The first IFRS financial statements in which an entity adopts International Financial Reporting Standards (IFRSs), by an explicit and unreserved statement of compliance with IFRSs.
IFRS 1 sets out detailed rules that entities must follow when adopting IFRS for the first time. The standard also sets out a number of exemptions that may be applied when adopting IFRS.
If an entity wishes to apply either of these exemptions a full audit trail must be produced to outline the assessment and sufficient evidence must be provided to evidence that the application of the exemption is appropriate.
The main issues that entities need to be aware of when adopting IFRS 1 are:
Additional disclosure notes outlining the effect of the adoption of IFRS, including the following, where the adjustments are material:
- A reconciliation of equity (net assets) under local GAAP to equity under IFRS as at the opening balance date of forst adoption of IFRS.
- A reconciliation between net operating costs for the preceding year reported under local GAAP and as reported under IFRS where this is not explained through the reconciliation of equity;
- A disclosure note of any required impairment due to the adoption of IFRS.
Revise accounting policies to confirm that they are compliant with the requirements of IFRS. Areas that entities will commonly need to revise include:
- Consolidation and boundary issues (IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 28 Investments in Associates and Joint Ventures).
- The use of fair value for land and buildings fixed assets and the entity’s approach to valuation of the assets (IAS 16 Property, plant and equipment).
- The approach used to valuing financial instruments (IFRS 9 Financial instruments, IFRS 7 Financial Instruments: Disclosures, IAS 32 Financial instruments: Presentation).
- The approach to valuing and depreciating intangible non-current assets (IAS 38 Intangible Assets).
- The application of the revised inventories guidance (where applicable) (IAS 2 Inventories).
- The calculation of employee benefits accruals (IAS 19 Employee benefits).
- The application of related parties guidance (IAS 24 Related Party Disclosures).
- The explanation of significant areas of judgement and uncertainties in accounting estimates (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, IFRS 7 Financial Instruments: Disclosures).
Disclosures in the financial statements of a first-time adopter
IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS affected the entity’s reported financial position, financial performance and cash flows. [IFRS 1 23] This includes:
- reconciliations of equity reported under previous GAAP to equity under IFRS both (a) at the date of transition to IFRSs and (b) the end of the last annual period reported under the previous GAAP. [IFRS 1 24(a)] (For an entity adopting IFRSs for the first time in its 31 December 2014 financial statements, the reconciliations would be as of 1 January 2013 and 31 December 2013 (See below))
- 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 [IFRS 1 24(b)]
- explanation of material adjustments that were made, in adopting IFRSs for the first time, to the statement of financial position, statement of comprehensive income and statement of cash flows (the latter if presented under previous GAAP) [IFRS 1 25]
- if errors in previous GAAP financial statements were discovered in the course of transition to IFRSs, those must be separately disclosed [IFRS 1 26] if the entity recognised or reversed any impairment losses in preparing its opening IFRS statement of financial position, these must be disclosed [IFRS 1 24(c)]
- appropriate explanations if the entity has elected to apply any of the specific recognition and measurement exemptions permitted under IFRS 1 – for instance, if it used fair values as deemed cost.
Example disclosure note
This note to the financial statements illustrates one way in which a company might choose to set out explanation of its transition to IFRS. The format illustrated is based on IG Example 11 accompanying IFRS 1. However, in providing a suggested format for disclosure, this example is not intended to, and does not, illustrate every potential first-time adoption adjustment that entities may have to disclose.
First-time adoption of IFRS
These financial statements, for the year ended 31 December 2012, are the first the Group has prepared in accordance with IFRS. For periods up to and including the year ended 31 December 2011, the Group prepared its financial statements in accordance with local generally accepted accounting principle (Local GAAP). (IAS 1 23)
Accordingly, the Group has prepared financial statements which comply with IFRS applicable for periods ending on or after 31 December 2012, together with the comparative period data as at and for the year ended 31 December 2011, as described in the summary of significant accounting policies. In preparing these financial statements, the Group’s opening statement of financial position was prepared as at 1 January 2011, the Group’s date of transition to IFRS. This note explains the principal adjustments made by the Group in restating its Local GAAP financial statements, including the statement of financial position as at 1 January 2011 and the financial statements as at and for the year ended 31 December 2011.
