IFRS 1 First-time Adoption June 09

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Internationalfinancial reportingdevelopmentsIFRS 1 First-time adoption of International

Financial Reporting Standards

30 June 2009


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To our clients and other friends

To our clients and other friends

IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1) was

developed by the International Accounting Standards Board (IASB) to help entities transition

to International Financial Reporting Standards (IFRS) as their basis for financial reporting.

The key principle of IFRS 1 is full retrospective application of IFRS standards that are

effective as of the entitys first IFRS reporting period. However, IFRS 1 establishes two types

of departure from the principle of full retrospective application of standards effective at the

end of the first IFRS reporting period: (1) optional exemptions from some of the requirements

of certain IFRS and (2) mandatory exceptions from the requirement for the retrospective

application of other IFRS.

IFRS 1 grants optional exemptions from the general requirement of full retrospective

application of the IFRS standards effective at the end of an entity's first IFRS reporting period

because in the IASBs view the cost of complying with them is likely to exceed the benefits tousers of financial statements. IFRS 1 also defines a number of mandatory exceptions that

prohibit retrospective application of IFRS in some areas, particularly when retrospective

application would require judgments by management about past conditions after the outcome

of a particular transaction is already known. The reasoning behind the mandatory exceptions

is that retrospective application of IFRS in these situations could easily result in an

unacceptable use of hindsight and lead to arbitrary or biased restatements, which would be

neither relevant nor reliable.

On 14 November 2008, the US Securities and Exchange Commission (SEC) issued a proposed

Roadmap on the potential use of IFRSas issued by the IASB in financial statements

prepared by US issuers. With the proposed Roadmap the adoption of IFRS is becoming agreater possibility in the United States.

This publication is therefore designed to assist professionals in understanding the

requirements of first-time adoption, and in particular the mandatory exceptions and voluntary

exemptions, under IFRS 1 and how IFRS 1 may affect US issuers transitioning from US GAAP

to IFRS. This publication reflects our current understanding of the provisions in IFRS 1 based

on our experience with financial statement preparers and related discussions with the IASB.

IFRS 1 continues to be amended as the IASB becomes aware of additional areas in which

preparers require accommodations to deal with transitional issues and when new standards or

amendments to existing standards are developed. While we will update this publication as

additional authoritative guidance is issued, preparers of financial statements should closely

monitor developments in this area.

30 June 2009

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Contents

Contents

1 Overview................................................................................................................... 11.1 Introduction.................................................................................................... 11.2 Scope ............................................................................................................. 21.3 Opening IFRS Balance Sheet Selection of Accounting Policies.......................... 5

1.3.1 First IFRS Reporting Period................................................................... 51.3.2 Date of Transition to IFRS and Opening IFRS Balance Sheet .................... 51.3.3 Retrospective Application of IFRS.......................................................... 61.3.4 Transitional provisions in other standards.............................................. 81.3.5 Adjustments to the Opening IFRS Balance Sheet .................................... 8

1.3.5.1 Recognize all assets and liabilities whose recognition is

required by IFRS.................................................................. 91.3.5.2 Derecognize items as assets and liabilities if such

recognition is not permitted by IFRS ................................... 101.3.5.3 Classify items recognized in accordance with IFRS............... 101.3.5.4 Measure all recognized assets and liabilities in

accordance with IFRS......................................................... 111.3.6 Opening balance sheet accounting policies........................................... 15

2 Mandatory prohibitions on retrospective application............................................... 162.1 Introduction.................................................................................................. 162.2 Estimates...................................................................................................... 162.3 Derecognition of financial assets and liabilities ................................................ 19

2.3.1 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................... 212.3.1.1 Update on efforts to converge US GAAP with IFRS............... 21

2.4 Hedge accounting.......................................................................................... 222.4.1 Recognition and Measurement of derivatives that formed part of a

hedge relationship.............................................................................. 222.4.2 Prohibition on retrospective application............................................... 232.4.3 Hedge relationships reflected in the opening IFRS balance sheet ........... 242.4.4 Reflecting cash flow hedges in the opening IFRS balance sheet.............. 24

2.4.5 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................... 252.4.5.1 Recognition and Measurement of derivatives that

formed part of a hedge relationship .................................... 252.4.5.2 Reflecting cash flow hedges in the opening IFRS

balance sheet .................................................................... 272.5 Non-controlling Interest................................................................................. 28



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3 Voluntary Exemptions From the Requirements of Certain IFRS ..............................293.1 Introduction...................................................................................................293.2 Business combinations ...................................................................................30

3.2.1 Effect of previous accounting ..............................................................313.2.2 First-time adopter elects to restate prior business combinations ............333.2.3 First-time adopter elects to not restate prior business combinations ......33

3.2.3.1 Classification of prior business combinationsdoes not change.................................................................34

3.2.3.2 Recognized assets acquired and liabilities assumed in aprior business combination .................................................35

3.2.3.3 Subsequent measurement under IFRS not based on cost ......373.2.3.4 Subsequent measurement under IFRS based on cost............383.2.3.5 Assets acquired and liabilities assumed but not

recognized in a prior business combination..........................413.2.3.6 Evaluation of goodwill.........................................................423.2.3.7 Currency adjustments to goodwill........................................45

3.2.4 Other issues .......................................................................................463.2.4.1 Contingent consideration....................................................463.2.4.2 Acquisition of non-controlling interest .................................48

3.2.5 Acquisitions of investments in associates and of interests in

joint ventures .....................................................................................493.3 Share-based payment transactions .................................................................49

3.3.1 Potential issues applicable to first-time adopters that previouslyreported under US GAAP.....................................................................513.3.1.1 Measurement and recognition of expense awards with

graded vesting features...................................................513.3.1.2 Modification of vesting terms..............................................533.3.1.3 Equity repurchase features.................................................543.3.1.4 Deferred taxes ...................................................................553.3.1.5 Nonvesting conditions (other than service, performance,

and market conditions)........................................................573.3.1.6 Transactions with non-employees .......................................583.3.1.7 Performance conditions......................................................60

3.4 Insurance Contracts.......................................................................................603.4.1 Potential issues applicable to first-time adopters that previously

reported under US GAAP.....................................................................613.5 Fair value or revaluation as deemed cost .........................................................62

3.5.1 Scope of the Fair value or revaluation as deemed cost exemption.......633.5.2 Determining deemed cost....................................................................643.5.3 Evaluating impairment indicators.........................................................67

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3.5.4 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................... 673.5.4.1 Determining deemed cost................................................... 673.5.4.2 Calculating accumulated depreciation upon transition

to IFRS.............................................................................. 673.5.4.3 Effect of existing impairment indicators .............................. 69

3.6 Leases.......................................................................................................... 713.6.1 Potential issues applicable to first-time adopters that previously

reported under US GAAP .................................................................... 723.6.2 Future Developments ......................................................................... 72

3.7 Employee benefits......................................................................................... 733.7.1 Actuarial assumptions ........................................................................ 733.7.2 Exemption from presenting historical summary information.................. 733.7.3 Potential issues applicable to first-time adopters that previously

reported under US GAAP .................................................................... 743.7.3.1 Actuarial gains and losses .................................................. 743.7.3.2 Unrecognized past service cost........................................... 763.7.3.3 Plan assets........................................................................ 773.7.3.4 Curtailments...................................................................... 773.7.3.5 One-time termination benefits ............................................ 773.7.3.6 Full actuarial valuation....................................................... 783.7.3.7 Future convergence........................................................... 79

