IFRS-1 provides direction for first time transition to IFRS and therefore is extremely important. It can assist with establishing IFRS transitional positions, as well as the necessary disclosures to connect past Canadian GAAP reporting with the new IFRS standards. Entities can also benefit from IFRS-1 exemptions and exceptions in areas that have been deemed to be problematic from a transition point of view.
IFRS-1 applies only once – the 1st time an entity adopts IFRS. The basic principle underlying the standard is that it requires companies to restate their financial statements as if IFRS has always been the standard by which they reported – the concept of “retrospective” application. However, it contains exemptions and exceptions to that principle.
The exceptions relate to circumstances in which the standard prohibits retrospective application.
The exemptions provide an opportunity for an entity to elect not to retrospectively apply specific IFRS standards and requirements.
IFRS-1 provides exemptions in areas for which implementation would be challenging if it were to be retrospective. The exceptions and exemptions in IFRS-1 will significantly assist the implementation, but will require careful consideration of accounting policy choices. IFRS-1 is definitely an important standard to become familiar with and should be carefully reviewed with your accounting professional.
For example, IFRS-1 provides an exemption relating to the retrospective application of IFRS in accounting for property, plant & equipment. A company may not have the all of the information available or required to retrospectively recreate its fixed asset records in accordance with IFRS. In such circumstances, the company can decide to apply the exemption and determine the fair value of the fixed assets at the date of transition to IFRS and designate their fair value as the “deemed cost” – referred to as deemed cost exemption. The company would then use the deemed cost as the basis for its future accounting in accordance with IFRS, whether that is on a cost basis, or using the revaluation model in IAS 16.
Similarly, without an exemption under IFRS-1, a company would be required to retrospectively amend the accounting for all business combinations that it had entered into since the inception of the company to comply with IFRS-3. For a company that acquired a business many years ago or has gone through multiple acquisitions, this would be a very difficult or in some cases, an impossible undertaking. However, IFRS-1 provides relief, by allowing a company to elect not to restate those business combinations retrospectively.
IFRS-1 provides a number of optional exemptions in addition to mandatory exceptions, but once again, these exemptions and exceptions are only available during first time adoption of IFRS. The IASB realized that in certain situations, the cost of adopting IFRS retrospectively would exceed the benefits. In these cases there are several optional exemptions for retrospectively applying a portion of a standard or in some cases the entire standard. The optional exemptions for retrospective application within IFRS-1 should be carefully reviewed.
The Canadian Accounting Standards Board has also been working with the IASB on additional exemptions, including ones for example which are likely to be of significant benefit to oil and gas companies using full cost accounting, and to rate regulated entities such as utilities.
There is complete flexibility to review and select these exemptions – there is no need to apply all of them or to demonstrate the accounting appropriateness before selecting them for application – they are indeed optional. Bear in mind however that IFRS-1 is a first time adoption standard, as opposed to an ongoing standard. After 2011, IFRS-1 and its exemptions will no longer be applicable for most Canadian companies.
There are also mandatory exceptions for retrospective application and these should be reviewed very carefully. The rationale behind the IASB introducing these mandatory exceptions is that there was a concern that applying some IFRS standards or parts of standards retrospectively would result in too much professional judgement and potential for abuse in financial reporting. These exceptions prohibit companies from selecting only some parts of a standard or some concepts retrospectively. The exceptions are mandatory – you do not have the option or flexibility to apply or not. The mandatory exceptions include; de-recognition of financial assets and financial liabilities, hedge accounting and non-controlling interests.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
For further information, please refer to the ongoing series of IFRS blogs on the Edelkoort Smethurst Schein CPA’s LLP web-site and please remember to contact your accounting professional for further guidance.
Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.
All blog posts published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author or the accounting firm shall accept any liability for any reliance placed on the information posted.