Objective and Scope of IFRS 1

IFRS 1 applies to an entity that presents its first IFRS financial statements. It specifies the requirements that an entity must follow when it first adopts IFRS as the basis for preparing its general-purpose financial statements. IFRS 1 refers to these entities as first-time adopters.

The objective of this standard is to ensure that an entity's first IFRS financial statements, including interim financial reports, present high-quality information that:

1. Is transparent and comparable over all periods presented;
2. Provides a suitable starting point for accounting in accordance with IFRS; and
3. Can be prepared at a cost that does not exceed the benefits.

First-time IFRS adopters' financial statements should be comparable over time and between entities applying IFRS for the first time, as well as those already applying IFRS.

Per IFRS 1, an entity must apply the standard in its first IFRS financial statements and in each interim financial report it presents under IAS 34, Interim Financial Reporting, for a part of the period covered by its first IFRS financial statements. For example, if 20XX is the first annual period for which IFRS financial statements are being prepared, the quarterly or semiannual statements for 20XX, if presented, must also comply with IFRS.

According to the standard, an entity's first IFRS financial statements refer to the first annual financial statements in which the entity adopts IFRS by making an explicit and unreserved statement (in the financial statements) of compliance with IFRS (with all IFRS!).

IFRS 1 clarifies that an entity, which in a previous period fully complied with IFRS, but whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with IFRS, and in the current period makes an explicit and unreserved statement of compliance with IFRS, has the choice of either applying IFRS 1 (in full) or to retrospectively apply IFRS in accordance with the provision of IAS 8, Accounting Policies, Changes in Estimates and Errors (application of this is discussed in more detail in Chapter 7). Under both options an entity needs to disclose the reason it stops to apply IFRS and the reason it is resuming applying IFRS and when IAS 8 is applied, the reason for electing to apply IFRS as if it had never stopped applying IFRS.

An entity, in its first IFRS financial statements, has the choice between applying an existing and currently effective IFRS or applying early a new or revised IFRS that is not yet mandatorily effective, provided that the new or revised IFRS permits early application. An entity is required to apply the same version of the IFRS throughout the periods covered by those first IFRS financial statements. Early adoption is, however, possible and entities are permitted to early adopt any individual amendment within the cycle without early adopting all other amendments.

IFRS-compliant financial statements presented in the current year would qualify as first IFRS financial statements if the reporting entity presented its most recent previous financial statements:

1. Under national GAAP or standards that were inconsistent with IFRS in all respects;
2. In conformity with IFRS in all respects, but without an explicit and unreserved statement to that effect;
3. With an explicit statement that the financial statements complied with certain IFRS, but not with all applicable standards;
4. Under national GAAP or standards that differ from IFRS but using some individual IFRS to account for items which were not addressed by its national GAAP or other standards;
5. Under national GAAP or standards, but with a reconciliation of selected items to amounts determined under IFRS.

Other examples of situations where an entity's current year's financial statements would qualify as its first IFRS financial statements are when:

1. The entity prepared financial statements in the previous period under IFRS, but the financial statements had been identified as being “for internal use only” and had not been made available to the entity's owners or any other external users;
2. The entity presented IFRS-compliant financial reporting in the previous period under IFRS for consolidation purposes without preparing a complete set of financial statements as mandated by IAS 1, Presentation of Financial Statements; and
3. The entity did not present financial statements for the previous periods at all.

In cases when the reporting entity's financial statements in the previous year contained an explicit and unreserved statement of compliance with IFRS, but in fact did not fully comply with all accounting policies under IFRS, such an entity would not be considered a first-time adopter for the purposes of IFRS 1. The disclosed or undisclosed departures from IFRS in previous years' financial statements of this entity would be treated as an “error” under IFRS 1, which warrants correction made in the manner prescribed by IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. In addition, an entity making changes in accounting policies as a result of specific transitional requirements in other IFRS is also not considered a first-time adopter.

IFRS 1 identifies three situations in which IFRS 1 would not apply. These exceptions include, for example, when an entity:

1. Stops presenting its financial statements under national requirements (i.e., its national GAAP) along with another set of financial statements that contained an explicit or unreserved statement of compliance with IFRS;
2. Presented its financial statements in the previous year under national requirements (its national GAAP) and those financial statements contained (improperly) an explicit and unreserved statement of IFRS compliance; or
3. Presented its financial statements in the previous year that contained an explicit and unreserved statement of compliance with IFRS, and its auditors qualified their report on those financial statements.

Key Dates

In transition to IFRS, two important dates that must be clearly determined are the first IFRS reporting date and transition date. “Reporting date” for an entity's first IFRS financial statements refers to the end of the latest period covered by the annual financial statements, or interim financial statements, if any, that the entity presents under IAS 34 for the period covered by its first IFRS financial statements. This is illustrated in the following examples.