3.8 Cumulative translation differences ................................................................. 803.8.1 Hyperinflation .................................................................................... 813.8.2 Changes in functional currency ........................................................... 813.8.3 Potential issues applicable to first-time adopters that previously

reported under US GAAP .................................................................... 813.8.3.1 Hyperinflation ................................................................... 823.8.3.2 Available-for-sale monetary assets; foreign exchange

gains and losses................................................................. 823.9 Investments in a subsidiary, jointly controlled entity or associate...................... 833.10 Assets and liabilities of subsidiaries, associates and joint ventures...................... 84

3.10.1Previously unconsolidated subsidiaries ................................................ 843.10.2Previously consolidated entities that are not subsidiaries...................... 843.10.3Subsidiary becomes a first-time adopter later than its parent (for

purposes of separate subsidiary financial statements) .......................... 853.10.4Parent becomes a first-time adopter later than its subsidiary ................ 873.10.5Implementation guidance on accounting for assets and liabilities of

subsidiaries, associates and joint ventures ........................................... 893.10.6Adoption of IFRS in separate non-consolidated financial statements ........ 90



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3.10.7Potential issues applicable to first-time adopters that previouslyreported under US GAAP.....................................................................903.10.7.1 Different reporting dates of parent and subsidiary................903.10.7.2 Uniform accounting policies................................................913.10.7.3 Consolidation models .........................................................923.10.7.4 Equity method accounting ..................................................933.10.7.5 Qualified special-purpose-entity (QSPE) and

Investment companies........................................................933.10.8Future Developments..........................................................................94

3.10.8.1 Consolidation models .........................................................943.10.8.2 Joint venture proportionate accounting...............................943.10.8.3 Qualified special-purpose-entity (QSPE) ...............................94

3.11 Compound financial instruments and debt instruments withembedded derivatives ....................................................................................953.11.1Retrospective application of split accounting and

measurement challenges.....................................................................963.11.2Potential issues applicable to first-time adopters that previously

reported under US GAAP.....................................................................963.12 Designation of previously recognized financial instruments ..............................98

3.12.1 Implementation guidance on other categories of financial instruments.....1003.12.2Potential issues applicable to first-time adopters that previously

reported under US GAAP...................................................................1013.12.3 Future Developments........................................................................104

3.13 Fair value measurement of financial assets or financial liabilities.....................1043.13.1Potential issues applicable to first-time adopters that previously

reported under US GAAP...................................................................1053.13.2 Future Developments.......................................................................106

3.14 Changes in existing decommissioning, restoration, and similar liabilitiesincluded in the cost of property, plant and equipment.....................................1063.14.1Potential issues applicable to first-time adopters that previously

reported under US GAAP...................................................................1073.15 Service concession arrangements.................................................................110

3.15.1Potential issues applicable to first-time adopters that previouslyreported under US GAAP...................................................................1113.16 Borrowing Cost............................................................................................111

3.16.1Potential issues applicable to first-time adopters that previouslyreported under US GAAP...................................................................112

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4 Presentation and Disclosures................................................................................1134.1 Comparative information .............................................................................113

4.1.2 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................. 113

4.2 Non-IFRS comparative information and historical summaries ......................... 1144.3 Explanation of transition to IFRS...................................................................115

4.3.1 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................. 115

4.4 Reconciliations ............................................................................................ 1164.5 Correction of errors..................................................................................... 1174.6

Designation of financial assets and financial liabilities .................................... 118

4.7 Use of fair value as deemed costs ................................................................. 1184.8 Use of deemed cost for investments in subsidiaries, jointly controlled

entities and associates................................................................................. 1195 Interim Financial Statements................................................................................ 120

5.1 Potential issues applicable to first-time adopters that previously reportedunder US GAAP ........................................................................................... 121

6 Appendix...............................................................................................................1226.1 Proposed amendments to IFRS 1.................................................................. 122

6.1.1 Oil and gas exploration and production assets .................................... 1226.1.1.2 Potential issues applicable to first-time adopters thatpreviously reported under US GAAP.................................. 122

6.1.1.3 Future Developments....................................................... 1226.1.2 Rate regulated entities...................................................................... 123

6.1.2.1 Potential issues applicable to first-time adopters thatpreviously reported under US GAAP.................................. 124

6.1.2.2 Future Developments....................................................... 1246.2 Abbreviations used in this publication ........................................................... 125

Certain abbreviations of accounting standards are used throughout this publication.

Those abbreviations are defined in Appendix 6.2.

Portions of FASB publications reprinted with permission. Copyright Financial Accounting Standards Board, 401 Merritt 7,

P.O. Box 5116, Norwalk, CT 06856-5116, U.S.A. Portions of AICPA Statements of Position, Technical Practice Aids, and other

AICPA publications reprinted with permission. Copyright American Institute of Certified Public Accountants, 1211 Avenue of

the Americas, New York, NY 10036-8875, USA. Copies of complete documents are available from the FASB and the AICPA.

Portions of IASB publications and IASC Foundation standards reprinted with permission. Copyright International Accounting

Standards Committee Foundation, International Headquarters, 30 Cannon Street, London, EC4M 6XH, United Kingdom


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1 Overview


1 Overview

1.1 IntroductionExcerpt from IFRS 1

1

1. The objective of this IFRS is to ensure that an entity's first IFRS financial statements,

and its interim financial reports for part of the period covered by those financial

statements, contain high quality information that:

a. is transparent for users and comparable over all periods presented;

b. provides a suitable starting point for accounting in accordance with International

Financial Reporting Standards (IFRSs); and

c. can be generated at a cost that does not exceed the benefits.

The International Accounting Standards Board (IASB or the Board) published IFRS 1 toprovide guidance for all entities to follow on their initial adoption of IFRS. IFRS 1 prescribes

the methodology to be followed in preparation of an entitys first set of IFRS financial

statements, beginning with its opening IFRS balance sheet. The opening IFRS balance sheet

then serves as the starting point for an entitys future accounting under IFRS. While full

retrospective application of IFRS is required upon adoption, the IASB recognized there were

certain situations in which the cost of a full retrospective application of IFRS would exceed the

potential benefit to investors and other users of the financial statements. In other situations,

the Board noted that retrospective application would require judgments by management

about past conditions after the outcome of a particular transaction is already known. As a

result, IFRS 1 contains a number of exemptions from the requirements of certain IFRS and

mandatory exceptions from full retrospective application of IFRS. This document providesfurther details and insight to these voluntary exemptions and mandatory exceptions, as well

as to the disclosure requirements of IFRS 1.

With the US Securities and Exchange Commissions (SEC) publication in November 2008 of its

proposed Roadmap, the adoption of IFRS is becoming a more likely possibility in the United

States. The proposed Roadmap sets forth several milestones that, if achieved, could result in

the mandatory use of IFRS in financial statements filed with the SEC by US issuers for years

ending 31 December 2014, 2015 and 2016, depending on the size of the issuer. The

Roadmap proposes early adoption for years ending after 15 December 2009 by a limited

number of large issuers that participate in an industry when the use of IFRS is more prevalent

than any other basis of accounting. Many US entities are beginning to think about what theirinitial IFRS financial statements will look like when they convert from US GAAP to IFRS.

IFRS 1, like all other standards within IFRS, is a living document and subject to

modifications and improvements as deemed necessary by the IASB. IFRS 1 was originally

created to address potential conversion issues for companies within the European Union and

1 In November 2008, the IASB issued a revised version of IFRS 1. IFRS 1 (Revised 2008) is effective for entities

applying IFRS for the first time for annual periods beginning on or after 1 July 2009.


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1 Overview

c. prepared a reporting package in accordance with IFRSs for consolidation purposes

without preparing a complete set of financial statements as defined in IAS 1

Presentation of Financial Statements (as revised in 2007); or

d. did not present financial statements for previous periods.

