per national requirements and will only present financial statements containing an explicit and unreserved statement of compliance with IFRSs

Definitions

First Time Adopter

The entity which presents its first financial statements in accordance with IFRSs

First IFRS Financial Statements

The first financial statements of the entity which are presented in accordance with IFRSs containing an explicit and unreserved statement of compliance with IFRSs

First IFRS Reporting Period

The period covered by the first IFRS financial statements of the entity

Date of Transition to IFRSs

It is the beginning of the earliest accounting period for which entity presents its comparative information in accordance with IFRSs in its first IFRSs financial statements

Opening IFRS Statement of Financial Position

It is prepared and presented at the date of transition to IFRSs in accordance with all IFRSs and this is the beginning point for the application of IFRSs

Deemed Cost

It is the value which is considered as an alternative to the cost or depreciated historical cost

Preparing Opening IFRS Statement of Financial Position

This standard requires an entity to prepare and present an opening statement of financial position at the date of transition to IFRSs in accordance with all IFRSs and this will be the beginning point for the application of IFRSs.

For example, if an entity wishes to apply IFRSs to its financial statements for the first time in the year ended 31 December 2010, the date of transition to IFRSs will be the beginning of the comparative year i.e. 1 January 2009. On this date, the entity is required to prepare an opening IFRS statement of financial position and this will be the beginning point for the application of IFRSs.

• The entity selects and applies the accounting policies in accordance with the IFRSs effective at the end of first IFRS reporting period and use those accounting policies consistently in the opening IFRS statement of financial position and other periods presented in its first financial statements as per IFRSs

• The entity should recognize the assets and liabilities at the date of transition in accordance with the requirements of IFRSs effective at the end of first IFRS reporting period such as certain items may have not been recognized previously under GAAPs such as deferred tax or provisions

• The entity should de-recognize the assets and liabilities at the date of transition to IFRSs which do not qualify for recognition as per the requirements of IFRSs effective at the end of first IFRS reporting period such as capitalization of research cost under previous GAAPs

• The entity should measure all assets and liabilities at the date of transition in accordance with the requirements of IFRSs effective at the end of first IFRS reporting period

• The entity may reclassify the assets or liabilities at the date of transition in accordance with the requirements of IFRSs effective at the end of first IFRS reporting period such as convertible instrument may need to be split between equity and liability component

• The resulting effects of adjustments will be adjusted in retained earnings at the date of transition to IFRSs

Exemptions

IFRS 1 allows certain exemptions for the preparation of first IFRS financial statements to the first time adopter. These exemptions are available to encourage the adoption of IFRSs and to minimize the cost of adoption of IFRSs. These exemptions include:

1. Business Combination

The entity which applies IFRS 3 Business Combination for the first time in respect of its past business combination, it requires retrospective application of the IFRS 3 to all the past business combinations however, IFRS 1 allows exemption to the first time adopter in respect of its all the past business combination before adoption of IFRSs as follows:

• It permits an entity to retain the previous classification of its past business combination such as determination of acquirer and acquiree
• The entity will recognize the assets and liabilities assumed in the past business combination which qualify for recognition as per the IFRSs at the date of transition at the their respective values on the date of acquisition and there is no requirement to remeasure the fair values of these assets or liabilities
• The goodwill relating to the business acquired calculated under the previous GAAPs will not be changed except due to:

The recognition of a particular asset of acquiree if the entity had not recognized such asset of acquiree acquired in the business combination and it qualifies for recognition under IFRSs

The de-recognition of a particular asset of acquiree if the entity had recognized such asset of acquiree acquired in the business combination and it does not qualify for recognition under IFRSs

2.  Share Based Payment

The entity may claim exemption in respect of its share based payments as follows:

• The entity is encouraged but not required to apply IFRS 2 Share Based Payments to the shared base equity settled arrangements which were granted before November 7, 2002

• The entity is encouraged but not required to apply IFRS 2 Share Based Payments to the shared base equity settled arrangements which were granted after November 7, 2002 and were settled before the date of transition to IFRS or January 1, 2005 if it is later

• The entity is encouraged but not required to apply IFRS 2 Share Based Payments to the share based cash settled arrangements which were settled before the date of transition to IFRS or January 1, 2005 if it is later

3.  Exchange Differences

The entity will not recognized any exchange gain or losses relating to the foreign operation on the date of transition to IFRSs these will be assumed to be nil at the date of transition. The entity will account for fresh exchange gain and losses onward from the date of transition which will be covered as per the requirements of IAS 21 The Effects of Changes in Exchange Rates

4.  Deemed Cost

The entity can measure the property, plant and equipment, intangible asset, and investment property at deemed cost on the date of transition.The deemed cost may be taken as either:

• Fair value at the date of transition or
• Revalued amount under previous GAAPs on or before the date of transition

5.  Investment in Subsidiary, Associate and Joint Venture

The entity may elect to measure its investment on subsidiary, associate and joint venture either at:

• Cost as per IAS 27 Separate Financial Statements or
• Deemed cost as mentioned above

6.  Borrowing Costs

The entity will apply the requirements of IAS 23 Borrowing Costs in respect of the borrowing costs which will incur on or after the date of transition to IFRSs and it will not restate the borrowing cost accounted for under the previous GAAPs before the date of transition to IFRSs

Adoption of IFRSs by Subsidiary, Associate or Joint Venture

If the subsidiary, associate or joint venture adopts IFRSs later than its parent then the assets and liabilities of subsidiary, associate or joint venture will be measured at either:

• The values of assets and liabilities at the Parent’s date of transition to IFRSs or
• The values of assets and liabilities at the date of transition to IFRSs of the subsidiary, associate or joint venture