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Università degli studi di PaviaUniversità degli studi di PaviaUniversità degli studi di PaviaUniversità degli studi di PaviaFacoltà di EconomiaFacoltà di Economia

a.a.a.a. 20142014--20152015

Lesson 15 International Accounting

Lelio Bigogno, Stefano Santucci

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IFRS 1 IFRS 1 –– First Time Adoption First Time Adoption of of International Financial Reporting International Financial Reporting StandardsStandards

2International Accounting – Lesson 12

IFRS1 was developed by theInternational Accounting StandardsBoard (IASB) to help entitiestransition from national Gaap to

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International Financial ReportingStandards (IFRS) as their basis forfinancial reporting.

International Accounting – Lesson 12 3

It applies to an entity’s first IFRSfinancial statements and interimreports presented under IAS34,

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reports presented under IAS34,“Interim financial reporting”, forthe part of the period covered bythe first IFRS financial statements.


MAIN STEPS for the adoptionof IFRSs

- DIAGNOSTIC

- Selection of ACCOUNTING POLICIES (DESIGN)POLICIES (DESIGN)

- Preparing OPENING IFRS BALANCE (TRANSITION)

- PRESENTATION AND DISCLOSURES


STEP 1: DIAGNOSTIC

�Identify major ITAGaap-IFRSdifferences;

�Identify nature of potential effects ofIFRS conversion on tax position;

Preliminarly assess impact of IFRS on�Preliminarly assess impact of IFRS ontax accounts and reporting;

�Indentify major disclosures data gaps.


STEP 2: ACCOUNTING POLICIES(DESIGN)

Select accounting policies that complywith the IFRSs in force at the closingbalance sheet date for the first IFRSfinancial statements. The selectedfinancial statements. The selectedaccounting policies are appliedretrospectively to all of the periodspresented in the first IFRS financialstatements.


STEP 3: OPENING IFRS BALANCE(TRANSITION)

Prepare an opening IFRS balancesheet at “the date of transition toIFRSs”.

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IFRSs”.

This is the beginning of the earliestperiod for which full comparativeinformation is presented inaccordance with IFRS.


Example:

first IFRS financial statements december, 31st 2014

�Date of transition

January 1st , 2013 = December 31st, 2012

�….That means to prepare:

1) 3 balance sheet (31 December 2012, 2013 and 2014);

2) 2 cash flow statements as of the same dates (YE

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2) 2 cash flow statements as of the same dates (YE2013 and 2014);

3) 2 profit and loss (31 December 2013 and 2014);

4) 2 Notes to the financial statements (disclosures) withspecific prospects to explain the IFRS transition and itsimpact to net equity and net result.


The accounting policies selected areused to prepare the opening balancesheet which…..

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sheet which…..


� Includes all the assets and liabilities required by IFRSs.

� Excludes any assets and liabilities not permitted by IFRSs.

Classifies all assets, liabilities and

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� Classifies all assets, liabilities and equity in accordance with IFRSs.

� Measures all items in accordance with IFRSs.


Derecognition of some previous GAAP assets and liabilities

The entity should eliminate previous-GAAP assets and liabilities from the

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GAAP assets and liabilities from the opening balance sheet if they do not qualify for recognition under IFRSs


Examples:

� IAS 38 does not permit recognition of

expenditure on any of the following as anintangible asset:

◦ research

◦ start-up, pre-operating, and pre-opening costs

◦ training

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◦ training

◦ advertising and promotion

◦ moving and relocation

If the entity's previous GAAP had recognisedthese as assets, they are eliminated in theopening IFRS balance sheet


� If the entity's previous GAAP had allowed

accrual of liabilities for "general reserves",restructurings, future operating losses, or majoroverhauls that do not meet the conditions forrecognition as a provision under IAS 37, theseare eliminated in the opening IFRS balancesheet;

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sheet;

� If the entity's previous GAAP had allowedrecognition of contingent assets as defined inIAS 37.10, these are eliminated in the openingIFRS balance sheet


Recognition of some assets andliabilities not recognized underprevious Gaap

The entity should recognise all assetsand liabilities that are required to be

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and liabilities that are required to berecognised by IFRS even if they werenever recognised under previousGAAP


Examples:� IAS 39 requires recognition of all derivative

financial assets and liabilities, includingembedded derivatives. These were notrecognised under many local GAAPs.