4. This IFRS applies when an entity first adopts IFRSs. It does not apply when, for

example, an entity:

a. stops presenting financial statements in accordance with national requirements,

having previously presented them as well as another set of financial statements

that contained an explicit and unreserved statement of compliance with IFRSs;

b. presented financial statements in the previous year in accordance with national

requirements and those financial statements contained an explicit and unreservedstatement of compliance with IFRSs; or

c. presented financial statements in the previous year that contained an explicit and

unreserved statement of compliance with IFRSs, even if the auditors qualified

their audit report on those financial statements.

5. This IFRS does not apply to changes in accounting policies made by an entity that

already applies IFRSs. Such changes are the subject of:

a. requirements on changes in accounting policies in IAS 8Accounting Policies,

Changes in Accounting Estimates and Errors; and

b. specific transitional requirements in other IFRSs.

An entity that presents financial statements in accordance with IFRS for the first time is a

first-time adopter as that term is used in IFRS 1, and it should apply IFRS 1 in preparing its

financial statements. IFRS 1 defines an entitys first IFRS financial statements as being the

first annual financial statements in which an entity adopts IFRS by making an explicit and

unreserved statement of compliance with IFRS in those financial statements. It should also

apply the standard in each interim financial report that it presents under IAS 34 for a part of

the period covered by its first IFRS financial statements.2

2 Note, for US public companies, it will ultimately be a decision of the SEC as to whether or not the interim

financial statements in the year of adoption of IFRS must be presented in accordance with IAS 34 or in

accordance with US GAAP. The SECs proposed Roadmap indicates that the SEC anticipates requiring entities to

adopt IFRS as part of an annual report, and that interim reporting in accordance with IAS 34 would not occur

until the next fiscal year (for example, interim reporting in accordance with IFRS would begin in 2015 for an

entity that is a first-time adopter in 2014). However, the proposed Roadmap also requests feedback on

alternative approach by which companies that early adopt IFRS can present their interim financial statements

during the first IFRS reporting period by filing a Form 10-K/A early in that period, which includes financial

statements of the prior two years under IFRS.



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1 Overview

general purpose IFRS financial statements that meet the objectives of the framework.3 As a

result, an entity may determine that those subsidiaries have not yet prepared IFRS compliant

financial statements and, therefore, should be considered first-time adopters.

Entities that adopt a new set of local accounting standards that are identical to IFRS should

consider including a statement of compliance with both the local accounting standards and

IFRS. In such situations, failure to make such a dual statement of compliance may subject the

entity to the application of IFRS 1 whenever it decides to state compliance with IFRS.

However, entities reporting under a local accounting standard that has gradually converged

with IFRS would be required to apply IFRS 1 the first time they chose to state compliance with

IFRS, even if that local accounting standard has ultimately become identical to IFRS.

1.3 Opening IFRS Balance Sheet Selection of Accounting Policies1.3.1 First IFRS Reporting Period

The first IFRS reporting period is the latest period covered by the first-time adopters first

IFRS financial statements. For example, fiscal year ending 31 December 2014 would be the

first IFRS reporting period for a calendar year-end entity that begins reporting under IFRS in

its 2014 financial statements.

In the US, a public entitys first reporting period likely will be mandated by the SEC. Based on

the SECs Roadmap, the mandatory first IFRS reporting period for US public companies will

be the fiscal year ending on or after December 15, 2014, 2015, or 2016 for large

accelerated filers, accelerated filers, and non-accelerated filers, respectively. Also, if the

SEC moves forward with its proposed rule, a limited number of entities would be allowed to

adopt IFRS as early as the fiscal year ending on or after December 15, 2009 as long as

certain criteria are met.

1.3.2 Date of Transition to IFRS and Opening IFRS Balance Sheet

Excerpt from IFRS 1

6. An entity shall prepare and present an opening IFRS statement of financial position at

the date of transition to IFRSs. This is the starting point for its accounting in

accordance with IFRSs.

The beginning of the earliest comparative period for which a first-time adopter presents full

comparative financial statements under IFRS will be its date of transitionto IFRS the startingpoint for accounting for assets, liabilities and equity accounts recognized as of the transition

date and subsequently. IFRS requires that a first-time adopters financial statements include

at least one comparative period, but a first-time adopter may elect to or be required to

3 It is important to note that if the subsidiary or branchs financial statements had contained an unreserved

statement of compliance with IFRS, that subsidiary or branch would no longer be considered a first-time adopter

and would not be eligible to apply the provisions of IFRS 1. However, we believe it is unlikely that financial

statements prepared solely for tax or other regulatory requirements would contain such a statement.



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provide more than one comparative period. For example, the SEC has indicated in its

proposed Roadmap that it likely will require US issuers to include two comparative periods for

all financial statements other than the statement of financial position in their first IFRS

financial statements.

At the date of transition to IFRS a first-time adopter must prepare, and present as part of its

first IFRS financial statements, an opening IFRS statement of financial position (that is, the

opening balance sheet). For example, 1 January 2012 is the date of transition to IFRS for a

first-time adopter that presents two years of comparative figures with a first IFRS reporting

period ended 31 December 2014.

The periods to be presented in a first-time adopters financial statements are discussed

further in Chapter 4.

1.3.3 Retrospective Application of IFRS

Excerpt from IFRS 1

7. An entity shall use the same accounting policies in its opening IFRS statement of financial

position and throughout all periods presented in its first IFRS financial statements. Those

accounting policies shall comply with each IFRS effective at the end of its first IFRS

reporting period, except as specified in paragraphs 13-19 and Appendices B-E.

8. An entity shall not apply different versions of IFRSs that were effective at earlier dates.

An entity may apply a new IFRS that is not yet mandatory if that IFRS permits early

application.IFRS 1 requires full retrospective application of IFRS in a first-time adopters financial

statements. This means that companies must retrospectively apply the current versions of

IFRS for all periods presented (opening IFRS balance sheet, comparative period(s) and

current period), except for those areas with specified limited relief as prescribed by IFRS 1. A

first-time adopter should not consider superseded or amended versions of IFRS in preparing

its first IFRS financial statements. For example, upon conversion to IFRS, account balances

existing at the date of transition and transactions after the date of transition to IFRS are all

restated using the standards effective at the end of the first IFRS reporting period. If a new

standard became effective between the date of transition to IFRS and the first IFRS reporting

period, that standard would be applied retrospectively because the standards to be applied in

the opening IFRS balance sheet are those that are in effect on the first IFRS reporting date(regardless of the transition provisions provided within the new standard), unless a specific

exemption in IFRS 1 provided differently.

When a first-time adopter is preparing its first IFRS financial statements, there may be

standards at the reporting date that have been issued by the IASB but that are not yet

effective. If those standards have transitional provisions that allow early application, the first-

time adopter may but is not required to apply them in its first IFRS financial statements.

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1.3.4 Transitional provisions in other standardsExcerpt from IFRS 1

9. The transitional provisions in other IFRSs apply to changes in accounting policies made

by an entity that already uses IFRSs; they do not apply to a first-time adopter's

transition to IFRSs, except as specified in Appendices B-E.

IFRS 1 makes clear that the transitional provisions in other IFRS standards apply only to

entities that already use IFRS; they do not apply to a first-time adopters transition to IFRS.

There are limited exceptions to this general rule relating to (1) insurance contracts, (2)

service concessions, (3) borrowing cost and (4) assets classified as held for sale and

discontinued operations (these items are discussed further in Chapter 3 of this publication).

The implication of this provision is that the requirements of IFRS 1 override the transitionalprovisions in all other IFRS for a first-time adopter.

