Ifrs1 bb1800 June2009

International
financial reporting
developments
IFRS 1 First-time adoption of International
Financial Reporting Standards
30 June 2009
To our clients and other friends

To our clients and other friends
IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1) was

developed by the International Accounting Standards Board (IASB) to help entities transition
to International Financial Reporting Standards (IFRS) as their basis for financial reporting.
The key principle of IFRS 1 is full retrospective application of IFRS standards that are
effective as of the entitys first IFRS reporting period. However, IFRS 1 establishes two types
of departure from the principle of full retrospective application of standards effective at the
end of the first IFRS reporting period: (1) optional exemptions from some of the requirements
of certain IFRS and (2) mandatory exceptions from the requirement for the retrospective
application of other IFRS.
IFRS 1 grants optional exemptions from the general requirement of full retrospective
application of the IFRS standards effective at the end of an entity's first IFRS reporting period
because in the IASBs view the cost of complying with them is likely to exceed the benefits to
users of financial statements. IFRS 1 also defines a number of mandatory exceptions that
prohibit retrospective application of IFRS in some areas, particularly when retrospective
application would require judgments by management about past conditions after the outcome
of a particular transaction is already known. The reasoning behind the mandatory exceptions
is that retrospective application of IFRS in these situations could easily result in an
unacceptable use of hindsight and lead to arbitrary or biased restatements, which would be
neither relevant nor reliable.
On 14 November 2008, the US Securities and Exchange Commission (SEC) issued a proposed
Roadmap on the potential use of IFRS as issued by the IASB in financial statements
prepared by US issuers. With the proposed Roadmap the adoption of IFRS is becoming a
greater possibility in the United States.
This publication is therefore designed to assist professionals in understanding the
requirements of first-time adoption, and in particular the mandatory exceptions and voluntary
exemptions, under IFRS 1 and how IFRS 1 may affect US issuers transitioning from US GAAP
to IFRS. This publication reflects our current understanding of the provisions in IFRS 1 based
on our experience with financial statement preparers and related discussions with the IASB.
IFRS 1 continues to be amended as the IASB becomes aware of additional areas in which
preparers require accommodations to deal with transitional issues and when new standards or
amendments to existing standards are developed. While we will update this publication as
additional authoritative guidance is issued, preparers of financial statements should closely
monitor developments in this area.
30 June 2009
International financial reporting developments IFRS1
Contents
Overview ................................................................................................................... 1
1.1
1.2
1.3
Contents
Introduction .................................................................................................... 1
Scope ............................................................................................................. 2
Opening IFRS Balance Sheet Selection of Accounting Policies .......................... 5
1.3.1 First IFRS Reporting Period ................................................................... 5
1.3.2 Date of Transition to IFRS and Opening IFRS Balance Sheet .................... 5
1.3.3 Retrospective Application of IFRS.......................................................... 6
1.3.4 Transitional provisions in other standards .............................................. 8
1.3.5 Adjustments to the Opening IFRS Balance Sheet .................................... 8
1.3.5.1
Recognize all assets and liabilities whose recognition is
required by IFRS .................................................................. 9
1.3.5.2
Derecognize items as assets and liabilities if such
recognition is not permitted by IFRS ................................... 10
1.3.5.3
Classify items recognized in accordance with IFRS ............... 10
1.3.5.4
Measure all recognized assets and liabilities in
accordance with IFRS......................................................... 11
1.3.6 Opening balance sheet accounting policies........................................... 15
Mandatory prohibitions on retrospective application............................................... 16

2.1
2.2
2.3
2.4
2.5
Introduction .................................................................................................. 16
Estimates...................................................................................................... 16
Derecognition of financial assets and liabilities ................................................ 19
2.3.1 Potential issues applicable to first-time adopters that previously
reported under US GAAP .................................................................... 21
2.3.1.1
Update on efforts to converge US GAAP with IFRS............... 21
Hedge accounting.......................................................................................... 22
2.4.1 Recognition and Measurement of derivatives that formed part of a
hedge relationship.............................................................................. 22
2.4.2 Prohibition on retrospective application ............................................... 23
2.4.3 Hedge relationships reflected in the opening IFRS balance sheet ........... 24
2.4.4 Reflecting cash flow hedges in the opening IFRS balance sheet.............. 24
2.4.5.1
Recognition and Measurement of derivatives that
formed part of a hedge relationship .................................... 25
2.4.5.2
Reflecting cash flow hedges in the opening IFRS
balance sheet .................................................................... 27
Non-controlling Interest ................................................................................. 28
Contents
Voluntary Exemptions From the Requirements of Certain IFRS ..............................29

3.1
3.2
3.3
3.4
3.5
ii
Introduction...................................................................................................29
Business combinations ...................................................................................30
3.2.1 Effect of previous accounting ..............................................................31
3.2.2 First-time adopter elects to restate prior business combinations ............33
3.2.3 First-time adopter elects to not restate prior business combinations ......33
3.2.3.1
Classification of prior business combinations
does not change.................................................................34
3.2.3.2
Recognized assets acquired and liabilities assumed in a
prior business combination .................................................35
3.2.3.3
Subsequent measurement under IFRS not based on cost ......37
3.2.3.4
Subsequent measurement under IFRS based on cost ............38
3.2.3.5
Assets acquired and liabilities assumed but not
recognized in a prior business combination ..........................41
3.2.3.6
Evaluation of goodwill.........................................................42
3.2.3.7
Currency adjustments to goodwill........................................45
3.2.4 Other issues .......................................................................................46
3.2.4.1
Contingent consideration....................................................46
3.2.4.2
Acquisition of non-controlling interest .................................48
3.2.5 Acquisitions of investments in associates and of interests in
joint ventures .....................................................................................49
Share-based payment transactions .................................................................49
reported under US GAAP.....................................................................51
3.3.1.1
Measurement and recognition of expense awards with
graded vesting features...................................................51
3.3.1.2
Modification of vesting terms ..............................................53
3.3.1.3
Equity repurchase features.................................................54
3.3.1.4
Deferred taxes ...................................................................55
3.3.1.5
Nonvesting conditions (other than service, performance,
and market conditions) ........................................................57
3.3.1.6
Transactions with non-employees .......................................58
3.3.1.7
Performance conditions......................................................60
Insurance Contracts .......................................................................................60
Fair value or revaluation as deemed cost .........................................................62
3.5.1 Scope of the Fair value or revaluation as deemed cost exemption .......63
3.5.2 Determining deemed cost....................................................................64
3.5.3 Evaluating impairment indicators.........................................................67
Contents
3.6
3.7
3.8
3.9
3.10

3.5.4.1
Determining deemed cost................................................... 67
3.5.4.2
Calculating accumulated depreciation upon transition
to IFRS.............................................................................. 67
3.5.4.3
Effect of existing impairment indicators .............................. 69
Leases .......................................................................................................... 71
3.6.2 Future Developments ......................................................................... 72
Employee benefits ......................................................................................... 73
3.7.1 Actuarial assumptions ........................................................................ 73
3.7.2 Exemption from presenting historical summary information.................. 73
3.7.3.1
Actuarial gains and losses .................................................. 74
3.7.3.2
Unrecognized past service cost........................................... 76
3.7.3.3
Plan assets........................................................................ 77
3.7.3.4
Curtailments...................................................................... 77
3.7.3.5
One-time termination benefits ............................................ 77
3.7.3.6
Full actuarial valuation ....................................................... 78
3.7.3.7
Future convergence........................................................... 79
Cumulative translation differences ................................................................. 80
3.8.1 Hyperinflation .................................................................................... 81
3.8.2 Changes in functional currency ........................................................... 81
3.8.3.1
Hyperinflation ................................................................... 82
3.8.3.2
Available-for-sale monetary assets; foreign exchange
gains and losses................................................................. 82
Investments in a subsidiary, jointly controlled entity or associate...................... 83
Assets and liabilities of subsidiaries, associates and joint ventures ...................... 84
3.10.1 Previously unconsolidated subsidiaries ................................................ 84
3.10.2 Previously consolidated entities that are not subsidiaries ...................... 84
3.10.3 Subsidiary becomes a first-time adopter later than its parent (for
purposes of separate subsidiary financial statements) .......................... 85
3.10.4 Parent becomes a first-time adopter later than its subsidiary ................ 87
3.10.5 Implementation guidance on accounting for assets and liabilities of
subsidiaries, associates and joint ventures ........................................... 89
3.10.6 Adoption of IFRS in separate non-consolidated financial statements ........ 90
iii
Contents
3.11
3.12
3.13
3.14
3.15
3.16
iv

3.10.7.1 Different reporting dates of parent and subsidiary................90
3.10.7.2 Uniform accounting policies ................................................91
3.10.7.3 Consolidation models .........................................................92
3.10.7.4 Equity method accounting ..................................................93
3.10.7.5 Qualified special-purpose-entity (QSPE) and
Investment companies........................................................93
3.10.8 Future Developments..........................................................................94
3.10.8.1 Consolidation models .........................................................94
3.10.8.2 Joint venture proportionate accounting...............................94
3.10.8.3 Qualified special-purpose-entity (QSPE) ...............................94
Compound financial instruments and debt instruments with
embedded derivatives ....................................................................................95
3.11.1 Retrospective application of split accounting and
measurement challenges.....................................................................96
Designation of previously recognized financial instruments ..............................98
3.12.1 Implementation guidance on other categories of financial instruments .....100
reported under US GAAP...................................................................101
3.12.3 Future Developments ........................................................................104
Fair value measurement of financial assets or financial liabilities.....................104
3.13.2 Future Developments .......................................................................106
Changes in existing decommissioning, restoration, and similar liabilities
included in the cost of property, plant and equipment.....................................106
Service concession arrangements .................................................................110
Borrowing Cost ............................................................................................111
Contents
Presentation and Disclosures................................................................................ 113

4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
5
Interim Financial Statements................................................................................ 120

5.1
Comparative information ............................................................................. 113

reported under US GAAP .................................................................. 113
Non-IFRS comparative information and historical summaries ......................... 114
Explanation of transition to IFRS................................................................... 115
reported under US GAAP .................................................................. 115
Reconciliations ............................................................................................ 116
Correction of errors..................................................................................... 117
Designation of financial assets and financial liabilities .................................... 118
Use of fair value as deemed costs ................................................................. 118
Use of deemed cost for investments in subsidiaries, jointly controlled
entities and associates................................................................................. 119
Potential issues applicable to first-time adopters that previously reported

under US GAAP ........................................................................................... 121
Appendix............................................................................................................... 122
6.1
6.2
Proposed amendments to IFRS 1.................................................................. 122

