IFRS 1: First time adoption of international financial reporting standards
IFRS 1 pertains to first time adoption of IFRSs, essentially outlining (a) what is the actual date of implementation of IFRSs; (b) what are the exceptions that the entity may avail while adopting IFRSs for the first time.
The key question is – when is an entity supposed to have adopted IFRS for the first time? The answer lies in Para 3: the first IFRS financial statements are the first annual financial statements in which the entity adopts IFRSs, by an explicit and unreserved statement in those financial statements of compliance with IFRSs. In order for an entity to be said to have adopted IFRSs, not only should there be a total adherence to IFRSs, but there should also be an explicit statement to the effect that the statements are prepared as per IFRSs. Note the various conditions mentioned in Para 3.
The adoption of IFRSs starts with preparation of opening statement of financial position (SFP) (that is, balance sheet) that is IFRS-compliant. This would obviously mean that the accounts for the previous year should be prepared in accordance with IFRSs, so that the statement of financial position at the beginning of the year may be IFRS-compliant. For example, if an entity wants to adopt IFRS for the first time during 2011-12, it must implement IFRSs during 2010-11, so as to be able to prepare an opening balance sheet as on 1st April 2011 that is IFRS-compliant. Of course, in financial year 2010-11, the entity does not make a declaration of having adopted IFRSs, which may be made only in 2011-12 as that the first year where the opening and the closing SFP are prepared as per IFRSs.
The meaning of adoption of IFRSs is that entity shall recognize all such assets and liabilities, recognition of which is required by IFRSs, not recognize all such assets and liabilities recognition of which is not permitted by IFRSs, apply IFRSs in initial or on-going recognition of assets and liabilities, and classify assets and liabilities as per IFRSs.
Since adoption of IFRSs requires retrospective application, there are certain exceptions to such retrospective application. The significant exceptions are as follows:
- Estimates: the estimates made while preparing accounts as per earlier accounting standards do not have to be revised, unless there is objective evidence that those estimates were wrong.
- Exceptions in Appendix C
- Exceptions in Appendix D
- Exceptions in Appendix E
In addition, Appendix B consists of exceptions to retrospective application of IFRSs. It is notable that IAS 39 provides conditions for de-recognition of financial assets/liabilities. Where an entity makes a first time adoption of IFRSs, it does not retrospectively apply the derecognition conditions, that is, assets that could not have been derecognized as per IAS 39 but were derecognized under extant standards will not be brought back on books.
As regards hedge accounting, hedges that could not have qualified as effective hedges under IAS 39 will not be treated as such on the opening date of switching to IFRSs.
Appendix C and D allow exemption in specific circumstances. Appendix E contains provisions for short-term exemptions which may be granted to meet exigencies.