Exemptions and Relief from IFRS for First Time Adopters An Overview of IFRS 1 First Time Adoption of IFRS

By Pradeep Shakespeare, July 6, 2010

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Canadian companies are well onto their IFRS compliance effort and know what to expect as they prepare to convert from local GAAP to IFRS. The key issue they may be facing is finalizing their opening balance sheet at the date of transition (define). The opening balance sheet is the earliest date (i.e. transition date) of the most recent period of comparative financial statements produced in accordance with local GAAP. The fundamental requirement is companies must produce their financial statements retrospectively, i.e. as though IFRSs always applied consider the consequences of traveling back in time to restate their statements to conform to the new standards. This is where IFRS 1 plays an important part: IFRS 1 which was developed in June 2003 by IASB1 sets out the guidelines and procedures a company adopting IFRS for the first time must follow in preparing financial statements in accordance with International Financial Reporting Standards. IFRS 1 is essentially a roadmap for preparers of first year financial statements under IFRSs - it provides users of financial statements greater transparency by drawing a clear distinction between changes in reported earnings arising from the changes in accounting recognition and measurement criteria, and the underlying economic activity of the company. IFRS 1 also ensures that all first-time adopters have a consistent starting point. A sense of urgency prevails in publicly accountable companies in countries that are scheduled to adopt IFRS in 2011 while the United States is deliberating on decision to convert to IFRS and will announce its plan in 2011: Canada - The Accounting Standards Board requires all Canadian publicly accountable enterprises to adopt IFRSs for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. United States In February 2010, the SEC agreed to publish a statement of continued support for a single set of high-quality global accounting standards and acknowledged IFRS is best positioned to serve that role. The statement SEC outlined a work plan to better understand the implications of a change to IFRS and events SEC anticipates occurring prior to 2011. If such a decision is made in 2011 to incorporate IFRS into the U.S. public markets, IFRS based reporting would begin in 2015 or 2016. India In January 2010, the Core Group of the Indian Ministry of Corporate Affairs, which is responsible for IFRS convergence, announced that there will be two separate sets of
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International Accounting Standards Board

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Exemptions and Relief from IFRS for First Time Adopters

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accounting standards as at April 2011: The first set would be Indian Accounting Standards which are converged with IFRS; the second, existing Indian Accounting Standards (i.e. pre IFRS). The former will apply to specified class of companies based on revenue thresholds. The latter will apply to other companies including entities deemed as small and medium companies. Korea - The Korea Accounting Institute, which is responsible for setting accounting standards in Korea, and the Korean Financial Supervisory Commission, require all listed companies to prepare their annual financial statements under Korean IFRSs beginning on or after April 1, 2011. What are the primary requirements of IFRS 1? IFRS 1 is a mandatory standard requiring first time adopters of IFRSs to: a) Select global accounting policies that comply with IFRS and apply them retrospectively to all periods presented in the first IFRS financial statements (including beginning retained earnings of the comparative period), Apply any of the optional exemptions from retrospective application, to facilitate a more efficient IFRS conversion process, Apply the mandatory exceptions from retrospective application, Prepare an opening balance sheet in accordance with IFRSs at the transition date, Prepare the first IFRS financial statements and comparatives, Explain the impact of the transition to IFRSs in its disclosures, Include an explicit and unreserved statement of compliance with IFRSs.

b) c) d) e) f) g)

IASBs intent with this important standard is to ensure that IFRS financial statements (annual and interim) are transparent and comparable for all periods presented in the financial statements, while ensuring the costs of producing IFRS compliant statements dont outweigh the benefits. General Principles of IFRS 1 The overriding principles of IFRS 1 require a company to apply all IFRSs to its financial statements as though it had always followed international standards. The opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS; the opening balance sheet is prepared at the date of transition (which is the beginning of the earliest period for which full comparative IFRS based financial statements are presented). The opening balance sheet should:

Include (i.e. recognize) all assets and liabilities that IFRS requires Exclude (i.e. derecognize) assets and liabilities that IFRS does not permit Classify all assets, liabilities and equity in accordance with IFRS

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Exemptions and Relief from IFRS for First Time Adopters

Measure all items in accordance with IFRS

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Adjustments as a result of applying IFRSs for the first time are recorded in retained earnings or another equity category in the opening balance sheet. Exceptions to these general principles exist where one of the optional exemptions or mandatory exceptions does not require or permit recognition, classification, and measurement in accordance with IFRSs. IFRS Reporting Requirements & Disclosures IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS affected the Companys reported balance sheet, income statement and cash flows. Specifically, this includes:

Reconciliations of equity reported under previous GAAP to equity under IFRS both (a) at the date of the opening IFRS balance sheet and (b) the end of the last annual period reported under the previous GAAP, Reconciliations of total comprehensive income for the last annual period reported under the previous GAAP to total comprehensive income under IFRSs for the same period, Explanation of material adjustments that were made, in adopting IFRSs for the first time, to the balance sheet, income statement and cash flow statement, Separately disclose errors in previous GAAP financial statements discovered in the course of transition to IFRSs , Disclose any impairment losses recognized or reversed in preparing its opening IFRS balance sheet, Appropriate explanations of specific recognition and measurement exemptions adopted under IFRS 1 (e.g. if it used fair values as deemed cost).

