Monday, July 7, 2008

The importance of being IFRS 1

IFRS 1 deals with the first time adoption of IFRSs

There are actually quite complicated rules on who may actually use IFRS 1. However, publicly accountable enterprises that have been employing Canadian GAAP in their public reporting would be required to follow IFRS 1 on adoption of IFRSs. There could be complicated situations – check the Standard and check with your advisors.

IFRS 1 is not Number One for nothing. There are key strategic decisions to be made here on how to adopt certain accounting policies for the first time – not to mention the related disclosures. There are numerous potential devils here. I am not sure what the collective term for devils would be? Perhaps you have a suggestion (clean please)?

IFRS 1 applies to an entity that adopts IFRS for the first time and makes an explicit and unreserved statement of compliance with IFRSs. (no partial adoption allowed in order to use IFRS1).

There cannot be any National versions or addendums to IFRS 1. Exceptions to IFRS 1 itself would mean that companies would not be able to make the unreserved statement of IFRS compliance. The statement is a precondition of using IFRS 1 in the first place. Got it?

There are two key dates that need to be understood in reading IFRS 1 and understanding how it is applied. First is the date on which IFRS is adopted. For Canadian “publicly accountable” entities reporting on a calendar year basis this would be January 1, 2011. The second date is referred to as the date of transition in IFRS 1. This date is January 1, 2010 for calendar year companies providing one year of comparative financial information. (I will use this example later for discussion). The transition date is the earliest date for which comparatives are presented.

An opening balance sheet is required to be prepared as at the date of transition (January 1, 2010 in the example. discussed in the prior paragraph) The opening balance sheet need not be presented in the first year of adoption of IFRS.

For the comparative year(s) you will have to keep “2 sets of books” one on a Canadian GAAP basis and the other on IFRS. This data will be required to provide the detailed disclosure during the year of adoption (2011 in our example). Detail disclosure is required in both Interim and Annual Financial Statements.

In general, the adoption of IFRS is on a “retrospective” basis, “retroactive” in our parlance. There are exemptions and exceptions to the general principle.

Exemptions to this principle are set out for some situations. You have the choice which you would apply, or not apply, depending on cost benefit and other considerations. An example of one of these situations is an option to measure an item of property, plant and equipment at the date of transition at fair value and to use that fair value as its deemed cost at that date. These exemptions are designed to help you (really!).

There are also mandatory exceptions from retrospective application in IFRS 1. For example, an entity’s estimates under IFRSs at the date of transition to IFRSs have to be consistent with estimates made for the same date under previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error. Please read the section on Estimates very carefully, there are some tricky bits there.

IFRS 1 also contains rules on adopting those IFRSs that may be approved by the IASB but may not be in force at the date of transition.

There are many detailed requirements and disclosures in IFRS 1. You need to understand them clearly.

Well is your head spinning yet? Mine was one night at 2.00 am when I was trying to grapple with this and looking at examples. It’s a very lengthy Standard and it is prescriptive. However, many of the options and requirements may not apply in your situation. You should be able to tell.

The CICA has made a very useful presentation on IFRS 1 available. The presentation was made at a 2007 CICA Conference on IFRS. Joanne Barradas and Clair Grindley from Deloittes get into quite a lot of depth on IFRS 1 in a session that runs for a little over an hour. It is a great introduction and can be found at

Remember the presentation was made in 2007, before the confirmation of the date of IFRS adoption (now known to be years beginning on or after January 1, 2011). It was also after the CICA’s Accounting Standards Board confirmed its strategy with respect to IFRS 1.

IFRS 1 is mandatory reading (you could read the parts that do not apply to you somewhat faster).

What do you think about IFRS 1? It’s like nothing you have seen before. Thank heavens for most people it will be a once in a lifetime experience. Of course, if you converted to IFRS in the EU (or Australia) you are on your second (or third?) time through and ready for the challenge of going to the US for their conversion that is widely expected!

CICA developments

In order to be able to adopt IFRS 1 as I said one has to make an unreserved statement of complete adoption of IFRSs. Therefore it will be necessary to seek a change to IFRS 1 by the IASB to accommodate Canadian concerns if there are any lingering ones. There was a previous request in Canada for submission of proposed changes to IFRS 1. As a result changes were made to IFRS 1 upon representation to the IASB. In particular, an accommodation for oil and gas companies following full cost accounting.

Now we are pretty much at “last call” for proposed changes. The CICA is asking for input on this matter in its Exposure Draft ( comments due July 31, 2008)

It is a lot to get you head around and it all has to be done for many (most) by January 1, 2010. You will also have to consider the impact of complying with CSA 52-320 if you are affected (see my review of CSA 52-320 in May). There is a lot of work to do here.

The foregoing reflects the views and interpretations of the writer and should not be construed as an accounting opinion to be relied upon in the circumstances of specific entities..

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