The Board decided that whenever it issues a new IFRS, it would consider on a case-by-case

basis whether a first-time adopter should apply that IFRS retrospectively or prospectively.

The Board expects that retrospective application will be appropriate in most cases, given its

primary objective of comparability over time within a first-time adopters first IFRS financial

statements. However, if the Board concludes in a particular case that prospective application

by a first-time adopter is justified, it will amend IFRS 1 to make clear this requirement. For

example, in November 2006, the Board issued IFRIC 12, which contains guidance on

accounting for service concession arrangements. At the same time, the Board amended

IFRS 1 to allow first-time adopters to apply the transitional provision in IFRIC 12 as of the

entitys date of transition. See section 3.15 for a further discussion.

1.3.5 Adjustments to the Opening IFRS Balance Sheet

Excerpt from IFRS 1

10. Except as described in paragraphs 13-19 and Appendices B-E, an entity shall, in its

opening IFRS statement of financial position:

a. recognise all assets and liabilities whose recognition is required by IFRSs;

b. not recognise items as assets or liabilities if IFRSs do not permit such recognition;

c. reclassify items that it recognised in accordance with previous GAAP as one type

of asset, liability or component of equity, but are a different type of asset, liabilityor component of equity in accordance with IFRSs; and

d. apply IFRSs in measuring all recognised assets and liabilities.

Application of the general provisions in paragraph 10 of IFRS 1 regarding the preparation ofthe opening balance sheet is, however, not as straight forward as it may seem. Frequently an

entitys previous GAAP will have recognition or measurement differences (or both) with



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similar IFRS requirements.4 As a result, entities likely will spend a significant amount of time

in analyzing the amounts that should be reflected in the opening balance sheet. The

remainder of the discussion in this section focuses on differences between US GAAP and IFRSthat likely will result in entities having to adjust the amounts recorded in their US GAAP-based

balance sheet in order to create their opening IFRS balance sheet.

1.3.5.1 Recognize all assets and liabilities whose recognition is required by IFRS

Differences between US GAAP and IFRS may result in situations in which amounts are not

recognized on the US GAAP balance sheet but will need to be recognized in the opening balance

sheet to comply with IFRS. For example, one area in which there may be significant differencesfrom amounts recognized under US GAAP is the treatment of Qualified Special Purpose Entities

(QSPEs). While US GAAP contains certain provisions that allow for such entities to remain off

balance sheet, IFRS does not have similar scope exceptions in its consolidation rules, nor do any

of the voluntary exemptions or mandatory exceptions within IFRS 1 address the consolidationof entities. As a result, we believe it is possible that an entity that previously reported under

US GAAP may have to recognize additional assets and liabilities related to QSPEs under IFRS.See section 2.3.1 and 3.10.7.5 for a further discussion of this issue.

Another area in which a difference may exist between US GAAP and IFRS is restructuring

liabilities, as the timing of when such liabilities are recorded generally will differ under the two

GAAPs. For example, employee termination costs and contract termination costs potentiallymay be recorded earlier under IFRS than US GAAP. As this is an area not addressed by any of

the voluntary exemptions or mandatory exceptions of IFRS 1, entities may find that they need

to record additional restructuring liabilities as part of the IFRS opening balance sheet than theamounts previously recognized under US GAAP.

US GAAP and IFRS also potentially differ in the timing of the recognition of certain provisions.

Under the guidance in Statement 5, US GAAP uses a probable threshold to determine whenit is appropriate to recognize certain provisions. While IFRS uses similar probable

terminology, that term is defined in IAS 37 as more likely than not, a lower threshold than

the manner in which probable generally is applied under US GAAP. As a result, entities mayhave to recognize certain provisions under IFRS that previously were not recognized under

US GAAP. Moreover, provisions recognized may have to be discounted under IFRS while theywere not discounted under US GAAP.

An unrecognized intangible asset with a deemed cost other than zero is another example ofan item that is not recognized in a US GAAP balance sheet but may need to be recognized in

the opening IFRS balance sheet. See section 3.2.3.5 for more details.

See section 3.7.3.5 for an example that illustrates the recognition differences betweenUS GAAP and IFRS.

4 Throughout this publication, we generally assume the previous GAAP used was US GAAP, and base our

illustrative examples on that assumption. Companies whose previous GAAP is something other than US GAAP

may or may not encounter similar issues as US GAAP reporters upon conversion to IFRS.



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1.3.5.2 Derecognize items as assets and liabilities if such recognition is not

permitted by IFRS

Some assets and liabilities recognized under US GAAP may have to be derecognized underIFRS in the first-time adopters opening IFRS balance sheet. For example, under bothUS GAAP and IFRS, up-front connection fees in the utilities industry are deferred over theestimated customer relationship period. During this period, under US GAAP the associatedincremental direct costs, insofar as they do not exceed the deferred revenues, are deferredand recognized over the estimated customer relation period. However IFRS does not permitthese incremental direct costs to be capitalized.

1.3.5.3 Classify items recognized in accordance with IFRS

Differences may exist between an entitys previous GAAP and IFRS on the classification of

certain recognized assets and/or liabilities. IFRS 1 requires that once an entity has

appropriately identified all of the assets and liabilities to be recognized in the opening IFRS

balance sheet, those assets and liabilities must be classified in accordance with IFRS

requirements, regardless of how those items were classified under the entitys previous GAAP.

For example, one area in which there are differences in the classification/presentation of

assets and liabilities recognized under US GAAP and IFRS relates to the presentation of

discontinued operations. Currently, the definition of what constitutes a discontinued

operation differ under the two GAAPs. Under US GAAP, a discontinued operation is a

component of an entity that has been disposed of or is classified as held for sale provided that

(a) the operations and cash flows of the component have been (or will be) eliminated from the

ongoing operations of the entity as a result of the disposal transaction and (b) the entity willnot have any significant continuing involvement in the operations of the component after the

disposal transaction. A component of an entity may be a reportable segment or an operating

segment, a subsidiary or an asset group (the lowest level for which identifiable cash flows are

largely independent of the cash flows from other groups of assets and liabilities). Conversely,

IFRS 5 defines a discontinued operation as a component of an entity that either has been

disposed or is classified as held for sale and (a) represents a separate line of business or

geographical area of operations, (b) is part of a single coordinated plan to dispose of a

separate major line of business or geographical area of operations, or (c) is a subsidiary

acquired exclusively with a view to resale.5 As such, a first-time adopter may have presented

more discontinued operations under US GAAP than would be permitted under IFRS. As part

of the opening balance sheet, the entity would be required to reclassify assets and liabilitiespreviously classified as discontinued operations if the operation does not meet the definition

of a discontinued operation under IFRS.

5 A project currently is underway to eliminate the differences in these definitions under US GAAP and IFRS in this

area, with the FASB and IASB publishing exposure drafts in September 2008.



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1 Overview

Another area in which classification differences may occur between US GAAP and IFRS

relates to the classification of certain items as either liabilities or equity. As discussed more

fully in section 3.11.1, certain compound financial instruments that contain both liability and

equity components must be split into those separate components under IFRS, with each one

separately recognized. Those instruments may not have been classified in a similar manner

under US GAAP and may therefore need to be reclassified as part of the adjustments to the

opening balance sheet.

See section 3.3.1.3 for an example that illustrates the classification differences between

US GAAP and IFRS.

1.3.5.4 Measure all recognized assets and liabilities in accordance with IFRS

Once an entity has identified all the assets and liabilities that should be recognized inaccordance with IFRS, the entity must then apply the appropriate measurement principles of

IFRS to determine the amount at which those assets and liabilities should be recognized.