6.1.1 Oil and gas exploration and production assets .................................... 122
6.1.1.2
Potential issues applicable to first-time adopters that
previously reported under US GAAP.................................. 122
6.1.1.3
Future Developments....................................................... 122
6.1.2 Rate regulated entities...................................................................... 123
6.1.2.1
Potential issues applicable to first-time adopters that
previously reported under US GAAP.................................. 124
6.1.2.2
Future Developments....................................................... 124
Abbreviations used in this publication ........................................................... 125
Certain abbreviations of accounting standards are used throughout this publication.
Those abbreviations are defined in Appendix 6.2.
Portions of FASB publications reprinted with permission. Copyright Financial Accounting Standards Board, 401 Merritt 7,
P.O. Box 5116, Norwalk, CT 06856-5116, U.S.A. Portions of AICPA Statements of Position, Technical Practice Aids, and other
AICPA publications reprinted with permission. Copyright American Institute of Certified Public Accountants, 1211 Avenue of
the Americas, New York, NY 10036-8875, USA. Copies of complete documents are available from the FASB and the AICPA.
Portions of IASB publications and IASC Foundation standards reprinted with permission. Copyright International Accounting
Standards Committee Foundation, International Headquarters, 30 Cannon Street, London, EC4M 6XH, United Kingdom
1 Overview
1.1
1 Overview
Introduction
Excerpt from IFRS 11

1.
The objective of this IFRS is to ensure that an entity's first IFRS financial statements,
and its interim financial reports for part of the period covered by those financial
statements, contain high quality information that:
a.
is transparent for users and comparable over all periods presented;
b.
provides a suitable starting point for accounting in accordance with International

Financial Reporting Standards (IFRSs); and
c.
can be generated at a cost that does not exceed the benefits.
The International Accounting Standards Board (IASB or the Board) published IFRS 1 to
provide guidance for all entities to follow on their initial adoption of IFRS. IFRS 1 prescribes
the methodology to be followed in preparation of an entitys first set of IFRS financial
statements, beginning with its opening IFRS balance sheet. The opening IFRS balance sheet
then serves as the starting point for an entitys future accounting under IFRS. While full
retrospective application of IFRS is required upon adoption, the IASB recognized there were
certain situations in which the cost of a full retrospective application of IFRS would exceed the
potential benefit to investors and other users of the financial statements. In other situations,
the Board noted that retrospective application would require judgments by management
about past conditions after the outcome of a particular transaction is already known. As a
result, IFRS 1 contains a number of exemptions from the requirements of certain IFRS and
mandatory exceptions from full retrospective application of IFRS. This document provides
further details and insight to these voluntary exemptions and mandatory exceptions, as well
as to the disclosure requirements of IFRS 1.
With the US Securities and Exchange Commissions (SEC) publication in November 2008 of its
proposed Roadmap, the adoption of IFRS is becoming a more likely possibility in the United
States. The proposed Roadmap sets forth several milestones that, if achieved, could result in
the mandatory use of IFRS in financial statements filed with the SEC by US issuers for years
ending 31 December 2014, 2015 and 2016, depending on the size of the issuer. The
Roadmap proposes early adoption for years ending after 15 December 2009 by a limited
number of large issuers that participate in an industry when the use of IFRS is more prevalent
than any other basis of accounting. Many US entities are beginning to think about what their
initial IFRS financial statements will look like when they convert from US GAAP to IFRS.
IFRS 1, like all other standards within IFRS, is a living document and subject to
modifications and improvements as deemed necessary by the IASB. IFRS 1 was originally
created to address potential conversion issues for companies within the European Union and
1
In November 2008, the IASB issued a revised version of IFRS 1. IFRS 1 (Revised 2008) is effective for entities
applying IFRS for the first time for annual periods beginning on or after 1 July 2009.
1 Overview
Australia that were converting to IFRS in 2005. As new countries convert to IFRS, additional
conversion issues have arisen that the IASB determined should also be addressed within
IFRS 1. While the original standard included six voluntary exemptions, that list has grown to
fifteen (including business combinations) as of 2008, largely as a result of amendments to
existing standards and the issuance of new standards. In September 2008, the IASB
published an Exposure Draft proposing amendments to IFRS 1 to add three additional
voluntary exemptions in order to address potential challenges for entities in jurisdictions
adopting IFRS in the near future. See Chapter 6 of this publication for a further discussion of
those proposed amendments. As US entities move closer to conversion, new issues relating
specifically to US converters may arise that would warrant additional modifications to IFRS 1.
1.2
Scope
Excerpt from IFRS 1

2.
3.
An entity shall apply this IFRS in:

a.
its first IFRS financial statements; and
b.
each interim financial report, if any, that it presents in accordance with IAS 34
Interim Financial Reporting for part of the period covered by its first IFRS financial
statements.
An entity's first IFRS financial statements are the first annual financial statements in
which the entity adopts IFRSs, by an explicit and unreserved statement in those
financial statements of compliance with IFRSs. Financial statements in accordance with
IFRSs are an entity's first IFRS financial statements if, for example, the entity:
a.
presented its most recent previous financial statements:

(i)
in accordance with national requirements that are not consistent with IFRSs in
all respects;
(ii) in conformity with IFRSs in all respects, except that the financial statements
did not contain an explicit and unreserved statement that they complied with
IFRSs;
(iii) containing an explicit statement of compliance with some, but not all, IFRSs;
(iv) in accordance with national requirements inconsistent with IFRSs, using some
individual IFRSs to account for items for which national requirements did not
exist; or
(v) in accordance with national requirements, with a reconciliation of some
amounts to the amounts determined in accordance with IFRSs;
b.
prepared financial statements in accordance with IFRSs for internal use only,
without making them available to the entity's owners or any other external users;
1 Overview
4.
5.
c.
prepared a reporting package in accordance with IFRSs for consolidation purposes

without preparing a complete set of financial statements as defined in IAS 1
Presentation of Financial Statements (as revised in 2007); or
d.
did not present financial statements for previous periods.
This IFRS applies when an entity first adopts IFRSs. It does not apply when, for
example, an entity:
a.
stops presenting financial statements in accordance with national requirements,

having previously presented them as well as another set of financial statements
that contained an explicit and unreserved statement of compliance with IFRSs;
b.
presented financial statements in the previous year in accordance with national

requirements and those financial statements contained an explicit and unreserved
statement of compliance with IFRSs; or
c.
presented financial statements in the previous year that contained an explicit and
unreserved statement of compliance with IFRSs, even if the auditors qualified
their audit report on those financial statements.
This IFRS does not apply to changes in accounting policies made by an entity that
already applies IFRSs. Such changes are the subject of:
a.
requirements on changes in accounting policies in IAS 8 Accounting Policies,

Changes in Accounting Estimates and Errors; and
b.
specific transitional requirements in other IFRSs.
An entity that presents financial statements in accordance with IFRS for the first time is a
first-time adopter as that term is used in IFRS 1, and it should apply IFRS 1 in preparing its
financial statements. IFRS 1 defines an entitys first IFRS financial statements as being the
first annual financial statements in which an entity adopts IFRS by making an explicit and
unreserved statement of compliance with IFRS in those financial statements. It should also
apply the standard in each interim financial report that it presents under IAS 34 for a part of
the period covered by its first IFRS financial statements.2
Note, for US public companies, it will ultimately be a decision of the SEC as to whether or not the interim
financial statements in the year of adoption of IFRS must be presented in accordance with IAS 34 or in
accordance with US GAAP. The SECs proposed Roadmap indicates that the SEC anticipates requiring entities to
adopt IFRS as part of an annual report, and that interim reporting in accordance with IAS 34 would not occur
until the next fiscal year (for example, interim reporting in accordance with IFRS would begin in 2015 for an
entity that is a first-time adopter in 2014). However, the proposed Roadmap also requests feedback on
alternative approach by which companies that early adopt IFRS can present their interim financial statements
during the first IFRS reporting period by filing a Form 10-K/A early in that period, which includes financial
statements of the prior two years under IFRS.
1 Overview
In the Boards view, an entity should not be regarded as having adopted IFRS if it does not
provide all disclosures required by IFRS. Therefore, IFRS 1 contains a simple test that gives a
clear answer: an entity has adopted IFRS if, and only if, its financial statements contain an
explicit and unreserved statement of compliance with IFRS. The Board considered whether to
provide any exemptions in this area, and ultimately chose not to.
IFRS 1 is a rules-driven standard, which can lead to different answers in similar situations
and sometimes to counter-intuitive answers. For example, an entity that applied IFRS to its
previous financial statements but stated that it applied IFRS except for would be
considered a first-time adopter because its previous financial statements did not contain an
explicit and unreserved statement of compliance with IFRS. Conversely, if an entity had
applied IFRS in its previous financial statements and stated that the financial statements
are in conformity with IFRS but that entity had not applied a particular standard, that entity
would not be a first-time adopter. Since the previous financial statements contained an
unreserved statement of compliance, even if the auditors report was qualified because of
the entitys failure to comply with a particular standard, that entity would not be considered
a first-time adopter. Further, if an entity reported under IFRS and then switched to another
basis of accounting for a period of time, that entity would be considered a first-time adopter
in the first IFRS reporting period for which it resumed reporting under IFRS.
The determination of whether or not an entity meets the requirements to be considered a
first-time adopter will be relatively easy for most current US GAAP issuers, including SEC
registrants, as the most recent previous financial statements of those entities will clearly be
presented on a basis other than IFRS (that is, US GAAP). However, first-time adopters may
have to analyze this issue more closely when they have subsidiaries that have been preparing
and/or presenting their financial statements in conformity with IFRS. In such situations, firsttime adopters will have to determine if any of those subsidiaries previously qualified as a
first-time adopter by considering each of the criteria specified above. Ultimately, an entity
(including a stand-alone subsidiary) whose most recent previous financial statements
contained an explicit and unreserved statement of compliance with IFRS can never be
considered a first-time adopter.
IFRS is based on a framework that addresses preparation and presentation of general
purpose financial statements that are intended for external distribution to owners and other
stakeholders. IFRS is not intended to be used for special purpose financial statements,
although its framework may be applied in the preparation of such special purpose financial
statements. Accordingly, when analyzing whether subsidiaries have prepared IFRS financial
statements, it is important to understand the purpose for which they have been prepared
(that is, they have not been prepared for internal use only without making them available to
its owners and other external users). For example, a subsidiary or branch that prepared
statutory financial reports that are based on IFRS and that are provided only to regulators for
purposes of complying with tax or other regulatory requirements may not have prepared
1 Overview
general purpose IFRS financial statements that meet the objectives of the framework. 3 As a
result, an entity may determine that those subsidiaries have not yet prepared IFRS compliant
financial statements and, therefore, should be considered first-time adopters.
Entities that adopt a new set of local accounting standards that are identical to IFRS should
consider including a statement of compliance with both the local accounting standards and
IFRS. In such situations, failure to make such a dual statement of compliance may subject the
entity to the application of IFRS 1 whenever it decides to state compliance with IFRS.
However, entities reporting under a local accounting standard that has gradually converged
with IFRS would be required to apply IFRS 1 the first time they chose to state compliance with
IFRS, even if that local accounting standard has ultimately become identical to IFRS.
1.3
Opening IFRS Balance Sheet Selection of Accounting Policies
1.3.1
First IFRS Reporting Period
The first IFRS reporting period is the latest period covered by the first-time adopters first
IFRS financial statements. For example, fiscal year ending 31 December 2014 would be the
first IFRS reporting period for a calendar year-end entity that begins reporting under IFRS in
its 2014 financial statements.
In the US, a public entitys first reporting period likely will be mandated by the SEC. Based on
the SECs Roadmap, the mandatory first IFRS reporting period for US public companies will
be the fiscal year ending on or after December 15, 2014, 2015, or 2016 for large
accelerated filers, accelerated filers, and non-accelerated filers, respectively. Also, if the
SEC moves forward with its proposed rule, a limited number of entities would be allowed to
adopt IFRS as early as the fiscal year ending on or after December 15, 2009 as long as
certain criteria are met.
1.3.2
Date of Transition to IFRS and Opening IFRS Balance Sheet
Excerpt from IFRS 1

