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 2012 and 31 December 2013.) 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 balance sheet, 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
Disclosures in interim financial reports
If an entity is going to adopt IFRSs for the first time in its annual financial statements for the year ended 31 December 2014, certain disclosure are required in its interim financial statements prior to the 31 December 2014 statements, but only if those interim financial statements purport to comply with IAS 34 Interim Financial Reporting. Explanatory information and a reconciliation are 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. [IFRS 1.32]
Exceptions to the retrospective application of other IFRSs
Prior to 1 January 2010, there were three exceptions to the general principle of retrospective application. On 23 July 2009, IFRS 1 was amended, effective 1 January 2010, to add two additional exceptions with the goal of further simplifying the transition to IFRSs for first-time adopters. The five exceptions are: [IFRS 1.Appendix B]
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. [IFRS 1.B2-3]
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. [IFRS 1.B5]
Note: Modified requirements apply when an entity applies IFRS 9 Financial Instruments (2013).
IAS 27 – Non-controlling interest
IFRS 1.B7 lists specific requirements of IFRS 10 Consolidated Financial Statements 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 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.
Optional exemptions from the basic measurement principle in IFRS 1
There are some further optional exemptions to the general restatement and measurement principles set out above. The following exceptions are individually optional. They relate to:
business combinations [IFRS 1.Appendix C] and a number of others [IFRS 1.Appendix D]:
share-based payment transactions insurance contracts fair value, previous carrying amount, or revaluation as deemed cost leases cumulative translation differences investments in subsidiaries, jointly controlled entities, associates and joint ventures assets and liabilities of subsidiaries, associated and joint ventures compound financial instruments designation of previously recognised financial instruments fair value measurement of financial assets or financial liabilities at initial recognition decommissioning liabilities included in the cost of property, plant and equipment financial assets or intangible assets accounted for in accordance with IFRIC 12 Service Concession Arrangements borrowing costs transfers of assets from customers extinguishing financial liabilities with equity instruments severe hyperinflation joint arrangements stripping costs in the production phase of a surface mine
Some, but not all, of them are described below.
Business combinations that occurred before opening balance sheet date
IFRS 1 includes Appendix C explaining how a first-time adopter should account for business combinations that occurred prior to transition to IFRS.
An entity may keep the original previous GAAP accounting, that is, not restate:
previous mergers or goodwill written-off from reserves the carrying amounts of assets and liabilities recognised at the date of acquisition or merger, or how goodwill was initially determined (do not adjust the purchase price allocation on acquisition)
However, should it wish to do so, an entity can elect to restate all business combinations starting from a date it selects prior to the opening balance sheet date.
In all cases, the entity must make an initial IAS 36 impairment test of any remaining goodwill in the opening IFRS balance sheet, after reclassifying, as appropriate, previous GAAP intangibles to goodwill.
The exemption for business combinations also applies to acquisitions of investments in associates, interests in joint ventures and interests in a joint operation when the operation constitutes a business.
