There are national as well as international financial reporting standards and sometimes, companies have to shift to the international financial reporting standards (IFRS) either by choice or due to regulatory requirements.
Rules of Adopting IFRS Standards
There are some rules & regulations to follow when using the IFRS standards for the first time. These rules & regulations are compiled in the IFRS 1, First Time Adoption of International Financial Reporting Standards.
There are some minor differences between the national and international financial reporting standards. Therefore, accounting issues arise when a company adopts IFRS for the first time. To reconcile these differences, IFRS 1 has laid out the complete procedure of shifting to IFRS standards. This article explains the complete procedure of shifting to IFRS standards.
IFRS 1: First Time Adoption of International Financial Reporting Standards
IFRS 1 sets out the procedures to follow when using the IFRS standards for the first time. IFRS 1 defines a First-Time Adopter as an entity that makes an explicit and unreserved statement that its annual financial statements comply with the IFRS standards for the first time.
Basically, there are FIVE issues that need to be addressed when adopting the IFRS standards for the first time.
- The Date of transition to IFRS standards.
- Which IFRS standard should be adopted.
- Reporting Gains & Losses.
- Explanations & Disclosures
- Exemptions
1. The Date of Transition to IFRS Standards
The date of transition is the beginning of the earliest period for which the company presents full comparative information under IFRS standards in its financial statements for using the IFRS standards the first time.
For example, if the year-end of the entity is 31 December 2022, then the date of transition is 1 January 2021, which is the first date of the comparative period.
In addition, an opening IFRS statement of the financial position should be produced as at the date of transition. Though not need to be published, it will provide opening balances for the comparative period.
2. Which IFRS Standard Should be Adopted
The entity should use the same accounting policies for all the periods presented and the policies should be based solely on International Financial Reporting Standards.
According to IFRS 1, the opening IFRS statement of financial position must:
- Recognize all assets and liabilities permitted by IFRS standards.
- Not recognize assets and liabiities not permitted by IFRS standards.
- Reclassify all assets, liabilities and equity components in accordance with IFRS standards.
- Measure all assets & liabilities in accordance with IFRS standards.
As far as estimates are concerned, a company’s estimates at the date of transition to international financial reporting standards should be consistent with estimates made for the same period in accordance with Gaap unless evidence exists that those estimates were wrong.
3. Reporting Gains & Losses
Any gains or losses that may arise due to shifting to IFRS standards should be reported in Retained Earnings. Gains and losses arising due to shifting to IFRS standards are not allowed to report in profit or loss (P/L).
4. Explanations & Disclosures
The implication of IFRS standards for the first time may affect the reported financial performance, cash flows, and financial position. Therefore, the company that adopts the IFRS standards for the first time must explain:
- How the transition to IFRS standards affects their reported financial performance, financial position, and cash flows.
- Also, disclosure of errors that the company identifies in previous years and should disclose the correction of these errors separately.
5. Exemptions
IFRS 1 has exemptions in areas where the cost of the compliance of the financial statement item would outweigh the benefits. For example, previous business combinations do not need to be restated.
In the same way, past translation gains & losses are deemed to be nil in the transition to IFRS standards for the first time. Also, the restatement of the borrowing cost component that was capitalized under previous GAAP is exempted.