6.
An entity shall prepare and present an opening IFRS statement of financial position at
the date of transition to IFRSs. This is the starting point for its accounting in
accordance with IFRSs.
The beginning of the earliest comparative period for which a first-time adopter presents full
comparative financial statements under IFRS will be its date of transition to IFRS the starting
point for accounting for assets, liabilities and equity accounts recognized as of the transition
date and subsequently. IFRS requires that a first-time adopters financial statements include
at least one comparative period, but a first-time adopter may elect to or be required to
3
It is important to note that if the subsidiary or branchs financial statements had contained an unreserved
statement of compliance with IFRS, that subsidiary or branch would no longer be considered a first-time adopter
and would not be eligible to apply the provisions of IFRS 1. However, we believe it is unlikely that financial
statements prepared solely for tax or other regulatory requirements would contain such a statement.
1 Overview
provide more than one comparative period. For example, the SEC has indicated in its
proposed Roadmap that it likely will require US issuers to include two comparative periods for
all financial statements other than the statement of financial position in their first IFRS
financial statements.
At the date of transition to IFRS a first-time adopter must prepare, and present as part of its
first IFRS financial statements, an opening IFRS statement of financial position (that is, the
opening balance sheet). For example, 1 January 2012 is the date of transition to IFRS for a
first-time adopter that presents two years of comparative figures with a first IFRS reporting
period ended 31 December 2014.
The periods to be presented in a first-time adopters financial statements are discussed
further in Chapter 4.
1.3.3
Retrospective Application of IFRS
Excerpt from IFRS 1

7. An entity shall use the same accounting policies in its opening IFRS statement of financial
position and throughout all periods presented in its first IFRS financial statements. Those
accounting policies shall comply with each IFRS effective at the end of its first IFRS
reporting period, except as specified in paragraphs 13-19 and Appendices B-E.
8. An entity shall not apply different versions of IFRSs that were effective at earlier dates.
An entity may apply a new IFRS that is not yet mandatory if that IFRS permits early
application.
IFRS 1 requires full retrospective application of IFRS in a first-time adopters financial
statements. This means that companies must retrospectively apply the current versions of
IFRS for all periods presented (opening IFRS balance sheet, comparative period(s) and
current period), except for those areas with specified limited relief as prescribed by IFRS 1. A
first-time adopter should not consider superseded or amended versions of IFRS in preparing
its first IFRS financial statements. For example, upon conversion to IFRS, account balances
existing at the date of transition and transactions after the date of transition to IFRS are all
restated using the standards effective at the end of the first IFRS reporting period. If a new
standard became effective between the date of transition to IFRS and the first IFRS reporting
period, that standard would be applied retrospectively because the standards to be applied in
the opening IFRS balance sheet are those that are in effect on the first IFRS reporting date
(regardless of the transition provisions provided within the new standard), unless a specific
exemption in IFRS 1 provided differently.
When a first-time adopter is preparing its first IFRS financial statements, there may be
standards at the reporting date that have been issued by the IASB but that are not yet
effective. If those standards have transitional provisions that allow early application, the firsttime adopter may but is not required to apply them in its first IFRS financial statements.
1 Overview
Example 1.3.3 Consistent application of latest version of IFRS

Fact Pattern
The reporting date for Entity As first IFRS financial statements is 31 December 2014.
Entity A is an SEC registrant and therefore must present two comparative periods as part
of its financial statements except for the balance sheet. Entity A presented previous
financial statements under US GAAP each year up to and including 31 December 2013.
The IASB published a new standard on revenue recognition in 2011, with an effective date
of 1 January 2013.
Analysis
In its first IFRS reporting period (31 December 2014) financial statements, Entity A must
apply IFRS standards effective for the period ending on 31 December 2014, including the
new revenue recognition standard, for all periods presented, including:
reflecting the effect of the new revenue recognition standard in any revenue-related
balance sheet accounts in its opening IFRS balance sheet at 1 January 2012 (as well as
in the balance sheets for 31 December 2013 and 2014); and
reflecting the provisions of the new revenue recognition standard in its income
statement, cash flows and its statement of changes in equity, for the years ended 31
December 2012, 2013 and 2014, including footnote disclosures.
However, if the new standard of revenue recognition had an effective date of fiscal
periods beginning on or after 1 January 2015 with early adoption permitted, the entity
would have the choice of whether to adopt the new standard in its first IFRS financial
statements or to adopt the standard on its effective date.
This requirement to apply IFRS standards that are in effect as of the end of the first IFRS
reporting period for all periods presented, regardless of whether such standards were
effective for the comparative periods included with the financial statements, created
numerous implementation issues for European companies adopting IFRS in 2005, as many
new standards were finalized in 2003 and 2004 with a 2005 effective date. US companies
considering a conversion to IFRS should monitor this issue by maintaining awareness of the
current projects on the Boards agenda and their projected completion dates. Currently, the
IASB has a number of major projects on its agenda, including fair value, revenue recognition,
leasing and employee benefits, that are slated to be completed by 2011. However, if these
or other projects (including projects that currently are not on the IASBs agenda) are instead
completed in later periods, new standards resulting from these projects could present
reporting options for US reporting entities first time adoption of IFRS.
1 Overview
1.3.4
Transitional provisions in other standards
Excerpt from IFRS 1

9.
The transitional provisions in other IFRSs apply to changes in accounting policies made
by an entity that already uses IFRSs; they do not apply to a first-time adopter's
transition to IFRSs, except as specified in Appendices B-E.
IFRS 1 makes clear that the transitional provisions in other IFRS standards apply only to
entities that already use IFRS; they do not apply to a first-time adopters transition to IFRS.
There are limited exceptions to this general rule relating to (1) insurance contracts, (2)
service concessions, (3) borrowing cost and (4) assets classified as held for sale and
discontinued operations (these items are discussed further in Chapter 3 of this publication).
The implication of this provision is that the requirements of IFRS 1 override the transitional
provisions in all other IFRS for a first-time adopter.
The Board decided that whenever it issues a new IFRS, it would consider on a case-by-case
basis whether a first-time adopter should apply that IFRS retrospectively or prospectively.
The Board expects that retrospective application will be appropriate in most cases, given its
primary objective of comparability over time within a first-time adopters first IFRS financial
statements. However, if the Board concludes in a particular case that prospective application
by a first-time adopter is justified, it will amend IFRS 1 to make clear this requirement. For
example, in November 2006, the Board issued IFRIC 12, which contains guidance on
accounting for service concession arrangements. At the same time, the Board amended
IFRS 1 to allow first-time adopters to apply the transitional provision in IFRIC 12 as of the
entitys date of transition. See section 3.15 for a further discussion.
1.3.5
Adjustments to the Opening IFRS Balance Sheet
Excerpt from IFRS 1

10.
Except as described in paragraphs 13-19 and Appendices B-E, an entity shall, in its
opening IFRS statement of financial position:
a.
recognise all assets and liabilities whose recognition is required by IFRSs;
b.
not recognise items as assets or liabilities if IFRSs do not permit such recognition;
c.
reclassify items that it recognised in accordance with previous GAAP as one type
of asset, liability or component of equity, but are a different type of asset, liability
or component of equity in accordance with IFRSs; and
d.
apply IFRSs in measuring all recognised assets and liabilities.
Application of the general provisions in paragraph 10 of IFRS 1 regarding the preparation of