“Transition date” refers to the beginning of the earliest period for which an entity presents full comparative information under IFRS as part of its first IFRS financial statements. Thus, the date of transition to IFRS depends on two factors: the date of adoption of IFRS and the number of years of comparative information that the entity decides to present along with the financial information of the year of adoption. In accordance with IFRS 1, at least one year of comparative information is required. The “first IFRS reporting period” is the latest reporting period covered by an entity's first IFRS financial statements.

The financial reporting requirements under IFRS 1 are presented below.

Steps in Transition to IFRS

Transition to IFRS involves the following steps:

1. Selection of accounting policies that comply with IFRS standards effective at the reporting date.
2. Preparation of an opening IFRS statement of financial position at the date of transition to IFRS as the starting point for subsequent accounting under IFRS. Recognise all assets and liabilities whose recognition is required under IFRS:
   1. Derecognise items as assets or liabilities if IFRS does not permit such recognition;
   2. Reclassify items in the financial statements in accordance with IFRS; and
   3. Measure all recognised assets and liabilities according to principles set forth in IFRS.
3. Presentation and disclosure in an entity's first IFRS financial statements and interim financial reports.

Selection of Accounting Policies

IFRS 1 stipulates that an entity should use the same accounting policies throughout all periods presented in its first IFRS financial statements, and also in its opening IFRS statement of financial position. Furthermore, the standard requires that those accounting policies must comply with each IFRS effective at the “reporting date” (as explained before) for its first IFRS financial statements, with certain exceptions. It requires full retrospective application of all IFRS effective at the reporting date for an entity's first IFRS financial statements, except under certain defined circumstances wherein the entity is prohibited by IFRS from applying IFRS retrospectively (mandatory exceptions) or it may elect to use one or more exemptions from some requirements of other IFRS (optional exemptions). Both concepts are discussed later in this chapter.

If a new IFRS has been issued on the reporting date, but application is not yet mandatory, although reporting entities have been encouraged to apply it before the effective date, the first-time adopter is permitted, but not required, to apply it as well. As stated before, an entity's first reporting date under IFRS refers to the end of the latest period covered by the first annual financial statements in accordance with IFRS, or interim financial statements, if any, that the entity presents under IAS 34. For example, if an entity's first IFRS reporting date is December 31, 202X, consequently:

1. First IFRS financial statements must comply with IFRS in effect at December 31, 202X; and
2. Opening statement of financial position at January 1, 202X-1, and comparative information presented for 202X-1, must comply with IFRS effective at December 31, 202X (at the end of the first IFRS reporting period).

On first-time adoption of IFRS, the first most important step that an entity has to take is the selection of accounting policies that comply with IFRS. Management must select initial IFRS accounting policies based on relevance and reliability as these choices will affect the company's financial reporting for years to come. While many accounting policy choices will simply reflect relevant circumstances (e.g., method of depreciation, percentage of completion vs. completed contract accounting), other choices will result from IFRS flexibility.

The several areas where a choice of accounting policies under IFRS exists include:

1. IFRS 1—Optional exemptions from the full retrospective application of IFRS for some types of transactions on first-time IFRS adoption (see optional exemptions from other IFRS);
2. IFRS 3—In acquisitions of less than 100%, the option to measure non-controlling interest at fair value or proportionate share of the acquiree's identifiable net assets (this choice will result in recognising 100% of goodwill or only the parent's share of goodwill);
3. IFRS 4—Remeasure insurance liabilities to fair value during each accounting period;
4. IAS 1—
   1. Present one statement of comprehensive income or separate income statement and comprehensive income statement;
   2. Presentation of expenses in the income statement by nature or by function;
5. IAS 2—
   1. Value inventories at FIFO or weighted-average;
   2. Measure certain inventories, for example agricultural produce, minerals and commodities, at net realisable value rather than cost;
3. IAS 7—
   1. Direct or indirect method for presenting operating cash flows;
   2. Classify interest and dividends as operating, investing or financing;
3. IAS 16—Measure property, plant and equipment using the cost-depreciation model or the revaluation through equity model;
4. IAS 19—Many options available for recognising actuarial gains and losses (immediately in profit or loss, immediately in equity or different methods of spreading the cost);
5. IAS 20—Various options of accounting for government grants;
6. IAS 23—Borrowing costs;
7. IAS 27, IAS 28, IAS 31—Cost or fair value model for investments in subsidiaries, associates and joint ventures in the separate financial statements;
8. IAS 31—Equity method or proportionate consolidation for joint ventures;
9. IAS 38—The cost-depreciation model or revaluation through equity model for intangible assets with quoted market prices;
10. IFRS 9—
    1. Optional hedge accounting;
    2. Option to designate individual financial assets and financial liabilities to be measured at fair value through P&L;
    3. Option to designate non-trading instruments as fair value through other comprehensive income;
    4. Option to reclassify out of fair-value-through-profit or loss, and out of other comprehensive income categories;
    5. Option to adjust the carrying amount of a hedged item for gains and losses on the hedging instrument;
    6. Option of trade date or settlement date accounting; and
    7. Option to separate an embedded derivative or account for the entire contract at fair-value-through-profit or loss;
8. IAS 40—
   1. The cost-depreciation model or fair value model for investment property; and
   2. Option to classify land use rights as investment property.