IFRS 1 allows first-time adopters certain exemptions from the retrospective application of certain requirements under IFRS.
The Group has applied the following exemptions: First IFRS financial statements
- IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries, which are considered businesses for IFRS, or of interests in associates and joint ventures that occurred before 1 January 2011. Use of this exemption means that the Local GAAP carrying amounts of assets and liabilities, that are required to be recognised under IFRS, is their deemed cost at the date of the acquisition. After the date of the acquisition, measurement is in accordance with IFRS. Assets and liabilities that do not qualify for recognition under IFRS are excluded from the opening IFRS statement of financial position. The Group did not recognise or exclude any previously recognised amounts as a result of IFRS recognition requirements. IFRS 1 also requires that the local GAAP carrying amount of goodwill must be used in the opening IFRS statement of financial position (apart from adjustments for goodwill impairment and recognition or derecognition of intangible assets). In accordance with IFRS 1, the Group has tested goodwill for impairment at the date of transition to IFRS. No goodwill impairment was deemed necessary at 1 January 2011. (IFRS 1 C1, IFRS 1 C4(b)-(f) and IFRS 1 C4(g)-(h))
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Business combinations (IFRS 1 Appendix C)
If a first-time adopter does not use the exemption and restates any business combination to comply with IFRS 3, it must restate all later business combinations and must also apply IAS 27 (as amended in 2008) from that same date.
IFRS 3 provides a very specific definition of a business combination. Therefore, it is possible that under some previous GAAPs, transactions that are not business combinations (e.g. asset acquisitions) may have been accounted for as if they were business combinations. A first-time adopter will need to restate any transactions that it accounted for as a business combination under its previous GAAP, but which are not business combinations under IFRS.
The business combinations exemption is also available to past acquisitions of investments in associates and interests in joint ventures. However, if a first-time adopter elects to restate business combinations retrospectively, it must also restate all acquisitions of investments in associates and of interests in joint ventures that occurred from such retrospective date.
- The Group has not applied IAS 21 retrospectively to fair value adjustments and goodwill from business combinations that occurred before the date of transition to IFRS. Such fair value adjustments and goodwill are treated as assets and liabilities of the parent rather than as assets and liabilities of the acquiree. Therefore, those assets and liabilities are already expressed in the functional currency of the parent or are non-monetary foreign currency items and no further translation differences occur. (IFRS 1 C2)
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Business combinations — foreign exchange on fair value adjustments and goodwill (IFRS 1 C2)
Therefore, those goodwill and fair value adjustments either are already expressed in the entity’s functional currency or are non-monetary foreign currency items, which are reported using the exchange rate applied in accordance with previous GAAP. This exemption allows the first-time adopter to avail itself of similar transition elections available to current IFRS users the first time they applied this amendment to IAS 21.
- Freehold land and buildings, other than investment property, were carried in the statement of financial position prepared in accordance with local GAAP on the basis of valuations performed on 31 December 2009. The Group has elected to regard those values as deemed cost at the date of the revaluation since they were broadly comparable to fair value. (IFRS 1 D6)
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Deemed cost — Previous GAAP revaluation (IFRS 1 D6)
- Certain items of property, plant and equipment have been measured at fair value at the date of transition to IFRS. (IFRS 1 D5) First IFRS financial statements
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Deemed cost — Fair value of property, plant and equipment (IFRS 1 D5)
IAS 16 does not prescribe the unit of measure for recognition, i.e., what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to an entity’s specific circumstances. A first-time adopter can therefore apply the deemed cost exemption to some or all of its assets.
- Cumulative currency translation differences for all foreign operations are deemed to be zero as at 1 January 2011. (IFRS 1 D13) First IFRS financial statements
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Cumulative translation differences (IFRS 1 D13)
The exemption applies to all cumulative translation differences arising from the translation of foreign operations, including related gains or losses on related hedges. Accordingly, we believe it is entirely appropriate for this exemption to be applied to net investment hedges as well as to the underlying gains and losses.