the opening balance sheet is, however, not as straight forward as it may seem. Frequently an
entitys previous GAAP will have recognition or measurement differences (or both) with
1 Overview
similar IFRS requirements.4 As a result, entities likely will spend a significant amount of time
in analyzing the amounts that should be reflected in the opening balance sheet. The
remainder of the discussion in this section focuses on differences between US GAAP and IFRS
that likely will result in entities having to adjust the amounts recorded in their US GAAP-based
balance sheet in order to create their opening IFRS balance sheet.
1.3.5.1
Recognize all assets and liabilities whose recognition is required by IFRS
Differences between US GAAP and IFRS may result in situations in which amounts are not
recognized on the US GAAP balance sheet but will need to be recognized in the opening balance
sheet to comply with IFRS. For example, one area in which there may be significant differences
from amounts recognized under US GAAP is the treatment of Qualified Special Purpose Entities
(QSPEs). While US GAAP contains certain provisions that allow for such entities to remain off
balance sheet, IFRS does not have similar scope exceptions in its consolidation rules, nor do any
of the voluntary exemptions or mandatory exceptions within IFRS 1 address the consolidation
of entities. As a result, we believe it is possible that an entity that previously reported under
US GAAP may have to recognize additional assets and liabilities related to QSPEs under IFRS.
See section 2.3.1 and 3.10.7.5 for a further discussion of this issue.
Another area in which a difference may exist between US GAAP and IFRS is restructuring
liabilities, as the timing of when such liabilities are recorded generally will differ under the two
GAAPs. For example, employee termination costs and contract termination costs potentially
may be recorded earlier under IFRS than US GAAP. As this is an area not addressed by any of
the voluntary exemptions or mandatory exceptions of IFRS 1, entities may find that they need
to record additional restructuring liabilities as part of the IFRS opening balance sheet than the
amounts previously recognized under US GAAP.
US GAAP and IFRS also potentially differ in the timing of the recognition of certain provisions.
Under the guidance in Statement 5, US GAAP uses a probable threshold to determine when
it is appropriate to recognize certain provisions. While IFRS uses similar probable
terminology, that term is defined in IAS 37 as more likely than not, a lower threshold than
the manner in which probable generally is applied under US GAAP. As a result, entities may
have to recognize certain provisions under IFRS that previously were not recognized under
US GAAP. Moreover, provisions recognized may have to be discounted under IFRS while they
were not discounted under US GAAP.
An unrecognized intangible asset with a deemed cost other than zero is another example of
an item that is not recognized in a US GAAP balance sheet but may need to be recognized in
the opening IFRS balance sheet. See section 3.2.3.5 for more details.
See section 3.7.3.5 for an example that illustrates the recognition differences between
US GAAP and IFRS.
4
Throughout this publication, we generally assume the previous GAAP used was US GAAP, and base our
illustrative examples on that assumption. Companies whose previous GAAP is something other than US GAAP
may or may not encounter similar issues as US GAAP reporters upon conversion to IFRS.
1 Overview
1.3.5.2
Derecognize items as assets and liabilities if such recognition is not

permitted by IFRS
Some assets and liabilities recognized under US GAAP may have to be derecognized under
IFRS in the first-time adopters opening IFRS balance sheet. For example, under both
US GAAP and IFRS, up-front connection fees in the utilities industry are deferred over the
estimated customer relationship period. During this period, under US GAAP the associated
incremental direct costs, insofar as they do not exceed the deferred revenues, are deferred
and recognized over the estimated customer relation period. However IFRS does not permit
these incremental direct costs to be capitalized.
1.3.5.3
Classify items recognized in accordance with IFRS
Differences may exist between an entitys previous GAAP and IFRS on the classification of
certain recognized assets and/or liabilities. IFRS 1 requires that once an entity has
appropriately identified all of the assets and liabilities to be recognized in the opening IFRS
balance sheet, those assets and liabilities must be classified in accordance with IFRS
requirements, regardless of how those items were classified under the entitys previous GAAP.
For example, one area in which there are differences in the classification/presentation of
assets and liabilities recognized under US GAAP and IFRS relates to the presentation of
discontinued operations. Currently, the definition of what constitutes a discontinued
operation differ under the two GAAPs. Under US GAAP, a discontinued operation is a
component of an entity that has been disposed of or is classified as held for sale provided that
(a) the operations and cash flows of the component have been (or will be) eliminated from the
ongoing operations of the entity as a result of the disposal transaction and (b) the entity will
not have any significant continuing involvement in the operations of the component after the
disposal transaction. A component of an entity may be a reportable segment or an operating
segment, a subsidiary or an asset group (the lowest level for which identifiable cash flows are
largely independent of the cash flows from other groups of assets and liabilities). Conversely,
IFRS 5 defines a discontinued operation as a component of an entity that either has been
disposed or is classified as held for sale and (a) represents a separate line of business or
geographical area of operations, (b) is part of a single coordinated plan to dispose of a
separate major line of business or geographical area of operations, or (c) is a subsidiary
acquired exclusively with a view to resale.5 As such, a first-time adopter may have presented
more discontinued operations under US GAAP than would be permitted under IFRS. As part
of the opening balance sheet, the entity would be required to reclassify assets and liabilities
previously classified as discontinued operations if the operation does not meet the definition
of a discontinued operation under IFRS.
10
A project currently is underway to eliminate the differences in these definitions under US GAAP and IFRS in this
area, with the FASB and IASB publishing exposure drafts in September 2008.
1 Overview
Another area in which classification differences may occur between US GAAP and IFRS
relates to the classification of certain items as either liabilities or equity. As discussed more
fully in section 3.11.1, certain compound financial instruments that contain both liability and
equity components must be split into those separate components under IFRS, with each one
separately recognized. Those instruments may not have been classified in a similar manner
under US GAAP and may therefore need to be reclassified as part of the adjustments to the
opening balance sheet.
See section 3.3.1.3 for an example that illustrates the classification differences between
US GAAP and IFRS.
1.3.5.4
Measure all recognized assets and liabilities in accordance with IFRS
Once an entity has identified all the assets and liabilities that should be recognized in
accordance with IFRS, the entity must then apply the appropriate measurement principles of
IFRS to determine the amount at which those assets and liabilities should be recognized.
Different measurement criteria under IFRS could result in significant changes to the amounts
previously recognized under US GAAP.
Adjustments to amounts previously recognized may result from differences in the underlying
measurement objectives of US GAAP and IFRS. For example, US GAAP and IFRS contain
different measurement objectives surrounding the recognition of impairment on long-lived
assets. US GAAP requires impaired long-lived assets (that is, those for which the recoverably
test has indicated the assets are not recoverable) to be recognized based on the fair value of
those assets. Conversely, IFRS requires impaired long-lived assets to be recognized at the
higher of the fair value less costs to sell or the value in use. Value in use differs from fair
value as it is the present value of future cash flows from continued use including any disposal
value and therefore is based on entity-specific rather than market-specific assumptions.
As a result, upon transition to IFRS, any impairment previously recognized under US GAAP
would be remeasured in accordance with IFRS. Because impairment is measured at fair value
under US GAAP but at the higher of fair value less costs to sell or value in use under IFRS,
upon transition to IFRS, adjustments to the carrying amount of previously impaired assets
may be necessary. As discussed in section 3.5.3 a first-time adopter must evaluate its assets
for impairment in accordance with IAS 36. Because US GAAP first requires a recoverability
test to determine whether to measure and, if necessary, recognize, an impairment loss but
IFRS does not there may be additional impairments to be recognized upon transition to IFRS
as discussed more fully in section 3.5.4.3.
As illustrated in the example below, there are also differences between US GAAP and IFRS in
the measurement objective of inventory in that the LIFO method of valuing inventory is
allowable under US GAAP but is prohibited under IFRS.
11
1 Overview
Example 1.3.5.4 Subsequent Measurement of Acquired Finished Goods Inventory

Fact Pattern
On 1 December 2011, Entity A, a US GAAP reporter, purchased 100 units of finished goods
inventory at $1.00/unit. On 15 December 2011, it purchased an additional 100 units of
finished goods inventory at $1.20/unit. Entity A accounts for its inventory using the last-in,
first-out (LIFO) cost formula and uses the specific identification method for purposes of
determining LIFO cost. On 21 December 2011, Entity A sold 60 units and recorded a debit
to cost of goods sold and a credit to inventory of $72 (60 units * $1.20/unit). The ending
LIFO inventory balance in Entity As consolidated US GAAP financial statements as of
1 January 2012 was $148 [(100 units * $1.00/unit) + (40 units * $1.20/unit)].
Analysis
Entity A will become a first-time adopter and will present its first IFRS financial statements
as of and for the year ending 31 December 2014. In preparing its opening IFRS balance
sheet as of 1 January 2012, Entity A must determine whether it will subsequently account
for the finished goods inventory using either the first-in, first-out (FIFO) or weighted
average cost formula under IAS 2.(LIFO is not permitted.) If Entity A elects to use the FIFO
cost formula, the carrying amount of the inventory in the opening IFRS balance sheet as of
1 January 2012 must be restated to its FIFO cost or $160 [(40 units * $1.00/unit) + (100
units * $1.20/unit)]. The difference between the LIFO and FIFO ending inventory balances
of $12 would be recorded as an adjustment to retained earnings (before any adjustment
for income taxes).
Note: Because the US tax law requires conformity between the inventory costing method
for financial reporting and tax purposes, a change from LIFO to either FIFO or weighted
average cost, also may affect the calculation of certain domestic or foreign cash tax
liabilities. As the US continues to move towards the adoption of IFRS, we expect the
Internal Revenue Service to fully consider this issue.
Another example of differences in the measurement objectives between US GAAP and IFRS
relates to which assets and liabilities may be valued at fair value. For example, IFRS provides
entities with an accounting policy election to elect to value certain non-financial assets at fair
value that must be valued at historical cost under US GAAP, including investment property and
property, plant and equipment. In addition, while both US GAAP and IFRS permit (but neither
requires) entities to elect fair value measurement for most financial assets and liabilities, the
ability to elect the fair value option is slightly more restrictive under IFRS due to certain
eligibility requirements.
12
1 Overview
Even when the measurement objectives for recognized assets and liabilities are broadly aligned
between US GAAP and IFRS, differences may result from the specific application guidance
within the two GAAPs. For example, while both US GAAP and IFRS provide for the
measurement of certain assets and liabilities at fair value, in certain instances differences may
exist regarding the manner in which fair value is determined. While the principles underlying the
objective and determination of fair value measurements are generally consistent between
US GAAP and IFRS, specific differences exist that may affect the determination of fair value in
certain situations. As was the case under US GAAP prior to the issuance of Statement 157,
IFRS does not have a single definition of fair value, but instead provides application guidance in
varying levels of detail within the individual pronouncements that require (or permit) fair value
measurements. This guidance is often specific to the type of asset or liability being measured at
fair value (for example intangible assets under IAS 38 or investment property under IAS 40) or
the purpose of the fair value measurement (for example impairment of assets under IAS 36).6
Conversely, the measurement of fair value across US GAAP is generally based on a singular
definition applied within a consistent framework established by Statement 157 with the
intention of increasing the consistency of fair value estimates used in financial reporting.
The definition of fair value in US GAAP is based on an exit price notion with an explicit focus
on market participants assumptions regarding the use and pricing of the asset (or liability).
However, under IFRS the definition of fair value is based on an exchange transaction notion,
which is neither explicitly an exit price nor entry price. Depending on the particular
accounting pronouncement within IFRS, the application guidance may provide more or less
emphasis on an entry price notion from the perspective of the reporting entity , thereby
resulting in fair value measurements that are more entity-specific than market-based
measurements. In addition, specific differences between IFRS and US GAAP related to (i) the
recognition of inception (day one) gains and losses, (ii) the pricing of assets and liabilities
that transact in markets based on bid and ask prices, and (iii) the determination of the market
in which an asset or liability would be exchanged (that is, principal market vs. most
advantageous market) may result in the need for adjustments to the amounts of assets and
liabilities recognized at fair value under US GAAP in the opening IFRS balance sheet. These
differences are discussed in more detail in section 3.13.1.
It is important to note that IFRS 1, while providing for a number of voluntary exemptions and
mandatory exceptions on the accounting for certain types of transactions (as discussed
further below), provides no exemptions or exceptions relating to the accounting for income
taxes. As a result, a first-time adopter should apply IAS 12 as if it had always been the
governing standard. In this regard, a first-time adopter should recalculate its deferred taxes
based on the difference between the carrying amount of the assets and liabilities in the firsttime adopters opening IFRS balance sheet and their respective tax bases.
6
Note that the IASB currently has an active project on its agenda to develop further fair value measurement
guidance. The IASB issued a discussion paper in November 2006 and is currently deliberating the issue and
preparing an exposure draft.
13
1 Overview
The first-time adopter also should recalculate the carrying amount of any non-controlling
interest after all adjustments (including deferred taxes) have been made to the first-time
adopters opening IFRS balance sheet. For example, if a first-time adopter derecognizes a
liability that previously was recognized under US GAAP in a subsidiary in which the first-time
adopter owns a majority ownership interest, the carrying amount of the non-controlling
interest should be increased for the non-controlling interests share of that derecognized
liability. Any resulting change in the carrying amount of the deferred taxes applicable to the
controlling interest generally should also be recorded as an adjustment to retained earnings
or, if appropriate, another category of equity.
Examples in this publication that illustrate when the measurement principles of IFRS may
differ from those in US GAAP and therefore, may result in adjustments to the assets and
liabilities recognized in the opening IFRS balance sheet are listed below:
14
2.2.1
Change in Estimate
3.2.3.3
Subsequent Measurement of Acquired Investment Property
3.2.3.4a
Subsequent Measurement of Acquired Equipment
3.2.3.4b
Provisionally Determined Fair Values
3.2.4.1
Contingent Consideration
3.3.1.1
Application of the Accelerated Recognition Method
3.3.1.3
Equity Repurchase Feature
3.3.1.4
Deferred Tax Benefit
3.5.4.2
Calculating accumulated depreciation upon transition to IFRS
3.5.4.3
Reversal of an Impairment Charge
3.7.3.1
Recognized Retirement Benefit
3.10.4
Parent Becomes a First-Time Adopter Later Than its Subsidiary
3.14.1
Decommissioning Liability
1 Overview
1.3.6
Opening balance sheet accounting policies
Excerpt from IFRS 1