IFRS 1 requires a first-time adopter to use the current version of IFRS (or future standards, if early adoption permitted) without considering the superseded versions. This obviates the need to identify varying iterations of the standards that would have guided the preparation of the entity's financial statements at each prior reporting date, which would have been a very time-consuming and problematic task. This means that the comparative financial statements accompanying the first IFRS-compliant reporting may differ—perhaps materially—from what would have been presented in those earlier periods had the entity commenced reporting consistent with IFRS at an earlier point in time. Entities can early adopt new standards if early adoption is permitted by the standards but cannot apply standards that are not published at the first IFRS reporting period.

The IASB's original thinking was to grant the first-time adopter an option to elect application of IFRS as if it had always applied IFRS (i.e., from the entity's inception). However, to have actualised this, the first-time adopter would have had to consider the various iterations of IFRS that had historically existed over the period of time culminating with its actual adoption of IFRS. Upon reflection, this would have created not merely great practical difficulties for preparers but would have negatively impacted comparability among periods and across reporting entities. Thus, IFRS 1, as promulgated, offers no such option.

The amendment to IFRS 1 as part of the 2010 Improvement to IFRS clarified that, if a first-time adopter changes its accounting policies or its use of the exemptions in IFRS 1 after it has published an interim financial report in accordance with IAS 34, Interim Financial Reporting, but before its first IFRS financial statements are issued, it should explain those changes and update the reconciliations between previous GAAP and IFRS. The requirements in IAS 8 do not apply to such changes.

Opening IFRS Statement of Financial Position

A first-time adopter must prepare and present an opening IFRS statement of financial position at the date of transition to IFRS. This statement serves as the starting point for the entity's accounting under IFRS. Logically, preparation of an opening statement of financial position is a necessary step to accurately restate the first year's statements of comprehensive income, changes in equity and cash flows.

In preparing the opening IFRS statement of financial position in transition from previous GAAP to IFRS, several adjustments to the financial statements are required. A first-time IFRS adopter should apply the following (except in cases where IFRS 1 prohibits retrospective application or grants certain exemptions):

1. Recognise all assets and liabilities whose recognition is required under IFRS. It is expected that many companies will recognise additional assets and liabilities under IFRS reporting, when compared with the national GAAP formerly employed. Areas which may result in this effect include:
   1. Defined benefit pension plans (IAS 19);
   2. Deferred taxation (IAS 12);
   3. Assets and liabilities under certain finance leases (IAS 17);
   4. Provisions where there is a legal or constructive obligation (IAS 37);
   5. Derivative financial instruments (IFRS 9);
   6. Internal development costs (IAS 38); and
   7. Share-based payments (IFRS 2).
2. Derecognise items as assets or liabilities if IFRS does not permit such recognition. Some assets and liabilities recognised under an entity's previous (national) GAAP will have to be derecognised. For example:
   1. Provisions where there is no legal or constructive obligation (e.g., general reserves, post-acquisition restructuring) (IAS 37);
   2. Internally generated intangible assets (IAS 38); and
   3. Deferred tax assets where recovery is not probable (IAS 12).
3. Reclassify items that are recognised under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under IFRS. Assets and liabilities that might be reclassified to conform to IFRS include:
   1. Certain financial instruments previously classified as equity;
   2. Any assets and liabilities that have been offset where the criteria for offsetting in IFRS are not met—for example, the offset of an insurance recovery against a provision;
   3. Non-current assets held for sale (IFRS 5); and
   4. Non-controlling interest (IFRS 10).
4. Measure all recognised assets and liabilities according to principles set forth in IFRS. This remeasurement may be required when the accounting basis is the same but measured differently (e.g., cost basis under IFRS may not be the same as under US GAAP), when the basis is changed (e.g., from cost to fair value) or there are differences in the applicability of discounting (e.g., provisions or impairments). Assets and liabilities that might have to be measured differently include:
   1. Receivables (IAS 18);
   2. Inventory (IAS 2);
   3. Employee benefit obligations (IAS 19);
   4. Deferred taxation (IAS 12);
   5. Financial instruments (IFRS 9);
   6. Provisions (IAS 37);
   7. Impairments of property, plant and equipment, and intangible assets (IAS 36);
   8. Assets held for disposal (IFRS 5); and
   9. Share-based payments (IFRS 2).

