An entity`s first financial statements in accordance with IFRS are first financial statements in which entity adopts all IFRSs. Following IAS 1 Presentation of Financial Statements the financial statements are in compliance with IFRS only if contains the explicit and unreserved statement in those financial statements of compliance with IFRSs.
Standard IFRS 1 stated list of examples how the previous financial statements might have been presented supporting the necessity of first-time adoption:
- in accordance with national requirements that are not consistent with IFRSs in all respects,
- not containing explicit statement of compliance with all IFRSs standards,
- prepared financial statements in accordance with IFRSs for internal use only, without making them available to external users,
- prepared only reporting package in accordance with IFRS for consolidation purposes without preparing of a complete set of financial statements,
- did not present financial statements previously.
Specifically, if the most recent previous annual financial statements did not contain the explicit and unreserved statement of compliance with IFRSs, entity must apply IFRS 1 of apply IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors as if the entity has never stopped applying IFRSs with additional disclosures required by IAS 8 and IFRS 1.
Recognition and measurements requirements
- presenting of opening IFRS statements of financial position at the date of transition to IFRSs,
- using the same accounting policies in all presented periods (3 at least),
- applying the same version of IFRSs if previous application of a new IFRS is permitted,
- recognising or derecognising of assets and liabilities (such as capitalisation of training costs, deferred tax),
- reclassification of assets and liabilities (such as compound derivatives),
- measuring value of assets and liabilities.
All adjustments are recognised directly in retained earnings.
Main exemptions from applying IFRS in the opening IFRS statements of financial position
Prohibition of the retrospective application of:
- Estimates in accordance with IFRSs at the date of translation shall be consistent with previous GAAP, unless there is an objective evidence of the error. Entity should the information obtained after the reporting date treat as non-adjusting events in accordance with IAS 10 Events After Reporting Period.
- Derecognition of financial assets and financial liabilities (paragraphs B2 and B3) shall apply prospectively for transaction occurring on or after the transition date.
- Hedge accounting (paragraphs B4–B6) shall be measured at fair value and eliminate all deferred gain and losses. In accordance with IFRS 9 Financial instruments all hedging relations that are not qualify for hedge accounting shall not reflect in financial statements.
- Non-controlling interests (paragraph B7) allocation of other comprehensive income, accounting for changes in ownership interest and accounting for loss of control shall apply prospectively.
- Classification and measurement of financial assets (paragraphs B8–B8C) if is impracticable to assess the modified time value of money , fair value of a prepayment feature and the effective interest method, the fair value of assets and liabilities at the date of transition shall be taken into account.
- Impairment of financial assets (paragraphs B8D–B8G) representing loss allowance shall recognise at amount equal to lifetime expected credit losses at each reporting date until that financial assets is derecognised.
- Embedded derivatives (paragraph B9) is required to be separated from host contract and accounted for as a derivative on the basis of actual conditions.
- Government loans (paragraphs B10–B12) in context of loan with below-market rate of interest shall be measured in opening IFRS statement of financial position in the carrying amount of the loan by the previous GAAP.
- Insurance contracts (paragraph B13) should be applying in context that transition date is the date of transition to IFRSs.
Exemption of the retrospective application of:
- Business combination (paragraph C) – The carrying amount of goodwill in the opening IFRS statement of financial position shall be its carrying amount in accordance with previous GAAP at the date of transition to IFRSs after reclassification of intangible assets and impairment test as well.
- Share based payment transactions (paragraphs D2 and D3) applicable only for equity instruments issued 7.11.2002 and vested before 1.1.2005.
- Deemed cost (paragraphs D5–D8B) could represent fair value of property, plant and equipment at the transition date.
- Leases (paragraphs D9 and D9B–D9E) may be assessed whether the contact existing at the date of transition contains lease on the basis of facts and circumstances at that date and measure the right-of-use at carrying amount or equal lease liability and lease liabilities at the present value of remaining lease payments.
- Cumulative translation differences (paragraphs D12 and D13) for all foreign operations are deemed to be zero.
- Investments in subsidiaries, joint ventures and associates (paragraphs D14–D15A) could be measured also in deemed costs (fair value of previous GAAP carrying value).
- Assets and liabilities of subsidiaries, associates and joint ventures (paragraphs D16 and D17) may be taken from parent`s consolidated financial statements if subsidiary become first-adopted later than parent.
- Compound financial instruments (paragraph D18) need not separate to two portion – retained earning and liability component of the financial instrument is the financial instrument is no longer outstanding.
- Designation of previously recognised financial instruments (paragraphs D19–D19C) as financial instruments measured at fair value through profit and loss or other comprehensive income on the basis of the facts and circumstances that exists at the date of transition.
- Fair value measurement of financial assets or financial liabilities at initial recognition (paragraph D20) may apply prospectively.
- Decommissioning liabilities included in the cost of property, plant and equipment (paragraphs D21 and D21A) need no comply with requirements of IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities for changes in such liabilities that occurred before the date of transition.
- Financial assets or intangible assets accounted for in accordance with IFRIC 12 Service Concession Arrangements (paragraph D22).
- Borrowing costs (paragraph D23) included before the date of transition shall not be restated.
- Extinguishing financial liabilities with equity instruments (paragraph D25).
- Severe hyperinflation (paragraphs D26–D30).
- Joint arrangements (paragraph D31).
- Stripping costs in the production phase of a surface mine (paragraph D32).
- Designation of contracts to buy or sell a non-financial item (paragraph D33).
- Revenue (paragraphs D34 and D35).
- Foreign currency transactions and advance consideration (paragraph D36).