- IFRS 2 Share-based Payment has not been applied to equity instruments in share-based payment transactions that were granted on or before 7 November 2002, nor has it been applied to equity instruments granted after 7 November 2002 that vested before 1 January 2011. For cash-settled share-based payment transactions, the Group has not applied IFRS 2 to liabilities that were settled before 1 January 2011. (IFRS 1 D2) First IFRS financial statements
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Share-based payment transactions exemption (IFRS 1 D2)
However, if a first-time adopter elects to apply IFRS 2 to such equity instruments, it may do so only if the entity has disclosed publicly the fair value of those equity instruments determined at the measurement date as defined in IFRS 2.
For all grants of equity instruments that are still outstanding at the date of transition to IFRS, to which IFRS 2 has not been applied, a first-time adopter must disclose information that enables users of the financial statements to understand the nature and extent of share-based payment arrangements that existed (paragraphs 44 and 45 of IFRS 2).
If a first-time adopter modifies the terms or conditions of a grant of equity instruments to which IFRS 2 has not been applied, the entity is also not required to apply IFRS 2’s requirements for modifications of awards if the modification occurred before the date of transition to IFRS.
- The Group has applied the transitional provision in IFRS 16 Leases and has assessed all arrangements based upon the conditions in place as at the date of transition. (IFRS 1 D9)
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As a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, the entity is permitted:
If an entity chooses this practical expedient, it shall disclose that fact and apply the practical expedient to all of its contracts. As a result, the entity shall apply the requirements in paragraphs 9–11 of IFRS 16 only to contracts entered into (or changed) on or after the date of initial application.
- The Group has applied the transitional provisions in IAS 23 Borrowing Costs and capitalises borrowing costs relating to all qualifying assets after the date of transition. Similarly, the Group has not restated for borrowing costs capitalised under Local GAAP on qualifying assets prior to the date of transition to IFRS. (IFRS 1 D23) First IFRS financial statements
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Borrowing costs (IFRS 1 D23)
- The Group has designated unquoted equity instruments held at 1 January 2011 as at fair value through other comprehensive income in accordance with paragraph 5.7.5 of IFRS 9 on the basis of the facts and circumstances that exist at the date of transition to IFRSs. (IFRS 1 D19B) First IFRS financial statements
Other exemptions not utilised in this example are as follows: First IFRS financial statements
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Deemed cost — Investment property or intangible assets (IFRS 1 D7)
Deemed cost — Event-driven (IFRS 1 D8)
Deemed cost — Oil and gas assets (IFRS 1 D8A)
A first-time adopter that uses the exemption under (b) should disclose that fact and the basis on which carrying amounts determined under previous GAAP were allocated.
To avoid the use of deemed costs resulting in an oil and gas asset being measured at more than its recoverable amount, oil and gas assets that were valued using this exemption should be tested for impairment at the date of transition to IFRS.
Deemed cost — Assets used in operations subject to rate regulation (IFRS 1 D8B)
Investments in subsidiaries, jointly controlled entities and associates (IFRS 1 D14-15A)
In separate financial statements, a first-time adopter that subsequently measures an investment in a subsidiary, jointly controlled entity or associate at cost, may measure such investment using the equity method in IAS 28 in its separate opening IFRS statement of financial position, by applying the exemption for past business combinations (Appendix C) to the acquisition of the investment or if the entity becomes a first-time adopter for its separate financial statements earlier than for its consolidated financial statements it applies IFRS 1 D16 – D17 below)
Assets and liabilities of subsidiaries associates and joint ventures (IFRS 1 D16-17)
If a parent becomes a first-time adopter later than its subsidiary (or associate or joint venture), in the parent’s consolidated financial statements, the assets and liabilities of the subsidiary (or associate or joint venture) must be measured at the same amounts as in the subsidiary’s (or associate’s or joint venture’s) financial statements (after adjusting for consolidation and equity accounting adjustments and for the effects of the business combination in which the entity acquired the subsidiary).
Compound financial instruments (IFRS 1 D18)
Fair value measurement of financial assets or financial liabilities (IFRS 1 D20)
Decomissioning liabilities included in the cost of property, plant and equipment (IFRS 1 D21-D21A)
An entity accounts for changes in decommissioning liability in accordance with IFRIC 1 that requires specified changes in a decommissioning, restoration or similar liability to be added or deducted from the cost of the asset to which it relates.
IFRS 1 provides an exemption for changes that occurred before the date of transition to IFRS and prescribes an alternative treatment if the exemption is used.