Mandatory Exceptions to the Retrospective Application of Other IFRS

IFRS 1 prohibits retrospective application of some aspects of other IFRS when a judgement would have been required about the past and the outcome is known on first-time adoption. For example, practical implementation difficulties could arise from the retrospective application of aspects of IFRS 9 or could lead to selective designation of some hedges to report a particular result. Mandatory exceptions relate to estimates, derecognition of non-derivative financial assets and non-derivative financial liabilities, hedge accounting and non-controlling interests.

Business Combinations

IFRS 1 exempts the first-time adopter from mandatory retrospective application in the case of business combinations that occurred before the date of transition to IFRS. That is, requirements under IFRS 3 can be applied in accounting for combinations that occurred before the transition date under IFRS, but this need not be done. Thus, under IFRS 1, an entity may elect to use previous national GAAP accounting relating to such business combinations. The IASB provided this exemption because, if retrospective application of IFRS 3 had been made obligatory, it could have forced entities to estimate (or make educated guesses) about conditions that presumably prevailed at the respective dates of past business combinations. This would have been particularly challenging where data from past business combinations had not been preserved. The use of such estimates could have adversely affected the relevance and reliability of the financial statements, and was thus seen as a situation to be avoided.

In evaluating responses to the draft of its standard on first-time adoption of IFRS, the IASB concluded that notwithstanding the fact that restatement of past business combinations to conform with IFRS was conceptually preferable, a pragmatic assessment of cost versus benefit weighed in favour of permitting but not requiring such restatement. However, the IASB did place an important limitation on this election: if a first-time adopter having multiple acquisition transactions restates any business combination, it must restate all business combinations that took place subsequent to the date of that restated combination transaction. First-time adopters thus cannot “cherry pick” among past business combinations to apply IFRS opportunistically to certain of them.

IFRS 1 states that these exemptions for past business combinations also apply to past acquisitions of investments in associates and in joint ventures. Furthermore, the date chosen for electing to apply IFRS 3 retrospectively to past business combinations applies equally to associates and joint ventures.

In addition, the concept of “push-down accounting,” required under SEC guidance in special circumstances, does not exist in IFRS. It means that previous revaluations to fair value at acquisition made by subsidiaries to apply push-down accounting need to be reversed on transition to IFRS, but those revaluations can be used as deemed cost of property, plant and equipment, certain intangible assets and investment property.

Deemed Cost

An entity may elect to measure an item of property, plant and equipment at fair value at the date of its transition to IFRS and use the fair value as its deemed cost at that date. In accordance with IFRS 1, “deemed cost” is an amount substituted for “cost” or “depreciated cost” at a given date, and this value is subsequently used as the basis for depreciation or amortisation. A first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant and equipment at, or before, the date of transition to IFRS as deemed costs at the date of revaluation if the revaluation amount, when determined, was broadly comparable to either fair value or cost (or depreciated cost under IFRS adjusted for changes in general or specific price index).

These elections are equally available for investment property measured under the cost model and intangible assets that meet the recognition criteria and the criteria for revaluation (including the existence of an active market).

If a first-time adopter has established a deemed cost under previous GAAP for any of its assets or liabilities by measuring them at their fair values at a particular date because of the occurrence of an event such as privatisation or an initial public offering, it is allowed to use such an event-driven fair value as deemed cost for IFRS at the date of that measurement. The May 2010 Improvements to IFRS amended IFRS 1 to clarify that a first-time adopter is also permitted to use an event-driven fair value as “deemed cost” at the measurement date for measurement events that occurred after the date of transition to IFRS but during the period covered by the first IFRS financial statements. Any resulting adjustment is recognised directly in equity at the measurement date.

First-time adopters must assess and evaluate available accounting options under IAS 16 and determine which options would be more advantageous going forward, when adopting IFRS. For example, the first IFRS financial statements must present property, plant and equipment as if the requirements of IAS 16 had always been applied. While the “component approach” to depreciation is allowed but rarely used under US GAAP, this approach is required under IFRS and may result in significant adjustments in conversion for US adopters discussed in detail in Chapter 9, Property, Plant and Equipment.

It is common in some countries to account for exploration and development costs for properties in development or production in cost centres that include all properties in a large geographical area (often referred to as “full cost accounting”). Since this approach is not allowed under IFRS, the process of remeasuring the assets on the first-time adoption of IFRS would likely be tedious and expensive. The amendments to IFRS 1, in effect for annual periods beginning on or after January 1, 2011, would allow an entity that used full cost accounting under its previous GAAP to measure exploration and evaluation assets, as well as oil and gas assets in the development or production phases, at the date of transition to IFRS, at the amount determined under the entity's previous GAAP.

The amendments allow an entity that used such accounting under previous GAAP to elect to measure oil and gas assets at the date of transition on the following basis:

1. Exploration and evaluation assets at the amount determined under previous GAAP; and
2. Assets in the development or production phases at the amount determined for the cost centre under previous GAAP. This amount is allocated pro rata to the underlying assets, using reserve volumes or reserve values as of that date.