11.
The accounting policies that an entity uses in its opening IFRS statement of financial
position may differ from those that it used for the same date using its previous GAAP.
The resulting adjustments arise from events and transactions before the date of
transition to IFRSs. Therefore, an entity shall recognise those adjustments directly in
retained earnings (or, if appropriate, another category of equity) at the date of
transition to IFRSs.
As a result of applying the provisions of paragraph 10 of IFRS 1 as discussed above, entities

may make changes to their accounting policies. As a result, adjustments will be necessary to
the carrying amounts of assets and liabilities previously recognized under US GAAP. IFRS 1
provides that an entity shall recognize those adjustments directly in retained earnings (or, if
appropriate, another category of equity) at the date of transition to IFRS. (In only limited
circumstances the adjustments may affect goodwill. See section 3.2.3.6 below for a further
discussion of those limited adjustments affecting goodwill.) In addition, the first-time adopter
must consider the effects of such adjustments on deferred taxes and any non-controlling
interest (previously minority interest).
15
2 Mandatory prohibitions on
retrospective application
2 Mandatory prohibitions on retrospective application
2.1
Introduction
Excerpt from IFRS 1

13.
This IFRS prohibits retrospective application of some aspects of other IFRSs. These
exceptions are set out in paragraphs 14-17 and Appendix B.
IFRS 1 specifically prohibits restatement for certain transactions upon the initial adoption of
IFRS, as the retrospective application in those areas would require judgments by
management about past conditions after the outcome of the particular transactions. In
deliberating this Standard, the IASB determined that it would not be appropriate for
management to use hindsight to adjust previously recorded amounts, as doing so would lead
to arbitrary restatements that would be neither relevant nor reliable.
The mandatory exceptions in IFRS 1 provide another example of the detailed nature of
IFRS 1. The exceptions are essentially specific thou shalt not dos, not broad principles
that can or should be analogized or applied to similar situations. Further, unlike the
voluntary exemptions that are covered in Chapter 3 of this publication, entities must comply
with all of the mandatory exceptions provided in IFRS 1. Entities may not make policy
choices to apply only some or none of the exemptions. This is the case even when the
entitys previous GAAP is similar to IFRS for the applicable topic.
2.2
Estimates
Excerpt from IFRS 1
16
14.
An entity's estimates in accordance with IFRSs at the date of transition to IFRSs shall
be consistent with estimates made for the same date in accordance with previous
GAAP (after adjustments to reflect any difference in accounting policies), unless there
is objective evidence that those estimates were in error.
15.
An entity may receive information after the date of transition to IFRSs about estimates
that it had made under previous GAAP. In accordance with paragraph 14, an entity
shall treat the receipt of that information in the same way as non-adjusting events
after the reporting period in accordance with IAS 10 Events after the Reporting Period.
For example, assume that an entity's date of transition to IFRSs is 1 January 20X4 and
new information on 15 July 20X4 requires the revision of an estimate made in
accordance with previous GAAP at 31 December 20X3. The entity shall not reflect that
new information in its opening IFRS statement of position (unless the estimates need
adjustment for any differences in accounting policies or there is objective evidence
that the estimates were in error). Instead, the entity shall reflect that new information
in profit or loss (or, if appropriate, other comprehensive income) for the year ended 31
December 20X4.
16.
An entity may need to make estimates in accordance with IFRSs at the date of
transition to IFRSs that were not required at that date under previous GAAP. To
achieve consistency with IAS 10, those estimates in accordance with IFRSs shall reflect
conditions that existed at the date of transition to IFRSs. In particular, estimates at the
date of transition to IFRSs of market prices, interest rates or foreign exchange rates
shall reflect market conditions at that date
17.
Paragraphs 14-16 apply to the opening IFRS statement of financial position. They also
apply to a comparative period presented in an entity's first IFRS financial statements,
in which case the references to the date of transition to IFRSs are replaced by
references to the end of that comparative period
IFRS 1 requires a first-time adopter to use estimates under IFRS that are consistent with the
estimates made for the same date under previous GAAP, after adjusting for any difference in
accounting policy, unless there is objective evidence that there were errors in those previous
estimates, as is defined in IAS 8. This requirement applies to both estimates made in respect
of the date of transition to IFRS and to those in respect of the end of any comparative periods
included in the first IFRS financial statements. For example, a US entitys first reporting date
under IFRS may be 31 December 2014, and based on SEC requirements those financial
statements will include years ended 31 December 2012, 2013, and 2014. That entity cannot
use information that became available in 2014 to adjust estimates made in the financial
statements for the year ended 2012 or 2013. A first-time adopter is not allowed to take into
account any subsequent events that provide evidence of conditions that existed at a balance
sheet date that came to light after the date its previous GAAP (for example, US GAAP)
financial statements were issued.
Under IFRS 1, a first-time adopter cannot apply hindsight and make better estimates when
it prepares its first IFRS financial statements. This also means that a first-time adopter is not
allowed to take into account any subsequent events that provide evidence of conditions that
existed at a balance sheet date that came to light after the date its previous GAAP financial
statements were issued. In the Basis for Conclusions to IFRS 1,the IASB indicated that events
occurring from the date the previous GAAPs financial statements were issued through the
date of transition to IFRS might provide additional information regarding estimates made in
those previously issued financial statements. However, the IASB ultimately concluded that it
would be more helpful to users and more consistent with IAS 8 to recognize the revision of
those estimates as income or expense in the period when the first-time adopter made the
revision, rather than in preparing the opening IFRS balance sheet. Effectively, the IASB
wished to prevent first-time adopters from using hindsight to clean up their balance sheets
by direct write-offs to equity as part of the opening IFRS balance sheet exercise.
Further, if a first-time adopters previous GAAP accounting policy was not consistent with IFRS,
the entity may only adjust the estimate for the difference in accounting policy; it may not also
adjust the estimate to reflect the more current information available. In other words, the firsttime adopter uses information available at the time of the original previous GAAP accounting to
apply its new accounting policy. If an entity later adjusts those estimates, it accounts for the
revisions to those estimates as events in the period in which it makes the revisions.
17
Example 2.2.1 Change in estimate