A decommissioning liability is measured in accordance with IAS 37 at the date of transition to IFRS, and an estimate of the amount to include in the cost of the asset when the liability first arose is made at the date of transition to IFRS.
When a first-time adopter has also elected deemed cost for oil and gas assets in the production or development stages (IFRS 1 D8A(b)) a further exemption is provided. A decommissioning liability is measured at the date of transition to IFRS, and any difference between this amount and the previous GAAP carrying amount is recognised in retained earnings.
Financial assets or intangible assets accounted for in accordance with IFRIC 12 (IFRS 1 D22)
Severe hyperinflation (IFRS 1 D26)
Estimates (IFRS 1 14)
The estimates at 1 January 2011 and at 31 December, 2011 are consistent with those made for the same dates in accordance with local GAAP (after adjustments to reflect any differences in accounting policies) apart from the following items where application of Local GAAP did not require estimation: First IFRS financial statements
- Pensions and other post employment benefits First IFRS financial statements
- Share-based payment transactions First IFRS financial statements
- Available-for-sale financial assets – unquoted equity shares First IFRS financial statements
The estimates used by the Group to present these amounts in accordance with IFRS reflect conditions at 1 January 2011, the date of transition to IFRS and as of 31 December, 2011. (IFRS 1 16)
Group reconciliation of equity as at 1 January 2011 (date of transition to IFRS)
Group reconciliation of equity as at 31 December 2011
Group reconciliation of total comprehensive income for the year ended 31 December 2011
Notes to the reconciliation of equity as at 1 January 2011 and 31 December 2011 and total comprehensive income for the year ended 31 December 2011
A Start-up expenses (IFRS 1 10(b)) First IFRS financial statements
Under Local GAAP, the Group capitalised the cost of incorporation of a new subsidiary and depreciated this on a straight-line basis over five years. As such cost does not qualify for recognition as an asset under IFRS this asset is derecognised against retained earnings.
B Available-for-sale financial assets (IFRS 1 10(d), IFRS 1 D19B, IFRS 1 29) First IFRS financial statements
Under Local GAAP, the Group accounted for investments in unquoted equity shares as financial instruments measured at cost. Under IFRS, the Group has designated such investments as available-for-sale investments. IFRS requires available-for-sale investments to be measured at fair value.
At the date of transition to IFRS, the fair value of these assets is €1,040,000 and their previous Local GAAP carrying amount was €890,000. The €150,000 difference between the instruments fair value and Local GAAP carrying amount has been recognised as a separate component of equity, in the available-for-sale reserve, net of related deferred taxes. First IFRS financial statements
C Trade and other receivables (IFRS 1 10(d)) First IFRS financial statements
Under Local GAAP, the provision for impairment of receivables consists of both a specific amount for incurred losses and general amount for expected future losses. IFRS does not permit recognition of impairment for expected future losses and this amount has been eliminated against retained earnings at 1 January 2011. The effect on earnings for the year ended 31 December 2011 is also recognised in profit for the year under IFRS. First IFRS financial statements
D Other financial assets and liabilities (IFRS 1 10(a), IFRS 1 B4) First IFRS financial statements
The fair value of forward foreign exchange contracts is recognised under IFRS, and was not recognised under Local GAAP. The contracts, which were designated as hedging instruments under Local GAAP, have been designated as at the date of transition to IFRS as hedging instrument in cash flow hedges of either expected future sales for which the group has firm commitments or expected purchases from suppliers that are highly probable. The corresponding adjustment has been recognised as a separate component of equity, in the cash flow hedge reserve.
E Trade and other payables (IFRS 1 10(b))
Under Local GAAP, proposed dividends are recognised as a liability in the period to which they relate, irrespective of when they are declared. Under IFRS, a proposed dividend is recognised as a liability in the period in which it is declared by the company (usually when approved by shareholders in a general meeting) or paid. In the case of the Group, the declaration of dividend occurs after period end. Therefore, the liability recorded for this dividend has been derecognised against retained earnings. First IFRS financial statements
F Intangible assets (IFRS 1 10(b), IFRS 1 4(c)) First IFRS financial statements
Under Local GAAP, the Group recognised indefinite lived intangible assets amounting to €57,000 on a business combination that do not qualify for recognition under IFRS. These intangible assets have been reclassified as part of goodwill on transition to IFRS. Goodwill has been presented within Intangible assets on the Statement of Financial Position.