To avoid the use of deemed costs resulting in an oil and gas asset being measured at more than its recoverable amount, the first-time adopter should test exploration and evaluation assets and assets in the development and production phases for impairment at the date of transition to IFRS in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources, or IAS 36, Impairments of Assets, and, if necessary, reduce the amount determined in accordance with (1) and (2). This paragraph considers only those oil and gas assets that are used in the exploration, evaluation, development or production of oil and gas.

In addition, in the May 2010 Improvements to IFRS, the IASB amended IFRS 1 to allow entities with rate-regulated activities that hold, or previously held, items of property, plant and equipment or intangible assets for use in such operations (and recognised separately as regulatory assets) that may not be eligible for capitalisation under IFRS to recognise such items and to elect to use the previous GAAP carrying amount of such items as their deemed cost at the date of transition to IFRS. This exemption is available on an item-by-item basis, but entities are required to immediately (at the date of transition to IFRS) test for impairment in accordance with IAS 36 each item for which this exemption is used. (See discussion of rate-regulated activities in Chapter 32, Extractive Industries.)

Leases

In accordance with IFRIC 4, Determining Whether an Arrangement Contains a Lease, a first-time adopter may determine whether an arrangement existing at the date of transition to IFRS contains a lease on the basis of facts and circumstances existing at that date.

IFRS 1 exempts entities with existing leasing contracts that made, under previous GAAP, the same determination as that required by IFRIC 4, but that assessment was at a date other than that required by IFRIC 4, from reassessing the classification of those contracts when adopting IFRS.

Below Market Rate Government Loans

In the amendment to IFRS 1 issued in March 2012, it was clarified that first-time adopters will not be required to recognise the corresponding benefit of a government loan at a below-market rate of interest as a government grant. An entity may still elect to retrospectively apply the requirements in IAS 20 if the information needed to do so was obtained at the time of initially accounting for that loan. The amendment will give first-time adopters the same relief as existing preparers of IFRS financial statements.

Cumulative Translation Differences

A first-time IFRS adopter has the option to reset to zero all cumulative translation differences arising on monetary items that are part of a company's net investment in foreign operations existing at the transition date. IAS 21 requires an entity to classify certain translation differences as a separate component of equity, and upon disposal of the foreign operation, to transfer the cumulative translation difference relating to the foreign operation to the statement of comprehensive income as part of the gain or loss on disposal.

Under IFRS 1, a first-time adopter is exempted from recognising cumulative translation differences on foreign operations prior to the date of transition to IFRS. If it elects this exemption, the cumulative translation adjustment for all foreign operations would be deemed to be zero and the gain or loss on subsequent disposal of any foreign operation should exclude translation differences that arose before the date of transition to IFRS, but would include all subsequent translation adjustments recognised in accordance with IAS 21.

A subsidiary (or associate, or joint venture entity) may elect, in its financial statements, to measure cumulative translation differences for all of its foreign operations at the carrying amount that would be included in the parent's consolidated financial statements, based on the parent's date of transition to IFRS. The election is only available if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary.

A company on transition to IFRS may also need to change the functional currency of one or more subsidiaries under IAS 21, due to differences in existing guidance in this respect. This could possibly create the need to revalue property, plant and equipment on first-time adoption rather than restating non-monetary assets measured at historical cost, which could be onerous.

Investments in Subsidiaries, Jointly Controlled Entities and Associates

In accordance with IAS 27 a company may value its investments in subsidiaries, jointly controlled entities and associates either at cost or in accordance with IFRS 9. Under IFRS 1, a first-time adopter electing deemed cost to account for these investments may choose either fair value, determined in accordance with IFRS 9, at the entity's date of transition to IFRS, or carrying amount under previous GAAP at that date.

Assets and Liabilities of Subsidiaries, Associates and Joint Ventures

IFRS 1 provides exemptions under two circumstances as follows:

1. If a subsidiary becomes a first-time adopter later than its parent, the subsidiary must, in its separate (stand-alone) financial statements, measure its assets and liabilities at either:
   1. The carrying amounts that would be included in its parent's consolidated financial statements, based on its parent's date of transition to IFRS (if no adjustments were made for consolidation procedures and for the effect of the business combination in which the parent acquired the subsidiary); or
   2. The carrying amounts required by the other provisions of IFRS 1, based on the subsidiary's date of transition to IFRS. A similar choice can be made by associates or joint ventures that adopt IFRS later than the entity.
2. If a reporting entity (parent) becomes a first-time adopter after its subsidiary (or associate or joint venture) the entity is required, in its consolidated financial statements, to measure the assets and liabilities of the subsidiary (or associate or joint venture) at the same carrying amounts as in the separate (stand-alone) financial statements of the subsidiary (or associate or joint venture), after adjusting for consolidation and equity accounting adjustments and for effects of the business combination in which an entity acquired the subsidiary. In a similar manner, if a parent becomes a first-time adopter for its separate financial statements earlier or later than for its consolidated financial statements, it shall measure its assets and liabilities at the same amounts in both financial statements, except for consolidation adjustments.