Different measurement criteria under IFRS could result in significant changes to the amounts

previously recognized under US GAAP.

Adjustments to amounts previously recognized may result from differences in the underlying

measurement objectives of US GAAP and IFRS. For example, US GAAP and IFRS contain

different measurement objectives surrounding the recognition of impairment on long-lived

assets. US GAAP requires impaired long-lived assets (that is, those for which the recoverably

test has indicated the assets are not recoverable) to be recognized based on the fair value of

those assets. Conversely, IFRS requires impaired long-lived assets to be recognized at thehigher of the fair value less costs to sell or the value in use. Value in use differs from fair

value as it is the present value of future cash flows from continued use including any disposal

value and therefore is based on entity-specific rather than market-specific assumptions.

As a result, upon transition to IFRS, any impairment previously recognized under US GAAP

would be remeasured in accordance with IFRS. Because impairment is measured at fair value

under US GAAP but at the higher of fair value less costs to sell or value in use under IFRS,

upon transition to IFRS, adjustments to the carrying amount of previously impaired assets

may be necessary. As discussed in section 3.5.3 a first-time adopter must evaluate its assets

for impairment in accordance with IAS 36. Because US GAAP first requires a recoverability

test to determine whether to measure and, if necessary, recognize, an impairment loss butIFRS does not there may be additional impairments to be recognized upon transition to IFRS

as discussed more fully in section 3.5.4.3.

As illustrated in the example below, there are also differences between US GAAP and IFRS in

the measurement objective of inventory in that the LIFO method of valuing inventory is

allowable under US GAAP but is prohibited under IFRS.



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1 Overview

Example 1.3.5.4 Subsequent Measurement of Acquired Finished Goods Inventory

Fact Pattern

On 1 December 2011, Entity A, a US GAAP reporter, purchased 100 units of finished goods

inventory at $1.00/unit. On 15 December 2011, it purchased an additional 100 units of

finished goods inventory at $1.20/unit. Entity A accounts for its inventory using the last-in,

first-out (LIFO) cost formula and uses the specific identification method for purposes of

determining LIFO cost. On 21 December 2011, Entity A sold 60 units and recorded a debit

to cost of goods sold and a credit to inventory of $72 (60 units * $1.20/unit). The ending

LIFO inventory balance in Entity As consolidated US GAAP financial statements as of

1 January 2012 was $148 [(100 units * $1.00/unit) + (40 units * $1.20/unit)].

Analysis

Entity A will become a first-time adopter and will present its first IFRS financial statements

as of and for the year ending 31 December 2014. In preparing its opening IFRS balance

sheet as of 1 January 2012, Entity A must determine whether it will subsequently account

for the finished goods inventory using either the first-in, first-out (FIFO) or weighted

average cost formula under IAS 2.(LIFO is not permitted.) If Entity A elects to use the FIFO

cost formula, the carrying amount of the inventory in the opening IFRS balance sheet as of

1 January 2012 must be restated to its FIFO cost or $160 [(40 units * $1.00/unit) + (100

units * $1.20/unit)]. The difference between the LIFO and FIFO ending inventory balances

of $12 would be recorded as an adjustment to retained earnings (before any adjustment

for income taxes).

Note: Because the US tax law requires conformity between the inventory costing method

for financial reporting and tax purposes, a change from LIFO to either FIFO or weighted

average cost, also may affect the calculation of certain domestic or foreign cash tax

liabilities. As the US continues to move towards the adoption of IFRS, we expect the

Internal Revenue Service to fully consider this issue.

Another example of differences in the measurement objectives between US GAAP and IFRS

relates to which assets and liabilities may be valued at fair value. For example, IFRS provides

entities with an accounting policy election to elect to value certain non-financial assets at fair

value that must be valued at historical cost under US GAAP, including investment property andproperty, plant and equipment. In addition, while both US GAAP and IFRS permit (but neither

requires) entities to elect fair value measurement for most financial assets and liabilities, the

ability to elect the fair value option is slightly more restrictive under IFRS due to certain

eligibility requirements.



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1 Overview

Even when the measurement objectives for recognized assets and liabilities are broadly aligned

between US GAAP and IFRS, differences may result from the specific application guidance

within the two GAAPs. For example, while both US GAAP and IFRS provide for the

measurement of certain assets and liabilities at fair value, in certain instances differences may

exist regarding the manner in which fair value is determined. While the principles underlying the

objective and determination of fair value measurements are generally consistent between

US GAAP and IFRS, specific differences exist that may affect the determination of fair value in

certain situations. As was the case under US GAAP prior to the issuance of Statement 157,

IFRS does not have a single definition of fair value, but instead provides application guidance in

varying levels of detail within the individual pronouncements that require (or permit) fair value

measurements. This guidance is often specific to the type of asset or liability being measured at

fair value (for example intangible assets under IAS 38 or investment property under IAS 40) or

the purpose of the fair value measurement (for example impairment of assets under IAS 36).6

Conversely, the measurement of fair value across US GAAP is generally based on a singular

definition applied within a consistent framework established by Statement 157 with the

intention of increasing the consistency of fair value estimates used in financial reporting.

The definition of fair value in US GAAP is based on an exit price notion with an explicit focus

on market participants assumptions regarding the use and pricing of the asset (or liability).

However, under IFRS the definition of fair value is based on an exchange transaction notion,

which is neither explicitly an exit price nor entry price. Depending on the particular

accounting pronouncement within IFRS, the application guidance may provide more or less

emphasis on an entry price notion from the perspective of the reporting entity , thereby

resulting in fair value measurements that are more entity-specific than market-basedmeasurements. In addition, specific differences between IFRS and US GAAP related to (i) the

recognition of inception (day one) gains and losses, (ii) the pricing of assets and liabilities

that transact in markets based on bid and ask prices, and (iii) the determination of the market

in which an asset or liability would be exchanged (that is, principal market vs. most

advantageous market) may result in the need for adjustments to the amounts of assets and

liabilities recognized at fair value under US GAAP in the opening IFRS balance sheet. These

differences are discussed in more detail in section 3.13.1.

It is important to note that IFRS 1, while providing for a number of voluntary exemptions and

mandatory exceptions on the accounting for certain types of transactions (as discussed

further below), provides no exemptions or exceptions relating to the accounting for incometaxes. As a result, a first-time adopter should apply IAS 12 as if it had always been the

governing standard. In this regard, a first-time adopter should recalculate its deferred taxes

based on the difference between the carrying amount of the assets and liabilities in the first-

time adopters opening IFRS balance sheet and their respective tax bases.

6 Note that the IASB currently has an active project on its agenda to develop further fair value measurement

guidance. The IASB issued a discussion paper in November 2006 and is currently deliberating the issue and

preparing an exposure draft.



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1 Overview

The first-time adopter also should recalculate the carrying amount of any non-controlling

interest after all adjustments (including deferred taxes) have been made to the first-time

adopters opening IFRS balance sheet. For example, if a first-time adopter derecognizes a

liability that previously was recognized under US GAAP in a subsidiary in which the first-time

adopter owns a majority ownership interest, the carrying amount of the non-controlling

interest should be increased for the non-controlling interests share of that derecognized

liability. Any resulting change in the carrying amount of the deferred taxes applicable to the

controlling interest generally should also be recorded as an adjustment to retained earnings

or, if appropriate, another category of equity.