VOLUNTARY EXEMPTIONS Decisions easier to make 1. Business combinations 2. Actuarial gains and losses 3. Pension disclosures 4. Compound instruments 5. Cumulative translation differences 6. Share-based payments 7. Decommissioning liability 8. Service concessions (IFRIC 12) 9. Borrowing costs 10. Insurance contracts 11. Customer contributions 12.Day one gain or loss 13. Oil and gas assets 14. Proposed exemptions for rate regulated entities Strategic selections 15. Deemed cost 16. Arrangement containing a lease 17. Designation of previously recognized financial instruments 18. Assets and liabilities of subsidiaries, associates, and joint ventures

To comply with IAS 1 Presentation of financial statements an entity is required to report at least one year of comparative information. In addition, IFRS 1 requires an entity to include an explicit and unreserved statement of compliance with IFRSs. Disclosures in interim financial reports - If an entity is going to adopt IFRSs for the first time in its annual financial statements, certain disclosure are required in its interim financial statements IFRS Solutions that Go Beyond the Numbers

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prior to the first year statements, but only if those interim financial statements purport to comply with IAS 34 Interim Financial Reporting. Explanatory information and a reconciliation are also required in the interim report that immediately precedes the first set of IFRS annual financial statements. The information includes reconciliations between IFRS and previous GAAP. Voluntary Exemptions IFRS 1 grants limited exemptions from the requirements of IFRSs when a company adopts IFRSs for the first time, in specified areas where the cost of complying with them would be likely to exceed the benefits to the users of financial statements. Some exemptions need to be applied to classes of items or transactions; and others may be elected on an item-by-item basis. Voluntary exemptions are specific and cannot be applied to other items by analogy. The accounting policy choices can affect the conversion effort required and plus affect the opening equity and IFRS reported results. Remember IFRS 1 is a living document - additional exemptions are likely to be developed as the IASB completes various projects. A summary of all available voluntary exemptions is listed below. Please refer to the standard for additional details: Exceptions to the retrospective application of other IFRSs Effective January 1, 2010, there were five exceptions to the general principle of retrospective application: IAS 39 Derecognition of financial instruments - 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 derecognition requirements retrospectively provided that the needed information was obtained at the time of initially accounting for those transactions. IAS 39 Hedge accounting - The general rule is that the entity shall not reflect in its opening IFRS balance sheet (statement of financial position) a hedging relationship of a type that does not qualify for hedge accounting in accordance with IAS 39. 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 IFRS, provided that it does so no later than the date of transition to IFRSs. IAS 27 Non-controlling interest - IFRS 1.B7 lists specific requirements of IAS 27(2008) that shall 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 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 IFRS Solutions that Go Beyond the Numbers

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accordance with 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. The key thing to remember is IFRS adoption from a Canadian perspective is likely to involve minor differences since IFRS and Canadian GAAP are for the most part principle based, unlike US, which is primarily rule based. These minor differences may translate considerable effort during transition as the firms auditors will require adequate documentation of accounting policy choices and rationale, as the onus is on the firm to prove the case. Even with minor differences, Canadian companies should bear in mind the increased level of disclosures that are required under IFRS. Ultimately, the financial statement users will be the final judge if you used IFRS 1 to the fullest extent possible are users able differentiate changes in opening equity and earnings reported under IFRS as those purely due to accounting changes and those due to company performance? Did the company provide adequate disclosure to help with this understanding? General consensus is IFRS based reporting requires more in terms of management judgment and consequently, more disclosures than under local GAAP.

Pradeep Shakespeare is a financial reporting and governance specialist with over 15 years Canadian experience in large public and private companies specializing in strategic change management, IFRS, Sarbanes-Oxley/NI 52-109, business process/systems re-engineering and project management. As a former Corporate Controller and as a Director, Treasury, he also improved financial reporting, related systems and processes; through effective collaboration among operations and other stakeholders he reduced SG&A expenses and contributed to profit improvement. Pradeep is a Chartered Management Accountant (England) and an Executive MBA. He can be reached at (905) 609 4105 or via email at pshakespeare@solutionsthink.com. 2010 Solutionsthink Consultants Inc. All rights reserved.

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