In cases where a subsidiary decided to elect different exemptions from those the parent selects for the preparation of consolidated financial statements, this may create permanent differences between the subsidiaries' and parents' books, requiring adjustments in consolidation. This exemption does not impact the requirement in IAS 1 that uniform accounting policies must be applied in the consolidated entities for all entities within a group.

Compound Financial Instruments

If an entity has issued a compound financial instrument, such as a convertible debenture, with characteristics of both debt and equity, IFRS requires that at inception, it should split and separate the liability component of the compound financial instrument from equity. If the liability portion is no longer outstanding at the date of adoption of IFRS, a retrospective and literal application of the standard would require separating two portions of equity. The first portion, which is in retained earnings, represents the cumulative interest accreted on the liability component. The other portion represents the original equity component of the instrument and would be in paid-in capital.

IFRS 1 exempts a first-time adopter from this split accounting if the former liability component is no longer outstanding at the date of transition to IFRS. This exemption can be significant to companies that routinely issue compound financial instruments.

Designation of Previously Recognised Financial Instruments

IFRS 1 permits a first-time adopter to designate a financial asset at fair value through other comprehensive income and a financial instrument (provided it meets certain criteria) as a financial asset or financial liability at fair value through profit or loss, at the date of transition to IFRS. IFRS 9 requires such designation to be made on initial recognition.

Fair Value Measurement of Financial Assets or Financial Liabilities at Initial Recognition

A first-time adopter may apply requirements of IFRS 9 regarding: (1) the best evidence of the fair value of a financial instrument at initial recognition, and (2) the subsequent measurement of the financial asset or financial liability and the subsequent recognition of gains and losses, prospectively to transactions entered into on or after the date of transition to IFRS.

Decommissioning Liabilities included in the Cost of Property, Plant and Equipment

IFRS 1 provides that a first-time adopter need not comply with the requirements of IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities, for changes in such liabilities that occurred before the date of transition to IFRS. Adjustments to liabilities on first-time IFRS adoption arise from events and transactions before the date of transition to IFRS and are generally recognised in retained earnings. For entities using this exemption, certain measurements and disclosures are required. If a first-time adopter uses these exemptions, it should:

1. Measure the liability at the date of transition in accordance with IAS 37;
2. Estimate the amount of the liability (which is within the scope of IFRIC 1) that would have been included in the cost of the related asset when the liability was first incurred, by discounting the liability to that date using its best estimate of the historical risk-adjusted discount rate(s) that would have applied for that liability over the intervening period; and
3. Calculate the accumulated depreciation on that amount, as of the date of transition to IFRS, on the basis of the current estimate of the useful life of the asset, using the depreciation policy in accordance with IFRS.

In addition, an entity that uses the exemption in IFRS 1 to value at deemed cost determined under previous GAAP oil and gas assets in the development or production phases in cost centres that include all properties in a large geographical area should, instead of following the above rules (1.–3.) or IFRIC 1:

1. Measure decommissioning, restoration and similar liabilities as of the date of transition to IFRS under IAS 37; and
2. Recognise directly in retained earnings any difference between that amount and the carrying amount of those liabilities at the date of transition determined under previous GAAP.

Service Concession Arrangements

A first-time adopter may apply the transitional provisions of IFRIC 12.

Borrowing Costs

IFRS 1 permits a first-time adopter to apply the transitional provisions included in IAS 23 (as revised in 2007). The effective date in IAS 23 should be interpreted as the later of July 1, 2009, or the date of transition to IFRS. With the amendment to IFRS 1, per the Annual Improvements 2009–11 cycle, published in May 2012, the first-time adopter may designate any date before the effective date and capitalise borrowing costs relating to all qualifying assets in accordance with IAS 23 for which the commencement date for capitalisation is on or after that date. Additionally, once the first-time adopter applies this provision, they may not restate any previously capitalised borrowing costs as capitalised under the previous GAAP. This amendment is effective for annual periods beginning on January 1, 2013, and early adoption is allowed.

Based on the experience of EU and Australian companies, exceptions most likely to be elected by first-time adopters pertain to the following: business combinations, deemed cost, employee benefits, share-based payment and cumulative translation differences.

These exemptions from the full retrospective application of IFRS should benefit first-time adopters, by reducing the cost of implementing IFRS. Entities should evaluate potential impacts of electing to use the proposed exemptions, including implications for information systems, taxes and reported results of operations.

Severe Hyperinflation

IFRS 1 permits a first-time adopter, if it has a functional currency that was, or is, the currency of a hyperinflationary economy, to determine whether it was subject to severe hyperinflation before the date of transition to IFRS.