Examples in this publication that illustrate when the measurement principles of IFRS may

differ from those in US GAAP and therefore, may result in adjustments to the assets and

liabilities recognized in the opening IFRS balance sheet are listed below:

2.2.1 Change in Estimate

3.2.3.3 Subsequent Measurement of Acquired Investment Property

3.2.3.4a Subsequent Measurement of Acquired Equipment

3.2.3.4b Provisionally Determined Fair Values

3.2.4.1 Contingent Consideration

3.3.1.1 Application of the Accelerated Recognition Method

3.3.1.3 Equity Repurchase Feature

3.3.1.4 Deferred Tax Benefit

3.5.4.2 Calculating accumulated depreciation upon transition to IFRS

3.5.4.3 Reversal of an Impairment Charge

3.7.3.1 Recognized Retirement Benefit

3.10.4 Parent Becomes a First-Time Adopter Later Than its Subsidiary

3.14.1 Decommissioning Liability



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1 Overview


1.3.6 Opening balance sheet accounting policiesExcerpt from IFRS 1

11. The accounting policies that an entity uses in its opening IFRS statement of financial

position may differ from those that it used for the same date using its previous GAAP.

The resulting adjustments arise from events and transactions before the date of

transition to IFRSs. Therefore, an entity shall recognise those adjustments directly in

retained earnings (or, if appropriate, another category of equity) at the date of

transition to IFRSs.

As a result of applying the provisions of paragraph 10 of IFRS 1 as discussed above, entities

may make changes to their accounting policies. As a result, adjustments will be necessary to

the carrying amounts of assets and liabilities previously recognized under US GAAP. IFRS 1provides that an entity shall recognize those adjustments directly in retained earnings (or, if

appropriate, another category of equity) at the date of transition to IFRS. (In only limited

circumstances the adjustments may affect goodwill. See section 3.2.3.6 below for a further

discussion of those limited adjustments affecting goodwill.) In addition, the first-time adopter

must consider the effects of such adjustments on deferred taxes and any non-controlling

interest (previously minority interest).


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2 Mandatory prohibitions on retrospective application

2 Mandatory prohibitions onretrospective application

2.1 IntroductionExcerpt from IFRS 1

13. This IFRS prohibits retrospective application of some aspects of other IFRSs. These

exceptions are set out in paragraphs 14-17 and Appendix B.

IFRS 1 specifically prohibits restatement for certain transactions upon the initial adoption of

IFRS, as the retrospective application in those areas would require judgments by

management about past conditions after the outcome of the particular transactions. In

deliberating this Standard, the IASB determined that it would not be appropriate for

management to use hindsight to adjust previously recorded amounts, as doing so would lead

to arbitrary restatements that would be neither relevant nor reliable.

The mandatory exceptions in IFRS 1 provide another example of the detailed nature ofIFRS 1. The exceptions are essentially specific thou shalt not dos, not broad principles

that can or should be analogized or applied to similar situations. Further, unlike the

voluntary exemptions that are covered in Chapter 3 of this publication, entities must comply

with all of the mandatory exceptions provided in IFRS 1. Entities may not make policy

choices to apply only some or none of the exemptions. This is the case even when the

entitys previous GAAP is similar to IFRS for the applicable topic.

2.2 Estimates

Excerpt from IFRS 1

14. An entity's estimates in accordance with IFRSs at the date of transition to IFRSs shallbe 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.

15. An entity may receive information after the date of transition to IFRSs about estimates

that it had made under previous GAAP. In accordance with paragraph 14, an entity

shall treat the receipt of that information in the same way as non-adjusting events

after the reporting period in accordance with IAS 10 Events after the Reporting Period.

For example, assume that an entity's date of transition to IFRSs is 1 January 20X4 and

new information on 15 July 20X4 requires the revision of an estimate made in

accordance with previous GAAP at 31 December 20X3. The entity shall not reflect that

new information in its opening IFRS statement of position (unless the estimates need

adjustment for any differences in accounting policies or there is objective evidence

that the estimates were in error). Instead, the entity shall reflect that new information

in profit or loss (or, if appropriate, other comprehensive income) for the year ended 31

December 20X4.

16. An entity may need to make estimates in accordance with IFRSs at the date of

transition to IFRSs that were not required at that date under previous GAAP. To

achieve consistency with IAS 10, those estimates in accordance with IFRSs shall reflect



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conditions that existed at the date of transition to IFRSs. In particular, estimates at the

date of transition to IFRSs of market prices, interest rates or foreign exchange rates

shall reflect market conditions at that date

17. Paragraphs 14-16 apply to the opening IFRS statement of financial position. They also

apply to a comparative period presented in an entity's first IFRS financial statements,

in which case the references to the date of transition to IFRSs are replaced by

references to the end of that comparative period

IFRS 1 requires a first-time adopter to use estimates under IFRS that are consistent with the

estimates made for the same date under previous GAAP, after adjusting for any difference in

accounting policy, unless there is objective evidence that there were errors in those previous

estimates, as is defined in IAS 8. This requirement applies to both estimates made in respect

of the date of transition to IFRS and to those in respect of the end of any comparative periodsincluded in the first IFRS financial statements. For example, a US entitys first reporting date

under IFRS may be 31 December 2014, and based on SEC requirements those financial

statements will include years ended 31 December 2012, 2013, and 2014. That entity cannot

use information that became available in 2014 to adjust estimates made in the financial

statements for the year ended 2012 or 2013. A first-time adopter is not allowed to take into

account any subsequent events that provide evidence of conditions that existed at a balance

sheet date that came to light after the date its previous GAAP (for example, US GAAP)

financial statements were issued.

Under IFRS 1, a first-time adopter cannot apply hindsight and make better estimates when

it prepares its first IFRS financial statements. This also means that a first-time adopter is notallowed to take into account any subsequent events that provide evidence of conditions that

existed at a balance sheet date that came to light after the date its previous GAAP financial

statements were issued. In the Basis for Conclusions to IFRS 1,the IASB indicated that events

occurring from the date the previous GAAPs financial statements were issued through the

date of transition to IFRS might provide additional information regarding estimates made in

those previously issued financial statements. However, the IASB ultimately concluded that it

would be more helpful to users and more consistent with IAS 8 to recognize the revision of

those estimates as income or expense in the period when the first-time adopter made the

revision, rather than in preparing the opening IFRS balance sheet. Effectively, the IASB

wished to prevent first-time adopters from using hindsight to clean up their balance sheets

by direct write-offs to equity as part of the opening IFRS balance sheet exercise.

Further, if a first-time adopters previous GAAP accounting policy was not consistent with IFRS,

the entity may only adjust the estimate for the difference in accounting policy; it may not also

adjust the estimate to reflect the more current information available. In other words, the first-

time adopter uses information available at the time of the original previous GAAP accounting to

apply its new accounting policy. If an entity later adjusts those estimates, it accounts for the

revisions to those estimates as events in the period in which it makes the revisions.



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Example 2.2.1 Change in estimate

Fact pattern

In May 2010, Entity A, a US GAAP reporter, issued share-based compensation in the form

of stock options to its employees. The options have a service condition and vest on a

graded vesting schedule over 4 years (that is, 25% of the options are vested in May 2011,

another 25% in May 2012, and so on). Under US GAAP, the entitys accounting policy was

to measure each tranche of the award separately, but then to recognize compensation

expense over on a straight-line basis over the requisite period for the entire award (that is,

four years).

As of the grant date of the stock options, the entity believed the expected lives of the stockoptions ranged from two to six years. On 1 January 2012, Entity A estimates that the

expected lives of those awards range from 1.5 to five years.

Analysis

Entity A will become a first time adopter and will present its first IFRS financial statements

as of and for the year ended 31 December 2014. Its date of transition to IFRS is 1 January

2012. As part of its adoption of IFRS, it must evaluate its share-based payment awards

that are not yet vested as of its date of transition. Under IFRS, Entity A must recognize its

compensation expense on a straight-line basis over the requisite service period for each

separately vesting portion of the award as if the award was, in substance, multiple awards,

(that is, accelerated method).

