The objective of IFRS 1 is to make sure that a reporting entity who adopts IFRS as its financial reporting basis prepares financial statements that:
- are transparent for users and comparable over all the periods presented;
- provides a suitable starting point for reporting under IFRS; and
- can be generated at a cost that does not exceed benefits to users.
An entity who chooses IFRS as its financial reporting basis must prepare an opening balance sheet (statement of financial position) at the date of transition to IFRS. The transition date is the start of the earliest period for which comparative information is provided. In preparing its opening balance sheet (statement of financial position), a reporting entity must;
(a) recognise all IFRS assets and liabilities
(b) not recognise assets and liabilities not permitted by IFRS
(c) classify assets and liabilities by IFRS
(d) apply IFRS in measuring all recognised assets and liabilities
IFRS 1 grants limited exemptions in certain areas where the costs of complying with the requirements would outweigh the benefits to the users of financial statements. A summary of these exemptions are:
· First time adopters will not have to comply with the requirements in IAS 32 ‘Financial Instruments: Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ in their comparative financial statements. Entities taking advantage of this exemption will, however, have to show a reconciliation of the amounts in the closing balance sheet (statement of financial position) as at the year end to the opening IFRS balance sheet (statement of financial position).
- Property, plant and equipment: local GAAP can be used as deemed cost for IFRS.
- Business combinations: test for recognition and impairment of goodwill – there is no need to re-assess the basis of accounting.
- Where an entity provides employee benefits that fall under the provisions of IAS 19 ‘Employee Benefits’, an entity adopting IFRS for the first time can either recognise the deficit or surplus in full at the transition date or apply the provisions in IAS 19 retrospectively.
- Where estimates are used under local GAAP, these can be used in IFRS, except where there is an obvious error.
About the author:
Steve Collings FMAAT ACCA DipIFRS is Audit Manager at Leavitt Walmsley Associates www.lwaltd.com. Read all of Collings's analyses of the International Financial Reporting Standards.