The currency of a hyperinflationary economy is subject to severe hyperinflation if it has both of the following characteristics:

1. A reliable general price index is not available to all entities with transactions and balances in the currency;
2. Exchangeability between the currency and a relatively stable foreign currency does not exist.

The functional currency of an entity ceases to be subject to severe hyperinflation on the functional currency's normalisation date. That is the date when the functional currency no longer has either, or both, of the characteristics in the above paragraph, or when there is a change in the entity's functional currency to a currency that is not subject to severe hyperinflation. When an entity's date of transition to IFRS is on, or after, the functional currency normalisation date, the entity may elect to measure all assets and liabilities held before the functional currency normalisation date at fair value on the date of transition to IFRS. The entity may use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position.

When the functional currency normalisation date falls within a 12-month comparative period, the comparative period may be less than 12 months, provided that a complete set of financial statements as required by IAS 1 is provided for that shorter period.

Explanation of Transition to IFRS

A first-time adopter that applied IFRS in a previous period and whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with IFRS standards, and in the current period makes an explicit and unreserved statement of compliance with IFRS, has the choice of either: (1) applying IFRS 1 (in full), or (2) retrospectively applying IFRS in accordance with the provision of IAS 8, Accounting Policies, Changes in Estimates and Errors. Should option 1 be applied, the first-time adopter must disclose its reason for not fully complying with IFRS in prior periods and the reason why it now does fully comply with IFRS. Should option 2 be applied, the first-time adopter must disclose its reasons for electing to apply IAS 8 full retrospective treatment to fully comply with IFRS (as if it had never stopped applying IFRS in the first place).

Comparative Information

A first-time adopter must prepare and present an opening statement of financial position as of its transition date, in accordance with IFRS in effect as of the company's first reporting date. At least one year of comparative financial statement information has to be presented. To comply with IAS 1, Presentation of Financial Statements, an entity's first IFRS financial statements should include at least three statements of financial position, two statements of comprehensive income, two separate income statements (if presented), two statements of cash flows and two statements of changes in equity and related notes, including comparative information.

If an entity also presents historical summaries of selected data for periods prior to the first period that it presents full comparative information under IFRS, and IFRS does not require the summary data to be in compliance with IFRS, such data should be labelled prominently as not being in compliance with IFRS and also disclose the nature of the adjustment that would make that data IFRS compliant.

Reconciliations

A first-time adopter must explain how the transition to IFRS affected its reported financial position, financial performance and cash flows. To comply with the above requirement, reconciliation of equity and profit and loss as reported under previous GAAP to IFRS should be included in the entity's first IFRS financial statements. Specifically, an entity should include a reconciliation of its equity reported under previous GAAP to its equity under IFRS, for both of the following dates: (1) the date of transition to IFRS, and (2) the end of the latest period presented in the entity's most recent annual financial statements under previous GAAP. Consequently, IFRS 1 requires the following reconciliations to be presented in first IFRS financial statements:

1. Reconciliations of the entity's equity reported under previous GAAP to its equity restated under IFRS for both of the following dates:
   1. The date of transition to IFRS; and
   2. The end of the latest period presented in the entity's most recent annual financial statements under previous GAAP.
2. A reconciliation of the entity's total comprehensive income reported in most recent financial statements under previous GAAP to its comprehensive income under IFRS for the same period. The starting point for that reconciliation should be the amount of comprehensive income reported under previous GAAP for the same period. If an entity did not report such a total, the reconciliation starts with profit or loss under previous GAAP.
3. In addition to the reconciliations of its equity and comprehensive income, if the entity recognised or reversed any impairment losses for the first time in preparing its opening IFRS statement of financial position, the entity is required to make the disclosures that would have been required in accordance with IAS 36, if the entity had recognised or reversed those impairment losses in the period beginning with the date of transition to IFRS.

Consequently, for an entity adopting IFRS for the first time in its December 31, 202X financial statements, the reconciliation of equity would be required as of January 1, 202X-1, and December 31, 202X-1; and the reconciliation of comprehensive income for the year 202X-1. These reconciliations must provide sufficient detail enabling users to understand material adjustments to the statement of financial position and comprehensive income. Material adjustments to the statement of cash flows should also be disclosed. For all reconciliations, entities must distinguish the changes in accounting policies from corrections of errors.