Entity A therefore must apply the accelerated method under IFRS 2 to these share-based

payment awards to adjust for the difference in accounting policy between the straight-line

recognition and the accelerated recognition under IFRS 2. However, the fair value

calculation must be based on the facts and circumstances that existed at the time the

share-based payments were issued, not the date of adoption of IFRS. Therefore, Entity A

may not adjust the value of the awards based on its revised estimates of the expected lives

of the awards.

In relation to financial instruments, IFRS 1 requires a first-time adopter that is unable to

determine whether a particular portion of an adjustment is a transitional adjustment or achange in estimate to treat the adjustment as a change in accounting estimate under IAS 8,

with appropriate disclosures as required by paragraphs 32 to 40 of IAS 8. For example, IFRS

may dictate a different effective interest methodology for a particular financial instrument

than an entitys previous GAAP required. An entity converting to IFRS would have to follow

the required IFRS methodology. However, IFRS also requires the entity to estimate the timing

of the principal payments on that financial instrument. For an entity converting to IFRS and

simultaneously updating its principal payments projections, it would be difficult to bifurcate

the change in estimate between that which was a result of the new application of IFRS (that



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IFRS 1 acknowledges that some arrangements for the transfer of assets, particularly

securitizations, may last for some time, with the result that transfers might be made both

before and on or after 1 January 2004 under the same arrangement. IFRS 1 clarifies that

transfers made under such arrangements fall within the first-time adoption provisions only if

they occurred before 1 January 2004. In other words, if a first-time adopter derecognized

non-derivative financial assets or non-derivative financial liabilities under its previous GAAP in

a financial year beginning before 1 January 2004, it does not recognize those assets and

liabilities under IFRS (unless they qualify for recognition as a result of a later transaction or

event). However, transfers on or after 1 January 2004 are subject to the full requirements of

IAS 39 and will have to be re-evaluated to determine whether they meet the criteria for

derecognition. Therefore, unless the derecognition requirements of IAS 39 are satisfied,

assets and liabilities transferred after 1 January 2004 must be recognized under IFRS.

A first-time adopter is not exempt from SIC-12, which requires consolidation of all special

purpose entities (SPEs), including qualifying special-purpose entities. In other words, SIC-12

contains no specific transitional or first-time adoption provisions. Accordingly, the SIC-12

requirements with regard to the consolidation of SPEs are fully retrospective for first-time

adopters. As a result, not all previously derecognized assets and liabilities will remain off-

balance sheet upon adoption of IFRS. For example, if under its previous GAAP an entity

derecognized non-derivative financial assets and non-derivative financial liabilities as the result

of a transfer to an entity treated as an SPE by SIC-12, those assets and liabilities may be

required to re-recognized on transition to IFRS, as the result of consolidation of the SPE rather

than through application of IAS 39. However, if the SPE itself then subsequently transferred

the asset and achieved derecognition of the items concerned under the entity's previous GAAP(other than by transfer to a second SPE or member of the entity's group), then the items

remain derecognized on transition.

A first-time adopter may elect to apply the derecognition requirements in IAS 39

retrospectively from a date of the entity's choosing prior to 1 January 2004, provided that

the information needed to apply IAS 39 to financial assets and financial liabilities

derecognized as a result of past transactions was obtained at the time of initially accounting

for those transactions. Therefore, an entity that was not permitted to derecognize

transferred financial assets under its previous GAAP may be able to derecognize the assets

through retrospective application of IAS 39, provided the entity also retained

contemporaneous documentation of its original basis for conclusion. However, the limitationon the retrospective application of IAS 39 helps to prevent the re-estimation of

measurements used in the risk and rewards analysis pursuant to IAS 39 (such as fair values)

with the unacceptable benefit of hindsight. This limitation, effectively also bans most first-

time adopters from restating transactions that occurred before 1 January 2004 because the

required contemporaneous documentation likely would not have been prepared or

maintained as of the date of transfer.

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2.3.1 Potential issues applicable to first-time adopters that previouslyreported under US GAAP

While the transition provisions of IFRS 1 related to derecognition of financial assets and

liabilities provided significant relief for many European entities that converted to IFRS on 1January 2004, it will provide little or no relief for first-time adopters that previously reported

under US GAAP that will have a transition date of 1 January 2012 or later, based on the

SECs proposed Roadmap. In addition, the option to retrospectively apply the derecognition

requirements under IAS 39 may not benefit many first-time adopters that previously reportedunder US GAAP because off-balance sheet accounting for structured financings generally is

considered more difficult to achieve under IFRS.

Under US GAAP, special derecognition rules apply to asset-backed financing arrangements orsecuritization transactions involving qualifying special-purpose entities (QSPEs), as definedin Statement 140. An enterprise that transfers assets to a QSPE or that holds a variable

interest therein generally does not apply the consolidation requirements of FIN 46(R), unless

the enterprise has the unilateral ability to cause the entity to liquidate or to change the entity

so that it is no longer a QSPE. However, the notion of a QSPE does not exist under IFRS, andas a result, we believe off-balance sheet financing will be more difficult to achieve under IFRS.

In short, entities currently engaged in off-balance sheet securitization financings (that have

been derecognized under US GAAP) may have to re-recognize many of the financial assets

previously derecognized unless the IASB decides to amend the first-time adoption transitionprovisions to accommodate companies converting from US GAAP (for example, by extending

the effective date for applying IAS 39 to transactions occurring after 1 January 2012).

2.3.1.1 Update on efforts to converge US GAAP with IFRS

In June 2009, the FASB issued Statement 166. Statement 166 is designed to make short-

term improvements to Statement 140 until such time as converged standards on

derecognition and consolidation are developed with the IASB. In the meantime, Statement

166 improves convergence with IFRS by eliminating the concept of a QSPE, including theexception for QSPEs from the consolidation guidance of FIN 46(R), and by limiting the

portions of financial assets that are eligible for derecognition. The amendments are effective

for fiscal years beginning after 15 November 2009 (that is, 1 January 2010 for calendaryear companies) and earlier application is prohibited.

Convergence between US GAAP and IFRS also may be advanced with recent proposals to

change the accounting for transfers of financial instruments under IFRS. In March 2009, the

IASB published for public comment an exposure draft of proposals to improve thederecognition requirements for financial instruments. The IASB believes its proposed

approach is similar in some respects to Statement 166. For example, the exposure draft

would replace the current mixed derecognition model under IAS 39, which combines

elements of risks and rewards and control, with a single element model that would giveprimacy to control. Therefore, like US GAAP, the proposed approach under IFRS would assess



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derecognition on the basis of control, and evaluate control in a somewhat similar manner. A

major difference between the derecognition requirements under US GAAP and the proposed

approach in the exposure draft is that the approach proposed in the exposure draft does notrequire a legal isolation test to determine whether effective control has been surrendered. A

final amendment of the IAS 39 derecognition guidance is expected to be issued sometime

during 2010.

Now that the FASB has completed its short-term amendments to Statement 140, the two

Boards have committed to work jointly and expeditiously to ultimately issue a converged

derecognition standard. However, it is unclear whether convergence between the two

accounting standards will be achieved before US issuers are required to transition to IFRS.

2.4 Hedge accounting2.4.1 Recognition and Measurement of derivatives that formed part of a

hedge relationship

Excerpt from Appendix B of IFRS 1

B4. As required by IAS 39, at the date of transition to IFRSs, an entity shall:

(a) measure all derivatives at fair value; and

(b) eliminate all deferred losses and gains arising on derivatives that were reported in

accordance with previous GAAP as if they were assets or liabilities.

