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IFRS 1, First-Time Adoption of International Financial Reporting Standards, is the standard that is applied during preparation of a company’s first IFRS-based financial statements. IFRS 1 was created to help companies transition to IFRS and provides practical accommodations intended to make first-time adoption cost-effective. It also provides application guidance for addressing difficult conversion topics.

2.1.1 What does IFRS 1 require?

The key principle of IFRS 1 is full retrospective application of all IFRS standards that are effective as of the closing balance sheet or reporting date of the first IFRS financial statements. Full retrospective adoption can be very challenging and burdensome. To ease this burden, IFRS 1 gives certain optional exemptions and certain mandatory exceptions from retrospective application.
IFRS 1 requires companies to:
  • Identify the first IFRS financial statements
  • Prepare an opening balance sheet at the date of transition to IFRS (see SD 2.1.3)
  • Select accounting policies that comply with IFRS effective at the end of the first IFRS reporting period and apply those policies retrospectively to all periods presented in the first IFRS financial statements
  • Apply mandatory exceptions to retrospective application
  • Consider whether to apply any of the optional exemptions from retrospective application
  • Make extensive disclosures to explain the transition to IFRS, including reconciliations from previous GAAP to IFRS for equity and total comprehensive income (see SD 2.1.4)
IFRS 1 identifies certain areas in which retrospective application is prohibited. Examples of these mandatory exceptions to retrospective application include the use of estimates (hindsight is not permitted), the classification and measurement of financial assets, impairments of financial assets, accounting for non-controlling interests (i.e., certain requirements of IFRS 10 are applied prospectively), and accounting for embedded derivatives, among others. When IFRS 17 becomes effective, the accounting for insurance contracts will also be precluded from retrospective application.
In addition to the mandatory exceptions, IFRS 1 includes a variety of optional exemptions that provide limited relief for first-time adopters, mainly in areas where the information needed to apply IFRS retrospectively might be particularly challenging to obtain.
Although the exemptions can ease the burden of accounting for the initial adoption of new standards, the long-term exemptions do not impact the disclosure requirements of IFRS. As a result, companies may experience challenges in collecting new information and data for retrospective footnote disclosures.
IFRS 1 is regularly updated to address first-time adoption issues arising from new standards and amendments as they become effective. Accordingly, consideration should be given to the impact on IFRS 1, if any, when a company adopts new standards or amendments to understand, for example, if that new standard or amendment should be applied on a full retrospective basis or if there is an exception or exemption to allow alternative accounting considerations.

2.1.2 When to apply IFRS 1

Companies are required to apply IFRS 1 when they prepare their first IFRS financial statements, including when they transition from their previous GAAP to IFRS. These are the first financial statements to contain an explicit and unreserved statement of compliance with IFRS.

2.1.3 The opening IFRS balance sheet

The opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS and is prepared at the date of transition, which is the beginning of the earliest period for which full comparative information is presented and disclosed in accordance with IFRS. For example, preparing IFRS financial statements for the two years ending December 31, 20X1 would have a transition date of January 1, 20X0. This would also be the date of the opening IFRS balance sheet. Therefore, as the opening balance sheet is required to be prepared and presented as a primary financial statement in accordance with IFRS 1, the entity would present a balance sheet as of January 1, 20X0, December 31, 20X0, and December 31, 20X1.
IFRS 1 requires that the opening IFRS balance sheet:
  • Include all of the assets and liabilities that IFRS requires;
  • Exclude any assets and liabilities that IFRS does not permit;
  • Classify all assets, liabilities, and equity in accordance with IFRS;
  • Measure all items in accordance with IFRS; and
  • Be prepared and presented within an entity’s first IFRS financial statements.
These general principles are followed unless one of the optional exemptions or mandatory exceptions does not require or permit recognition, classification, and measurement in line with the above.

2.1.4 Reconciliations of equity and total comprehensive income

Under IFRS 1, reconciliations between previous GAAP and IFRS are required for equity and total comprehensive income. The reconciliation of a company’s equity is required for both the date of transition to IFRS and the end of the last period presented under previous GAAP. For total comprehensive income/loss (or profit/loss if a company did not report total comprehensive income/loss), the reconciliation is only required for the latest annual period under previous GAAP. The reconciliations should provide sufficient detail to enable users to understand the material adjustments to the balance sheet, statement of comprehensive income/loss, and if presented under previous GAAP, statement of cash flows.
For example, a company that is preparing its first IFRS financial statements for the year ended December 31 20X1, with one year of comparative information as well as presenting its opening balance sheet, would disclose reconciliations for equity at January 1, 20X0 and December 31, 20X0, and comprehensive income/loss for the year ended December 31, 20X0.

2.1.5 IFRS first-time adoption - important takeaways

The transition to IFRS can be a long and complicated process with many technical and accounting challenges to consider. Experience with companies adopting IFRS for the first time indicates there are some challenges that are consistently underestimated, including:
Consideration of data gaps—Preparation of the opening IFRS balance sheet and all of the related footnote disclosures may require the calculation or collection of information that was not previously required under US GAAP. Companies should plan their transition and identify the differences between IFRS and US GAAP early so that all of the information required can be collected and verified in a timely manner.
Consolidation of additional entities—IFRS consolidation principles differ from those of US GAAP in certain respects and those differences might cause some companies either to deconsolidate entities or to consolidate entities that were not consolidated under US GAAP. Subsidiaries that previously were excluded from the consolidated financial statements are to be consolidated as if they were first-time adopters on the same date as the parent. Companies also will have to consider the potential data gaps of investees to comply with IFRS informational and disclosure requirements.
Consideration of accounting policy choices—A number of IFRS standards allow companies to choose between alternative policies. Companies should select carefully the accounting policies to be applied to the opening balance sheet and have a full understanding of the implications to current and future periods. Companies should take this opportunity to evaluate their IFRS accounting policies with a “clean sheet of paper” mind-set. That is, the guidance in IAS 8, Accounting Policies, Changes in Estimates and Errors, does not apply to changes in accounting policies until after a company presents its first set of financial statements under IFRS. Although many accounting requirements are similar between US GAAP and IFRS, companies should not overlook the opportunity to explore alternative IFRS accounting policies that might better reflect the economic substance of their transactions and enhance their communications with investors.
Regulatory considerations—In addition to differences that arise between accounting standards, there may also be local regulatory requirements to consider. For example, certain information required by the SEC but not by IFRS (e.g., a summary of historical data) can still be presented, in part under US GAAP; however, such comparative information must be clearly labeled as not being prepared in accordance with IFRS, and the nature of the main adjustments to comply with IFRS must be discussed (although such adjustments do not need to be quantified). Further, other incremental information required by a regulator might need to be presented in accordance with IFRS. For example, the SEC in certain instances requires two years of comparative IFRS financial statements, whereas IFRS would require only one year.
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