Fact pattern
In May 2010, Entity A, a US GAAP reporter, issued share-based compensation in the form
of stock options to its employees. The options have a service condition and vest on a
graded vesting schedule over 4 years (that is, 25% of the options are vested in May 2011,
another 25% in May 2012, and so on). Under US GAAP, the entitys accounting policy was
to measure each tranche of the award separately, but then to recognize compensation
expense over on a straight-line basis over the requisite period for the entire award (that is,
four years).
As of the grant date of the stock options, the entity believed the expected lives of the stock
options ranged from two to six years. On 1 January 2012, Entity A estimates that the
expected lives of those awards range from 1.5 to five years.
Analysis
Entity A will become a first time adopter and will present its first IFRS financial statements
as of and for the year ended 31 December 2014. Its date of transition to IFRS is 1 January
2012. As part of its adoption of IFRS, it must evaluate its share-based payment awards
that are not yet vested as of its date of transition. Under IFRS, Entity A must recognize its
compensation expense on a straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in substance, multiple awards,
(that is, accelerated method).
Entity A therefore must apply the accelerated method under IFRS 2 to these share-based
payment awards to adjust for the difference in accounting policy between the straight-line
recognition and the accelerated recognition under IFRS 2. However, the fair value
calculation must be based on the facts and circumstances that existed at the time the
share-based payments were issued, not the date of adoption of IFRS. Therefore, Entity A
may not adjust the value of the awards based on its revised estimates of the expected lives
of the awards.
In relation to financial instruments, IFRS 1 requires a first-time adopter that is unable to
determine whether a particular portion of an adjustment is a transitional adjustment or a
change in estimate to treat the adjustment as a change in accounting estimate under IAS 8,
with appropriate disclosures as required by paragraphs 32 to 40 of IAS 8. For example, IFRS
may dictate a different effective interest methodology for a particular financial instrument
than an entitys previous GAAP required. An entity converting to IFRS would have to follow
the required IFRS methodology. However, IFRS also requires the entity to estimate the timing
of the principal payments on that financial instrument. For an entity converting to IFRS and
simultaneously updating its principal payments projections, it would be difficult to bifurcate
the change in estimate between that which was a result of the new application of IFRS (that
18
is, the different effective interest method) and that which was a result of the requirement to
update the principal repayment timings. As a result, the entire adjustment is treated as a
change in estimate.
When a first-time adopter needs to make estimates to recognize certain assets or liabilities
under IFRS that were not required to be recognized under the entitys previous GAAP, those
estimates should be consistent with IAS 10 and reflect conditions that existed at the date of
transition to IFRS. This means that estimates of market prices, interest rates or foreign
exchange rates should reflect market conditions at the opening balance sheet date (for
example, 1 January 2012) and each subsequent reporting date (for example, 31 December
2012 and 2013), and not the conditions that exist as of the first reporting date (for example
31 December 2014).
It should be noted that while IFRS 1 requires estimates to be consistent with those made the
same date under the first-time adopters previous accounting, as discussed above, IFRS 1
does not override the requirements in other IFRS to make determinations on classifications or
measurements of certain assets and liabilities based on circumstances existing at a particular
date, such as:
the determination at inception date of finance leases and operating leases;

the restrictions in IAS 38 that prohibit capitalization in the opening IFRS balance sheet of
expenditures on an internally generated intangible asset if the asset did not qualify for
recognition when the expenditure was incurred; and
the distinction between financial liabilities and equity instruments (see IAS 32).
2.3
Derecognition of financial assets and liabilities
Excerpt from Appendix B of IFRS 1

B2. Except as permitted by paragraph B3, a first-time adopter shall apply the derecognition
requirements in IAS 39 Financial Instruments: Recognition and Measurement
prospectively for transactions occurring on or after 1 January 2004. In other words, if a
first-time adopter derecognised non-derivative financial assets or non-derivative
financial liabilities in accordance with its previous GAAP as a result of a transaction that
occurred before 1 January 2004, it shall not recognise those assets and liabilities in
accordance with IFRSs (unless they qualify for recognition as a result of a later
transaction or event).
B3. Notwithstanding paragraph B2, an entity may apply the derecognition requirements in
IAS 39 retrospectively from a date of the entity's choosing, provided that the
information needed to apply IAS 39 to financial assets and financial liabilities
derecognised as a result of past transactions was obtained at the time of initially
accounting for those transactions
19
IFRS 1 acknowledges that some arrangements for the transfer of assets, particularly
securitizations, may last for some time, with the result that transfers might be made both
before and on or after 1 January 2004 under the same arrangement. IFRS 1 clarifies that
transfers made under such arrangements fall within the first-time adoption provisions only if
they occurred before 1 January 2004. In other words, if a first-time adopter derecognized
non-derivative financial assets or non-derivative financial liabilities under its previous GAAP in
a financial year beginning before 1 January 2004, it does not recognize those assets and
liabilities under IFRS (unless they qualify for recognition as a result of a later transaction or
event). However, transfers on or after 1 January 2004 are subject to the full requirements of
IAS 39 and will have to be re-evaluated to determine whether they meet the criteria for
derecognition. Therefore, unless the derecognition requirements of IAS 39 are satisfied,
assets and liabilities transferred after 1 January 2004 must be recognized under IFRS.
A first-time adopter is not exempt from SIC-12, which requires consolidation of all special
purpose entities (SPEs), including qualifying special-purpose entities. In other words, SIC-12
contains no specific transitional or first-time adoption provisions. Accordingly, the SIC-12
requirements with regard to the consolidation of SPEs are fully retrospective for first-time
adopters. As a result, not all previously derecognized assets and liabilities will remain offbalance sheet upon adoption of IFRS. For example, if under its previous GAAP an entity
derecognized non-derivative financial assets and non-derivative financial liabilities as the result
of a transfer to an entity treated as an SPE by SIC-12, those assets and liabilities may be
required to re-recognized on transition to IFRS, as the result of consolidation of the SPE rather
than through application of IAS 39. However, if the SPE itself then subsequently transferred
the asset and achieved derecognition of the items concerned under the entity's previous GAAP
(other than by transfer to a second SPE or member of the entity's group), then the items
remain derecognized on transition.
A first-time adopter may elect to apply the derecognition requirements in IAS 39
retrospectively from a date of the entity's choosing prior to 1 January 2004, provided that
the information needed to apply IAS 39 to financial assets and financial liabilities
derecognized as a result of past transactions was obtained at the time of initially accounting
for those transactions. Therefore, an entity that was not permitted to derecognize
transferred financial assets under its previous GAAP may be able to derecognize the assets
through retrospective application of IAS 39, provided the entity also retained
contemporaneous documentation of its original basis for conclusion. However, the limitation
on the retrospective application of IAS 39 helps to prevent the re-estimation of
measurements used in the risk and rewards analysis pursuant to IAS 39 (such as fair values)
with the unacceptable benefit of hindsight. This limitation, effectively also bans most firsttime adopters from restating transactions that occurred before 1 January 2004 because the
required contemporaneous documentation likely would not have been prepared or
maintained as of the date of transfer.
20
2.3.1
Potential issues applicable to first-time adopters that previously

reported under US GAAP
While the transition provisions of IFRS 1 related to derecognition of financial assets and
liabilities provided significant relief for many European entities that converted to IFRS on 1
January 2004, it will provide little or no relief for first-time adopters that previously reported
under US GAAP that will have a transition date of 1 January 2012 or later, based on the
SECs proposed Roadmap. In addition, the option to retrospectively apply the derecognition
requirements under IAS 39 may not benefit many first-time adopters that previously reported
under US GAAP because off-balance sheet accounting for structured financings generally is
considered more difficult to achieve under IFRS.
Under US GAAP, special derecognition rules apply to asset-backed financing arrangements or
securitization transactions involving qualifying special-purpose entities (QSPEs), as defined
in Statement 140. An enterprise that transfers assets to a QSPE or that holds a variable
interest therein generally does not apply the consolidation requirements of FIN 46(R), unless
the enterprise has the unilateral ability to cause the entity to liquidate or to change the entity
so that it is no longer a QSPE. However, the notion of a QSPE does not exist under IFRS, and
as a result, we believe off-balance sheet financing will be more difficult to achieve under IFRS.
In short, entities currently engaged in off-balance sheet securitization financings (that have
been derecognized under US GAAP) may have to re-recognize many of the financial assets
previously derecognized unless the IASB decides to amend the first-time adoption transition
provisions to accommodate companies converting from US GAAP (for example, by extending
the effective date for applying IAS 39 to transactions occurring after 1 January 2012).
2.3.1.1
Update on efforts to converge US GAAP with IFRS
In June 2009, the FASB issued Statement 166. Statement 166 is designed to make shortterm improvements to Statement 140 until such time as converged standards on
derecognition and consolidation are developed with the IASB. In the meantime, Statement
166 improves convergence with IFRS by eliminating the concept of a QSPE, including the
exception for QSPEs from the consolidation guidance of FIN 46(R), and by limiting the
portions of financial assets that are eligible for derecognition. The amendments are effective
for fiscal years beginning after 15 November 2009 (that is, 1 January 2010 for calendar
year companies) and earlier application is prohibited.
Convergence between US GAAP and IFRS also may be advanced with recent proposals to
change the accounting for transfers of financial instruments under IFRS. In March 2009, the
IASB published for public comment an exposure draft of proposals to improve the
derecognition requirements for financial instruments. The IASB believes its proposed
approach is similar in some respects to Statement 166. For example, the exposure draft
would replace the current mixed derecognition model under IAS 39, which combines
elements of risks and rewards and control, with a single element model that would give
primacy to control. Therefore, like US GAAP, the proposed approach under IFRS would assess
21
derecognition on the basis of control, and evaluate control in a somewhat similar manner. A
major difference between the derecognition requirements under US GAAP and the proposed
approach in the exposure draft is that the approach proposed in the exposure draft does not
require a legal isolation test to determine whether effective control has been surrendered. A
final amendment of the IAS 39 derecognition guidance is expected to be issued sometime
during 2010.
Now that the FASB has completed its short-term amendments to Statement 140, the two
Boards have committed to work jointly and expeditiously to ultimately issue a converged
derecognition standard. However, it is unclear whether convergence between the two
accounting standards will be achieved before US issuers are required to transition to IFRS.
2.4
Hedge accounting
2.4.1
Recognition and Measurement of derivatives that formed part of a

hedge relationship

B4.
As required by IAS 39, at the date of transition to IFRSs, an entity shall:

(a) measure all derivatives at fair value; and
(b) eliminate all deferred losses and gains arising on derivatives that were reported in
accordance with previous GAAP as if they were assets or liabilities.
B5.
An entity shall not reflect in its opening IFRS statement of financial position a hedging
relationship of a type that does not qualify for hedge accounting in accordance with
IAS 39 (for example, many hedging relationships where the hedging instrument is a
cash instrument or written option; where the hedged item is a net position; or where
the hedge covers interest risk in a held-to-maturity investment). 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 IFRSs, provided that it does so no later than the date of transition to IFRSs.
B6.
If, before the date of transition to IFRSs, an entity had designated a transaction as a
hedge but the hedge does not meet the conditions for hedge accounting in IAS 39 the
entity shall apply paragraphs 91 and 101 of IAS 39 to discontinue hedge accounting.
Transactions entered into before the date of transition to IFRSs shall not be
retrospectively designated as hedges.
IFRS 1 provides that a first-time adopter should not reflect in its opening IFRS balance sheet a
hedging relationship of a type that does not qualify for hedge accounting under IAS 39. In
addition, IFRS 1 only allows prospective application of the hedge accounting provisions of IAS
39 by a first-time adopter from the date the hedge accounting criteria are met. That is to say,
a first-time adopter is prohibited from applying retrospectively some of the hedge accounting
provisions of IAS 39.
22
In making this determination, the Board felt that it was unlikely that most entities would have
adopted IAS 39s criteria for (a) documenting hedges at their inception and (b) testing the
hedges for effectiveness prior to adopting IAS 39, even if they intended to continue the same
hedging strategies after adopting IAS 39. Furthermore, the Board was concerned that
retrospective designation of hedges (or retrospective reversal of their designation) could lead
to selective designation of some hedges to report a particular result. Therefore, the Board
decided that transactions entered into before the date of transition to IFRS cannot be
retrospectively designated as hedges under the hedge accounting provisions of IAS 39.
Hedge designation that is compliant with IAS 39 must be completed on or before the
transition date to IFRS in order to qualify for hedge accounting after the transition date (no
retrospective designation is permitted).
If, before the date of transition to IFRS, the first-time adopter had designated a transaction as
a hedge under its previous GAAP but the hedge does not meet the requirements for hedge
accounting in IAS 39 at the transition date (for example, because the documentation does not
conform to the IAS 39 requirements and such documentation is not adjusted to conform prior
to or at the transition date), the entity must discontinue hedge accounting prospectively.7
A first-time adopter is required to account for all derivatives in its opening IFRS balance sheet
as assets or liabilities measured at fair value. It is important to note that under IFRS all
derivatives, other than those that are designated and are effective hedging instruments, are
classified as held for trading. (As a result, such instruments must be measured at fair value
with changes in fair value recognized in income each period.) When a derivative was not
explicitly recognized as an asset or liability under previous GAAP, the difference between the
previous carrying amount (which might be zero) and its fair value at the transition date should
be recognized as an adjustment of the balance of retained earnings at the transition date.
2.4.2
Prohibition on retrospective application
A first-time adopter is not permitted to designate hedges retrospectively in relation to

transactions entered into before the date of transition to IFRS. This requirement is to prevent
an entity from reflecting hedge relationships in its opening balance sheet that it did not
identify as such under the entitys previous GAAP. Further, the implementation guidance to
IFRS 1 explains that hedge accounting can be applied prospectively only from the date the
hedge relationship is fully designated and documented. Therefore, if the hedging instrument
is still held at the date of transition to IFRS, the designation and documentation of a hedge
relationship must be completed on or before that date if the hedge relationship is to qualify
for hedge accounting on an ongoing basis from that date.
This would be accomplished by applying paragraphs 91 and 101 of IAS 39 (as revised in 2003).
23
2.4.3
Hedge relationships reflected in the opening IFRS balance sheet
IFRS 1 provides that a hedge relationship should be reflected in the first-time adopters
opening IFRS balance sheet if it has been accounted for as a hedge relationship under
previous GAAP and the hedge relationship is a type that is eligible under IAS 39. Note that
satisfying the hedge accounting criteria (for example, passing the effectiveness test) under
IAS 39 is not a factor in deciding whether hedge accounting should be applied on transition.
As long as a hedge relationship can be specifically identified under a first-time adopters
previous GAAP and that hedge relationship would be a type that qualifies for hedge
accounting under IFRS (even if it is not subsequently pursued), then the first-time adopter
must account for the hedge relationship and recognize the hedging instrument in its opening
IFRS balance sheet.
We believe that the phrase hedge relationship is a type that is eligible under IAS 39
describes a hedge relationship for which both the hedging instrument and the hedged item
are eligible to be paired together in a IAS 39 hedge relationship. We do not believe that the
hedge effectiveness assessment and/or measurement methodologies used under US GAAP
for the hedge relationship must also have been previously compliant with IAS 39 in order for
the hedge relationship to be viewed as a type that is eligible under IAS 39.
However, in order for a first-time adopter to continue to apply hedge accounting subsequent
to the transition date, all of the designation, effectiveness and documentation requirements of
hedge accounting under IAS 39 must be satisfied as of the date of transition to IFRS. If the
hedge relationship does not meet the requirements in IAS 39 prospectively, then hedge
discontinuation rules in that standard must apply immediately after transition. Further, if an
entity wishes to continue to apply hedge accounting subsequent to the transition date, all of
the designation, effectiveness and documentation requirements of hedge accounting under
IAS 39 must be satisfied for each period in which the entity wishes to apply hedge accounting.
2.4.4
Reflecting cash flow hedges in the opening IFRS balance sheet
Excerpt from Implementation Guidance of IFRS 1

IG60B An entity may, under previous GAAP, have deferred gains and losses on a cash flow
hedge of a forecast transaction. If at the date of transition to IFRS, the hedged
forecast transition is not highly probable, but expected to occur, the entire deferred
gain or loss is recognized in equity. Any net cumulative gain or loss that has been
reclassified to equity on initial application of IAS 39 remains in equity until (a) the
forecast transaction subsequently results in recognition of a non financial asset or non
financial liability, (b) the forecast transaction affects profit or loss or (c) subsequently
circumstances change and the forecast transaction is no longer expected to occur, in
which case any related net cumulative gain or loss that had been recognized directly
in equity is recognized in profit and loss. If the hedging instrument is still held but the
hedge does not qualify as a cash flow hedge under IAS 39, hedge accounting is no
longer appropriate starting from the date of transition to IFRS.
24
IAS 39 requires that hedged forecast transactions must be highly probable in order to achieve
cash flow hedge accounting. While IAS 39 states that the term highly probable indicates a
much greater likelihood of happening than the term more likely than not, there is no
prescriptive definition of highly probable provided in IAS 39. If as of the date of transition
to IFRS the hedged forecast transaction is not highly probable but is still expected to occur,
the entire unrecognized portion of the fair value of the hedging derivative is taken to the cash
flow hedge reserve in equity in the opening IFRS balance sheet. If, at the date of transition to
IFRS, it was not possible the forecast transaction will occur, this would be a relationship of a
type that does not qualify for hedge accounting under IAS 39. Therefore, the hedging
relationship would not be reflected in the opening IFRS balance sheet and the deferred gains
and losses would be recognized in retained earnings.
2.4.5

2.4.5.1
Recognition and Measurement of derivatives that formed part of a hedge

relationship
The likelihood of satisfying IAS 39s criteria for hedge accounting may be relatively high for
first-time adopters that originally accounted for hedging relationships in accordance with
Statement 133. Both IAS 39 and Statement 133 define three types of hedge relationships:
1) fair value hedges, 2) cash flow hedges, and 3) net investment hedges. In addition, the
risks that can be hedged and the hedging instruments and hedged items permitted by
Statement 133 are similar to the types allowed under IAS 39. Also, the hedge documentation
and effectiveness assessment requirements of Statement 133 are not substantially different
from those required by IAS 39. Therefore, many first-time adopters should expect to reflect
most of their existing qualified hedge relationships in the opening IFRS balance sheet.
While the hedge accounting models under IAS 39 and Statement 133 are similar, a first-time
adopter should understand that differences do exist in terms of hedge accounting and that
they may result in adjustments to the opening IFRS balance sheet. For example, the fact that
the definition of a derivative under IAS 39 is broader than the definition under Statement 133
(for example, IAS 39s definition of a derivative does not require a net settlement provision or
a notional amount), we believe it is likely that contracts that were previously accounted for as
derivatives under Statement 133 will continue to be accounted for as derivatives and
measured at fair value under IAS 39. Conversely, certain contracts that are not derivatives
under US GAAP may meet the definition of a derivative under IFRS. For example, forward or
option contracts on non-public equity stocks that can only be settled gross in the future or
energy contracts without a minimum notional amount that have a settlement value
determinable based on the expected quantity of production for a given period, may be
derivatives under IAS 39. These instruments would not be derivatives reported at fair value
under Statement 133.
25
Some other US GAAP and IFRS differences relating to the recognition and measurement of
certain non-financial assets and liabilities may also result in adjustments to the opening IFRS
balance sheet at transition. For example, under US GAAP even though a non-financial
contract may meet the definition of a derivative, recognition and measurement
requirements for derivatives may not be applied if the contract is eligible for one of the
scope exceptions provided within paragraph 10 of Statement 133, including the Normal
Purchase Normal Sale (NPNS) exception. While IAS 39 paragraph 5 provides a similar
scope exemption, or the Own Purchase, Sale or Usage Requirements (Own-use)
exemption, and both the NPNS and Own-use exceptions were provided to allow companies to
avoid derivative accounting for certain purchase or sale contracts that are used in their
normal course of businesses, the criteria for a contract meeting the NPNS exception are
more restrictive than the IAS 39 criteria for the Own-use exemption. For example, the NPNS
exception is an election and such an election must be formally documented, the Own-use
exemption is not elective and accordingly does not require formal documentation. A nonfinancial contract that satisfies the Own-use exemption is automatically excluded from the
recognition and measurement requirements of IAS 39. In general however, if a contract has
met the NPNS election eligibility requirements under Statement 133, it would also likely
meet the requirements for the Own-use exemption under IAS 39. US entities may expect
additional non-financial contracts to qualify for the Own-use exemption upon the transition
and, therefore, fewer contracts to be accounted for as derivatives. Consequently, there
would be a reduced requirement for hedge accounting.
Questions may arise for first-time adopters as to whether hedge relationships for interest
rate swaps that apply the shortcut method pursuant to paragraph 68 of Statement 133 are
considered ineligible to be reflected in the opening IFRS balance sheet. The shortcut
method does not exist under IAS 39, and these entities that designated hedges that apply the
shortcut method would not have identified previously a method to be used to measure
ineffectiveness. However, pursuant to the transitional rules of IFRS 1, a first-time adopter
would only need to assess the eligibility of a hedge to determine whether it should be
reflected in the opening IFRS balance sheet or not. As the first-time adopter could pursue
hedge accounting under IAS 39 for the same relationship for which they had previously
applied the shortcut method, we believe this relationship would be deemed an eligible type
and therefore, it should be reflected in the opening IFRS balance sheet upon transition.
Subsequent to the transition, the first-time adopter must discontinue hedge accounting
pursuant to IAS 39 and re-designate it prospectively should the entity intend to apply hedge
accounting going forward. In addition, the first-time adopter would need to be compliant with
the hedge documentation requirements in IAS 39 as of the date it decided to apply hedge
accounting under IFRS.
26
2.4.5.2
Reflecting cash flow hedges in the opening IFRS balance sheet
Statement 133 requires that a hedged forecast transaction must be probable compared to
highly probable under IAS 39. Because of this difference in the level of assurance of the
probability of occurrence of the forecast transactions, additional persuasive evidence that a
forecast hedged item will occur is likely to be required under IFRS once the first-time adopter
transitions to IFRS.
If at the date of transition to IFRS an eligible cash flow hedge of forecast transaction was not
probable of occurring (expected to occur under IAS 39), this would be a relationship of a type
that does not qualify for hedge accounting under IAS 39 or Statement 133. Therefore the
hedging relationship would not be reflected in the opening IFRS balance sheet, and
presumably, a first-time adopter would no longer have been reflecting ongoing hedge
accounting in their final US GAAP financial statement either. However, the final US GAAP
financial statements might still have a balance in OCI reflective of the previously existing
hedge relationship. For example, under Statement 133, an entity must keep a balance
representing the effective portion of a hedge frozen in OCI even if the forecast transaction
was no longer expected to occur but was still not yet probable of not occurring, and
recycle the OCI balance into profit and loss as the transaction affects earnings. However,
under IAS 39, if the probability of occurrence of the forecast transaction is below the level of
probable of occurring, then the forecast transaction would not be considered an eligible
hedged item under IAS 39. At the date of transition to IFRS, the entity would have to make
adjustments to the opening IFRS balance sheet to reclassify the OCI amount recorded
pursuant to US GAAP to retained earnings (as if hedge accounting had never been applied to
this relationship).
A first-time adopter that reported under US GAAP will also likely find other potential issues
and considerations relating to its existing cash flow hedges upon first-time adoption as a
result of hedge accounting differences under IFRS and US GAAP. For example:
The change in variable cash flows method as provided by Statement 133