� IAS 37 requires recognition of provisions asliabilities. Examples could include an entity's

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liabilities. Examples could include an entity'sobligations for restructurings, onerouscontracts, decommissioning, remediation, siterestoration, warranties, guarantees, andlitigation


� IAS 19 requires an employer to recognise aliability when an employee has provided servicein exchange for benefits to be paid in the future.These are not just post-employment benefits(eg, pension plans) but also obligations formedical and life insurance, vacations,

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medical and life insurance, vacations,termination benefits, and deferredcompensation. In the case of 'over-funded'defined benefit plans, this would be a plan asset.

�Deferred tax assets and liabilities would berecognised in conformity with IAS 12


Reclassification

The entity should reclassify previous-GAAPopening balance sheet items into theappropriate IFRS classification

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Examples:

� IAS 10 does not permit classifying dividendsdeclared or proposed after the balance sheetdate as a liability at the balance sheet date. Ifsuch liability was recognised under previousGAAP it would be reversed in the opening IFRSbalance sheet.balance sheet.

� If the entity's previous GAAP had allowedtreasury stock (an entity's own shares that ithad purchased) to be reported as an asset, itwould be reclassified as a component of equityunder IFRS.


� Items classified as identifiable intangible assets in abusiness combination accounted for under the previousGAAP may be required to be reclassified as goodwillunder IFRS 3 because they do not meet the definition ofan intangible asset under IAS 38. The converse may alsobe true in some cases.

� IAS 32 has principles for classifying items as financialliabilities or equity. Thus mandatorily redeemable

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liabilities or equity. Thus mandatorily redeemablepreferred shares that may have been classified as equityunder previous GAAP would be reclassified as liabilitiesin the opening IFRS balance sheet.


�The reclassification principle would apply forthe purpose of defining reportable segmentsunder IFRS 8.

�Some offsetting (netting) of assets and liabilitiesor of income and expense items that had beenacceptable under previous GAAP may no longerbe acceptable under IFRS.be acceptable under IFRS.


Adjustments required to move fromprevious GAAP to IFRSs at the dateof transition should be recogniseddirectly in retained earnings or, ifappropriate, another category ofappropriate, another category ofequity at the date of transition toIFRSs


Estimates:IFRS 1 does not permit the use of hindsightto revise estimates or to make new estimates.

� In preparing IFRS estimates at the date oftransition to IFRSs retrospectively, the entitymust use the inputs and assumptions thatmust use the inputs and assumptions thathad been used to determine previous GAAPestimates as of that date (after adjustmentsto reflect any differences in accountingpolicies)


Estimates included in the opening IFRS

balance sheet must be consistent withestimates made at the same date underprevious GAAP, unless there is objectiveevidence of an error.

entity is not permitted to use information� entity is not permitted to use informationthat became available only after the previousGAAP estimates were made except tocorrect an error. THAT MEANS THATTHE ERROR WAS MADE ALSOAPPLYING PREVIOUS GAAP.


Example:

A provision for a liability associatedwith litigation recognised underprevious GAAP would not be revisedunder IFRS just because the outcomeof the case is known when the firstof the case is known when the firstIFRS financial statements are laterprepared.


However, an entity may need to makeestimates at the transition date underIFRS that were not required underprevious GAAP. Such estimates underIFRS should reflect conditions at the dateof the opening IFRS balance sheet. Inparticular, estimates at the date ofparticular, estimates at the date oftransition of market prices, interest ratesor foreign exchange rates should reflectmarket conditions at that date.


The key principle of IFRS 1 is fullretrospective application ofIFRS standards that are effectiveas of the entity’s first IFRSas of the entity’s first IFRSreporting period.


However, IFRS 1 establishes twotypes of exception from the principleof full retrospective application ofstandards effective at the end of thefirst IFRS reporting period


(1) optional exemptions from some of the requirements of certain IFRS

and

(2) mandatory exceptions from the (2) mandatory exceptions from the requirement for the retrospective application of other IFRS.


Why optional exemptions ?

because in the IASB’s view the costof complying with them is likely toof complying with them is likely toexceed the benefits to users offinancial statements from some ofthe requirements of certain IFRS


Optional exemptions relate to:

�Business combinations

�Deemed cost

�Employee benefits

�Cumulative currency translation�Cumulative currency translationdifferences

�Compound financial instruments

�Assets and liabilities of subsidiaries

�Associates and joint ventures


�Designation of previously recognisedfinancial instruments

�Share-based payment transactions

�Insurance contracts.