Other Disclosures

IFRS 1 requires first-time adopters to present other disclosures, including:

1. Entities that designated a previously recognised financial asset or financial liability as a financial asset or financial liability at fair value through profit or loss, or a financial asset at fair value through other comprehensive income should disclose the fair value designated into each category when this designation was made and the carrying amount in the previous financial statements.
2. Entities that recognised or reversed any impairment losses for the first time in preparing their opening IFRS statement of financial position need to present the disclosures required by IAS 36 as if those impairment losses or reversals had been recognised in the first period beginning with the date of transition to IFRS.
3. Entities that used fair values in their opening IFRS statement of financial position as deemed cost for an item of property, plant and equipment, an investment property or an intangible asset, should disclose for each line item in the opening IFRS statement of financial position the aggregate of those fair values and the aggregate adjustments made to the carrying amounts reported under previous GAAP.
4. Also, entities that apply the exemption to measure oil and gas assets in the development or production phases at the amount determined for the cost centre under previous GAAP (and this amount is allocated pro rata to the underlying assets, using reserve volumes or reserve values as of that date) should disclose that fact and the basis on which carrying amounts determined under previous GAAP were allocated.

Interim Reporting

An entity adopting IFRS in an interim report (e.g., in quarterly or half-yearly financial statements) that is presented in accordance with IAS 34 is required to comply with IFRS 1, adopt IFRS effective at the end of the interim period and prepare comparative financial information for interim periods.

Options With and Within the Accounting Standards

An entity adopting IFRS for the first time may have a choice among accounting standards as well as accounting policies as a result of: (1) options with accounting standards (newly issued IFRS), and (2) options within accounting standards.

In conformity with IFRS 1, an entity should adopt IFRS issued and effective at the reporting date of the entity's first IFRS financial statements. Some IFRS may not be issued as of the date of an entity's transition to IFRS but will be effective at the reporting date. It is also possible to adopt a standard whose application is not yet mandatory for the reporting period but whose early adoption is permitted. The IASB has a number of projects currently on its agenda where standards are expected to be finalised in the near future with application dates beyond that date, including those dealing with such matters as derecognition, liabilities, share-based payments and accounting for income taxes. An entity is required to apply the same version of the IFRS throughout the periods covered by those first IFRS financial statements.

On first-time adoption of IFRS, an entity must choose which accounting policies will be adopted. IFRS require an entity to measure some assets and liabilities at fair value, and some others (for example, pension liabilities) at net realisable value or other forms of current value that reflect explicit current projections of future cash flows. An entity will have a choice between different options of accounting policies within accounting standards that may be applied in preparing its first IFRS financial statements. Examples of areas where options within IFRS exist include: cost versus revaluation model of accounting for property, plant and equipment and intangible assets (IAS 16, IAS 38); cost versus fair value model of accounting for investment property (IAS 40); cost versus fair value of jointly controlled entities (IFRS 11, IAS 27); and fair value versus proportionate share of the acquiree's identifiable net assets to measure non-controlling interest in consolidated financial statements (IFRS 3). There are several other areas where there is a choice of accounting policies under IFRS which may have a significant impact on an entity's future results. Once an accounting policy is adopted, opportunities to change may be restricted to justified situations where the change would result in a more appropriate presentation.

In many respects, entities are given a “fresh start” and are required to redetermine their accounting policies under IFRS, fully restating past comparative information. The limited optional exceptions also present some opportunities for entities to determine optimal outcomes.

Transition from US GAAP to IFRS: The Case of DaimlerChrysler

DaimlerChrysler (former Daimler Benz, today Daimler AG) adopted US GAAP in 1998 for purposes of listing on the NYSE. Since it reported under US GAAP in 2005, DaimlerChrysler was exempted until 2007 from implementing the EU Regulation on adopting IFRS. In May 2007, DaimlerChrysler announced that it would sell 80.1% of its stake in the Chrysler Group. Although the company no longer operates the Chrysler Group, it continues to trade on the NYSE and to carry US-issued debt. In November 2007, the SEC eliminated the requirement for foreign registrants reporting under IFRS to reconcile their financial statements to US GAAP. In 2007, DaimlerChrysler had to implement IFRS and its 2007 financial statements were prepared in accordance with IFRS, as issued by the IASB and endorsed by the EU.

DaimlerChrysler followed the provisions of IFRS 1, First-time Adoption of IFRS, to prepare its opening IFRS statement of financial position at the transition date. In accordance with IFRS 1, DaimlerChrysler's date of transition to IFRS, on which the opening IFRS statement of financial position was prepared, was January 1, 2005, since the company presented two years of comparative financial statements (2005 and 2006). As required by IFRS 1, each IFRS effective at the reporting date of DaimlerChrysler's first IFRS-compliant financial statements (December 31, 2007) was retrospectively applied.

Certain of DaimlerChrysler's IFRS accounting policies applied in the opening statement of financial position differed from its US GAAP policies applied on that date. The resulting adjustments which arose from events and transactions before the date of transition to IFRS were recognised directly in retained earnings (or another category of equity where appropriate, as of January 1, 2005). The impacts of IFRS adoption on the financial statements are presented in Examples 1 and 2 below, along with the footnote, and Example 3, taken from the reissued 2006 report which provides explanation of the differences between IFRS and US GAAP that had major impacts on the financial reports.