B5. An entity shall 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 (for example, many hedging relationships where the hedging instrument is a

cash instrument or written option; where the hedged item is a net position; or where

the hedge covers interest risk in a held-to-maturity investment). However, if an entity

designated a net position as a hedged item in accordance with previous GAAP, it may

designate an individual item within that net position as a hedged item in accordance

with IFRSs, provided that it does so no later than the date of transition to IFRSs.

B6. 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 shall apply paragraphs 91 and 101 of IAS 39 to discontinue hedge accounting.

Transactions entered into before the date of transition to IFRSs shall not beretrospectively designated as hedges.

IFRS 1 provides that a first-time adopter should not reflect in its opening IFRS balance sheet a

hedging relationship of a type that does not qualify for hedge accounting under IAS 39. In

addition, IFRS 1 only allows prospective application of the hedge accounting provisions of IAS

39 by a first-time adopter from the date the hedge accounting criteria are met. That is to say,

a first-time adopter is prohibited from applying retrospectively some of the hedge accounting

provisions of IAS 39.



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In making this determination, the Board felt that it was unlikely that most entities would have

adopted IAS 39s criteria for (a) documenting hedges at their inception and (b) testing the

hedges for effectiveness prior to adopting IAS 39, even if they intended to continue the same

hedging strategies after adopting IAS 39. Furthermore, the Board was concerned that

retrospective designation of hedges (or retrospective reversal of their designation) could lead

to selective designation of some hedges to report a particular result. Therefore, the Board

decided that transactions entered into before the date of transition to IFRS cannot be

retrospectively designated as hedges under the hedge accounting provisions of IAS 39.

Hedge designation that is compliant with IAS 39 must be completed on or before the

transition date to IFRS in order to qualify for hedge accounting after the transition date (no

retrospective designation is permitted).

If, before the date of transition to IFRS, the first-time adopter had designated a transaction asa hedge under its previous GAAP but the hedge does not meet the requirements for hedge

accounting in IAS 39 at the transition date (for example, because the documentation does not

conform to the IAS 39 requirements and such documentation is not adjusted to conform prior

to or at the transition date), the entity must discontinue hedge accounting prospectively.7

A first-time adopter is required to account for all derivatives in its opening IFRS balance sheet

as assets or liabilities measured at fair value. It is important to note that under IFRS all

derivatives, other than those that are designated and are effective hedging instruments, are

classified as held for trading. (As a result, such instruments must be measured at fair value

with changes in fair value recognized in income each period.) When a derivative was not

explicitly recognized as an asset or liability under previous GAAP, the difference between theprevious carrying amount (which might be zero) and its fair value at the transition date should

be recognized as an adjustment of the balance of retained earnings at the transition date.

2.4.2 Prohibition on retrospective application

A first-time adopter is not permitted to designate hedges retrospectively in relation to

transactions entered into before the date of transition to IFRS. This requirement is to prevent

an entity from reflecting hedge relationships in its opening balance sheet that it did not

identify as such under the entitys previous GAAP. Further, the implementation guidance to

IFRS 1 explains that hedge accounting can be applied prospectively only from the date the

hedge relationship is fully designated and documented. Therefore, if the hedging instrument

is still held at the date of transition to IFRS, the designation and documentation of a hedgerelationship must be completed on or before that date if the hedge relationship is to qualify

for hedge accounting on an ongoing basis from that date.

7 This would be accomplished by applying paragraphs 91 and 101 of IAS 39 (as revised in 2003).



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2.4.3 Hedge relationships reflected in the opening IFRS balance sheetIFRS 1 provides that a hedge relationship should be reflected in the first-time adopters

opening IFRS balance sheet if it has been accounted for as a hedge relationship under

previous GAAP and the hedge relationship is a type that is eligible under IAS 39. Note that

satisfying the hedge accounting criteria (for example, passing the effectiveness test) under

IAS 39 is not a factor in deciding whether hedge accounting should be applied on transition.

As long as a hedge relationship can be specifically identified under a first-time adopters

previous GAAP and that hedge relationship would be a type that qualifies for hedge

accounting under IFRS (even if it is not subsequently pursued), then the first-time adopter

must account for the hedge relationship and recognize the hedging instrument in its opening

IFRS balance sheet.

We believe that the phrase hedge relationship is a type that is eligible under IAS 39

describes a hedge relationship for which both the hedging instrument and the hedged item

are eligible to be paired together in a IAS 39 hedge relationship. We do not believe that the

hedge effectiveness assessment and/or measurement methodologies used under US GAAP

for the hedge relationship must also have beenpreviously compliant with IAS 39 in order for

the hedge relationship to be viewed as a type that is eligible under IAS 39.

However, in order for a first-time adopter to continue to apply hedge accounting subsequent

to the transition date, all of the designation, effectiveness and documentation requirements of

hedge accounting under IAS 39 must be satisfied as of the date of transition to IFRS. If the

hedge relationship does not meet the requirements in IAS 39 prospectively, then hedge

discontinuation rules in that standard must apply immediately after transition. Further, if anentity wishes to continue to apply hedge accounting subsequent to the transition date, all of

the designation, effectiveness and documentation requirements of hedge accounting under

IAS 39 must be satisfied for each period in which the entity wishes to apply hedge accounting.

2.4.4 Reflecting cash flow hedges in the opening IFRS balance sheet

Excerpt from Implementation Guidance of IFRS 1

IG60B An entity may, under previous GAAP, have deferred gains and losses on a cash flow

hedge of a forecast transaction. If at the date of transition to IFRS, the hedged

forecast transition is not highly probable, but expected to occur, the entire deferred

gain or loss is recognized in equity. Any net cumulative gain or loss that has beenreclassified to equity on initial application of IAS 39 remains in equity until (a) the

forecast transaction subsequently results in recognition of a non financial asset or non

financial liability, (b) the forecast transaction affects profit or loss or (c) subsequently

circumstances change and the forecast transaction is no longer expected to occur, in

which case any related net cumulative gain or loss that had been recognized directly

in equity is recognized in profit and loss. If the hedging instrument is still held but the

hedge does not qualify as a cash flow hedge under IAS 39, hedge accounting is no

longer appropriate starting from the date of transition to IFRS.



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IAS 39 requires that hedged forecast transactions must be highly probable in order to achieve

cash flow hedge accounting. While IAS 39 states that the term highly probable indicates a

much greater likelihood of happening than the term more likely than not, there is no

prescriptive definition of highly probable provided in IAS 39. If as of the date of transition

to IFRS the hedged forecast transaction is not highly probable but is still expected to occur,

the entire unrecognized portion of the fair value of the hedging derivative is taken to the cash

flow hedge reserve in equity in the opening IFRS balance sheet. If, at the date of transition to

IFRS, it was not possible the forecast transaction will occur, this would be a relationship of a

type that does not qualify for hedge accounting under IAS 39. Therefore, the hedging

relationship would not be reflected in the opening IFRS balance sheet and the deferred gains

and losses would be recognized in retained earnings.

2.4.5 Potential issues applicable to first-time adopters that previously

reported under US GAAP

2.4.5.1 Recognition and Measurement of derivatives that formed part of a hedge

relationship

The likelihood of satisfying IAS 39s criteria for hedge accounting may be relatively high for

first-time adopters that originally accounted for hedging relationships in accordance with

Statement 133. Both IAS 39 and Statement 133 define three types of hedge relationships:

1) fair value hedges, 2) cash flow hedges, and 3) net investment hedges. In addition, the

risks that can be hedged and the hedging instru

IFRS 1 First-time Adoption June 09

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