G Defined benefit obligation (IFRS 1 10(a)) First IFRS financial statements
Under Local GAAP, the Group recognised costs related to its pension plan on a cash basis. Under IFRS, pension liabilities are recognised on an actuarial basis. The pension liability has been recognised in full against retained earnings. First IFRS financial statements
H Provisions (IFRS 1 10(b)) First IFRS financial statements
Under Local GAAP, a restructuring provision has been recorded relating to downsizing head office activities. This amount does not qualify for recognition as a liability according to IAS 37, and has been derecognised against retained earnings. First IFRS financial statements
I Deferred tax (IFRS 1 10(a)) First IFRS financial statements
The various transitional adjustments lead to different temporary differences. According to the accounting policies in Note 2.3, the Group has to account for such differences. Deferred tax adjustments are recognised in correlation to the underlying transaction either in retained earnings or a separate component of equity. First IFRS financial statements
J Share-based payments (IFRS 1 10(a)) First IFRS financial statements
Under Local GAAP, the Group recognised only the cost for the long-term incentive plan as an expense. IFRS requires the fair value of the share options to be determined using an appropriate pricing model recognised over the vesting period. An additional expense of €232,000 has been recognised in profit or loss for the year ended 31 December 2011. Share options totaling €338,000, which were granted before and still vesting at 1 January 2011, have been recognised as a separate component of equity against retained earnings at 1 January 2011.
K Foreign currency translation (IFRS 1 D13(a)) First IFRS financial statements
Under Local GAAP, the Group recognised translation differences on foreign operations in a separate component of equity. Cumulative currency translation differences for all foreign operations are deemed to be zero as at 1 January 2011. The resulting adjustment was recognised against retained earnings.
L Property, plant and equipment (IFRS 1 D5) First IFRS financial statements
The group has elected to measure certain items of property, plant and equipment at fair value at the date of transition to IFRS. At the date of transition to IFRS, an increase of €540,000 (31 December 2011: €486,000) was recognised in property, plant and equipment. This amount has been recognised against retained earnings.
M Depreciation of property, plant and equipment (IFRS 1 10(d), IAS 16 43) First IFRS financial statements
IAS 16 requires significant component parts of an item of property, plant and equipment to be depreciated separately. As explained in note 2.3(i), the cost of major inspections is capitalised and depreciated separately over the period to the next major inspection. At the date of transition to IFRS, an increase of €620,000 (31 December 2011: €558,000) was recognised in property, plant and equipment net of accumulated depreciation due to separate depreciation of significant components of property, plant and equipment. This amount has been recognised against retained earnings.
N Impairment of property, plant and equipment
Under Local GAAP, long-lived assets were reviewed for impairment when events or changes in circumstances indicated that their carrying value may exceed the sum of the undiscounted future cash flows expected from use and eventual disposal. For the purposes of assessing impairment, assets were grouped at the lowest level for which identifiable cash flows were largely independent of the cash flows of other assets.
If the estimated undiscounted cash flows for the asset group were less than the asset group’s carrying amount, the impairment loss was measured as the excess of the carrying value over fair value. Under IFRS, as explained in note 2.3(q), impairment of assets that do not generate cash inflows that are largely independent of those from other assets or groups of assets, is assessed at the CGU level based on the CGU’s recoverable amount. First IFRS financial statements
At the date of transition to IFRS, as a result of the changes in methodology, the Group determined that the recoverable amount of its manufacturing plant, which is considered a CGU and is part of the Group’s Fire Prevention Equipment reportable segment, was less than its carrying amount. The recoverable amount was based on the CGU’s value in use using a pre-tax discount rate of 8%. This resulted in an impairment loss of €250,000 being recognised as at 1 January 2011. This amount has been recognised against retained earnings.
Additionally, depreciation for the year ended December 31, 2011 was reduced by $25,000. First IFRS financial statements
O Statement of cash flows
The transition from Local GAAP to IFRS has not had a material impact on the statement of cash flows. First IFRS financial statements
First IFRS financial statements
First IFRS financial statements First IFRS financial statements First IFRS financial statements First IFRS financial statements First IFRS financial statements First IFRS financial statements
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