�Decommissioning liabilities included �Decommissioning liabilities included in the cost of property, plant and equipment

�Leases


�Service concession arrangements

�Borrowing costs

�Investments in subsidiaries, jointly controlled entities and associatescontrolled entities and associates

�Transfers of assets from customers


There are various optionalexemptions, each of them can beconsidered separately by first-timeadopters. Some of the exemptionsare applied to all relevant items inare applied to all relevant items inthe opening IFRS balance sheet, butsome can be applied to individualitems


Why mandatory exceptions?

IFRS 1 prohibit retrospective application of IFRSin some areas, particularly when retrospectiveapplication would require judgments bymanagement about past conditions after theoutcome of a particular transaction is alreadyknown.known.

THE IFRS GENERAL PRINCIPLE SAYSTHAT EACH TRANSACTION MUST BETREATED ON THE BASIS OF THEINFORMATION AVAILABLE AT THEDATE ON WHICH THE TRANSACTIONOCCURRED.


The reasoning behind the mandatoryexceptions is that retrospectiveapplication of IFRS in these situationscould easily result in an unacceptableuse of hindsight and lead to arbitraryor biased restatements, which wouldbe neither relevant nor reliable.


Prior to 1 January 2010, there were three exceptions to the general principle of retrospective application. On 23 July 2009, IFRS 1 was amended, effective 1 January 2010, to add two additional exceptions with add two additional exceptions with the goal of further simplifying the transition to IFRSs for first-time adopters. The five exceptions are.


�Derecognition of financialinstruments (IAS39)

�Hedge accounting (IAS 39)

�Full cost oil and gas assets�Full cost oil and gas assets

�Non-controlling interests (IAS27)

�Determine whether an arrangementcontains a lease


Derecognition of financial istruments:

A first-time adopter shall apply the derecognition requirements in IAS 39 prospectively for transactions occurring on or after 1 January 2004. However, the entity may apply the derecognitionentity may apply the derecognitionrequirements retrospectively provided that the needed information was obtained at the time of initially accounting for those transactions.


Hedge accounting:� The general rule is that the entity shall not

reflect in its opening IFRS balance sheet(statement of financial position) a hedgingrelationship of a type that does not qualify forhedge accounting in accordance with IAS 39.However, if an entity designated a net positionHowever, if an entity designated a net positionas a hedged item in accordance with previousGAAP, it may designate an individual item withinthat net position as a hedged item inaccordance with IFRS, provided that it does so

no later than the date of transition to IFRSs..


Non controlling interest

IFRS 1. paragraph B7 lists specificrequirements of IAS 27 (2008) thatshall be applied prospectively.


Full-cost oil and gas assets

Entities using the full cost method may elect exemption from retrospective application of IFRSs for oil and gas assets. Entities electing this exemption will use the carrying this exemption will use the carrying amount under its old GAAP as the deemed cost of its oil and gas assets at the date of first-time adoption of IFRSs.


Determining whether an arrangement contains a lease

If a first-time adopter with a leasing contract made the same type of determination of whether an arrangement contained a lease in accordance with previous GAAP as that required by IFRIC previous GAAP as that required by IFRIC 4 Determining whether an Arrangement Contains a Lease, but at a date other than that required by IFRIC 4, the amendments exempt the entity from having to apply IFRIC 4 when it adopts IFRSs


STEP 4: PRESENTATION ANDDISCLOSURES

An entity shall explain how thetransition from previuos ITAGaap toIFRSs affected its reported financialposition, financial performance andposition, financial performance andcash flows.


Comparative Information

An entity’s first IFRS financial statementshall include at least three statements offinancial position, two statements ofcomprehensive income, two separateincome statements (if presented), twostatements of cash flows and twostatements of cash flows and twostatements of changes in equity andrelated notes, including comparativeinformation.


Reconciliations

An entity shall explain how thetransition from previous GAAP toIFRSs affected its reported financialposition.position.


Reconciliations

An entity’s first IFRS financialstatemens shall include:

�Reconciliation of its equity reportedin accordance with previuos GAAPto its equity in accordance with IFRSfor both of the following dates


- The date of transition to IFRS

AND

- The end of the latest periodpresented in the entity’s most recentannual financial statements inaccordance with previuos GAAP


� a riconciliation to its totalcomprehensive income inaccordance with IFRSs for the latestperiod in the entity’s most recentannual financial statements.annual financial statements.


The starting point shall be totalcomprehensive income in accordancewith previous Gaap for the sameperiod or, if an entity did not reportsuch total, profit and loss undersuch total, profit and loss underprevious Gaap.


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