Implementation Issue No. G7 is not permitted under IFRS. US entities that use this
method to measure hedge ineffectiveness would have to identify a permissible method
under IAS 39 on or before the transition date in order to continue this hedging strategy
after transition.
IAS 39 does not consider hedged forecast cash flows to have a time element, unless it is
specified within variability terms of the hedged item. Therefore, it is not possible to
designate the entire change in the fair value of a purchased option hedging instrument
and report the full amount of such change in equity. IAS 39 requires the time value of a
purchased option to be excluded from a hedge relationship with fair value changes
attributable to this portion of the option reported directly in profit and loss. Under
Statement 133 Implementation Issue No. G20, the changes in fair value of a purchased
option attributable to time value can be included in the hedge effectiveness
27
assessment, be eligible for reporting in equity under the cash flow hedging model, and
potentially result in no hedge ineffectiveness. Therefore, hedging with purchased options
will result in more profit and loss volatility under IFRS than under US GAAP.
IAS 39 allows the election of a basis adjustment method for hedges of the forecast
acquisition of non-financial hedged items in cash flow hedges. The accumulated effective
portion of the hedge that has been initially reported in equity during the forecast period is
reclassified against the initial cost or the carrying amount of the hedged item whose
acquisition was the intent of the hedge (for example, the forecast purchase of commodity
inventory). Under Statement 133, basis adjustment is not permitted. The accumulated
effective portion of the hedge is recycled to profit and loss from equity as the hedged item
affects earnings. At transition, a first-time adopter may adopt as its accounting policy the
basis adjustment method for hedges of non-financial hedged items, and remove the hedging
gain or loss accumulated in OCI pursuant to US GAAP and recognize it as part of the carrying
amount of the non-financial item hedged. This accounting policy should be applied
consistently to all similar hedges going forward.
2.5
Non-controlling Interest

B7
A first-time adopter shall apply the following requirements of IAS 27 (as amended in
2008) prospectively from the date of transition to IFRSs:
(a) the requirement in paragraph 28 that total comprehensive income is attributed to
the owners of the parent and to the non-controlling interests even if this results in
the non-controlling interests having a deficit balance;
(b) the requirements in paragraphs 30 and 31 for accounting for changes in the
parents ownership interest in a subsidiary that do not result in a loss of control;
and
(c) the requirements in paragraphs 34-37 for accounting for a loss of control over a
subsidiary, and the related requirements of paragraphs 8A of IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations.
However, if a first-time adopter elects to apply IFRS 3(as revised in 2008) retrospectively to
past business combinations, it shall also apply IAS 27 (as amended in 2008) in accordance
with paragraph C1 of this IFRS.
See section 3.2.4.2 for discussion on non-controlling interest.
28
3 Voluntary Exemptions From the

Requirements of Certain IFRS
3 Voluntary Exemptions From the Requirements of Certain IFRS
3.1
Introduction
Excerpt from IFRS 1

18.
An entity may elect to use one or more of the exemptions contained in Appendices C-E.
An entity shall not apply these exemptions by analogy to other items.
The Board decided that, as a general principle, a first-time adopter should measure all assets
and liabilities recognized in its opening IFRS balance sheet on the basis required by the
relevant IFRS effective at the first IFRS reporting date. However, in some cases, the process
of reconstructing initial fully IFRS-compliant balance sheet might be costly or burdensome, or
even impracticable. For instance, some measurements under IFRS are based on an
accumulation of past costs or other transaction data. If an entity has not previously collected
such data, it may be costly or burdensome to collect or estimate the data retrospectively.
Similar costs and burdens may arise if an entity collected cost data that differ materially from
the amounts required to comply with IFRS.
To ease the burden, the IASB, considering these cost-benefit constraints, developed certain
voluntary exemptions to the general principle and the mandatory exceptions described in
Chapter 2 of this publication. Entities are free to choose whether or not to avail themselves of
each of these exemptions from applying other IFRS retrospectively. In addition to the
exemption related to business combinations, which is covered in Appendix C of IFRS 1,
Appendix D covers the following additional exemptions:
(a)
share-based payment differences;
(b)
insurance contracts;
(c)
the use of fair value or revaluation as deemed cost;
(d)
leases;
(e)
employee benefits;
(f)
cumulative translation differences;
(g)
investment in subsidiaries, jointly controlled entities and associates;
(h)
assets and liabilities of subsidiaries, associates and joint ventures;
(i)
compound financial instruments;
(j)
designation of previously recognized financial instruments;
(k)
fair value measurement of financial assets or financial liabilities at initial recognition;
(l)
decommissioning liabilities included in the cost of property, plant and equipment;
(m)
service concessions; and
(n)
borrowing cost.
29
It should be noted that, while IFRS generally contains less application and interpretive
guidance than US GAAP, IFRS 1 is an exception to that general rule. The provisions of IFRS 1
are very specific and are intended to be applied specifically as written, without analogy to
other areas or circumstances. As a result, the voluntary exemptions addressed in IFRS 1 and
discussed in Chapter 3 of this publication may only be applied to the areas specifically
covered in the exemption, and may not be applied by analogy to other or similar transactions.
Application of these exemptions is entirely optionalthat is, a first-time adopter can pick and
choose the exemptions that it wants to apply. Further, IFRS 1 does not provide a hierarchy to
any of the voluntary exemptions; therefore, when a first-time adopter has an item covered by
more than one exemption, the first-time adopter has free choice in determining the order in
which to apply the exemptions. For example, the voluntary exemption related to property,
plant and equipment applies even to those fixed assets, intangible assets and investment
properties that were acquired as part of a business combination and for which the first-time
adopter elects to not restate the business combination using the business combinations
exemption. As a result, a first-time adopter could elect to use fair value as the deemed cost
for property, plant and equipment acquired in a business combination as part of its transition
to IFRS.
The following discussions are based on the assumption that a first-time adopter will adopt IFRS
in 2014 (based on the SECs proposed Roadmap which indicates this is the target conversion
date for large-accelerated filers). For a calendar year-end entity this results in a first IFRS
reporting date of 31 December 2014 and a date of transition to IFRS of 1 January 2012.
3.2
Business combinations
IFRS 1 requires the first-time adopter to restate only those business combinations occurring
on or after the date of transition to IFRS to comply with IFRS 3R.8 For business combinations
that occurred prior to the date of transition to IFRS (for example, 1 January 2012 for
companies that adopt IFRS as of 31 December 2014), IFRS 1 allows the first-time adopter to
elect not to restate those prior business combinations to comply with IFRS 3R. The IASB
provided this exemption because it believed that retrospective application of IFRS 3R may
require the first-time adopter to recreate data that it did not capture at the date of the prior
business combination and to make subjective estimates about conditions that existed at that
date, which may reduce the relevance and reliability of the first-time adopters first IFRS
financial statements. But, if the first-time adopter elects to restate any pre-transition date
business combination, it must restate all later business combinations from that same date.
30
IFRS 3R is effective prospectively for business combinations with an acquisition date on or after the beginning of
the first annual reporting period beginning on or after July 1, 2009. Early application is permitted.
3.2.1
Effect of previous accounting
A first-time adopter that previously applied US GAAP would have originally accounted
for business combinations that occurred after 1 January 2012 in accordance with
Statement 141R. 9 While IFRS 3R and Statement 141R are substantially converged,10 a firsttime adopter should be aware that other differences may arise due to different accounting
requirements of other existing US GAAP-IFRS literature. However, if a first-time adopter elects
to restate some or all of its business combinations that took place prior to the entitys date of
transition, the entity may be restating business combinations previously accounted for in
accordance with Statement 141R (for business combinations occurring on or after 1 January
2009) or Statement 141 (for business combinations occurring prior to 1 January 2009). If a
first-time adopter elects to restate a prior business combination that was accounted for under
Statement 141, it should be aware that significant differences exist between Statement 141
and IFRS 3R that may result in significant adjustments to balances originally recorded in the
business combination transaction. Some of the more significant differences have been
summarized in the table below:
US GAAP Requirements
(Statement 141)
IFRS Requirements
(IFRS 3R)
Determining the
measurement date for the
market price of acquirers
marketable equity
securities issued as
purchase consideration
If certain criteria are met, a reasonable

Acquisition date (date on which the
period of time before and after the terms acquirer obtains control of the acquiree).
of the acquisition are agreed to and
announced (for fixed exchange ratios) or a
reasonable period of time before and after
the date of the last change in the
exchange ratio (for floating exchange
ratios). Otherwise, the acquisition date.
Contingent consideration
Generally recognized when the

contingency is resolved beyond a
reasonable doubt.
Recognized at fair value at the

acquisition date, with subsequent
changes in fair value generally reflected
in earnings.
Statement 141R is effective prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early
application is prohibited.
10
Differences do exist between Statement 141R and IFRS 3R such as the measurement of non-controlling interest
and the accounting for pre-acquisition contingencies. However, for non-controlling interest, because the
Statement 141R requirement of measuring non-controlling interest at fair value at the acquisition date is also
permitted under IFRS 3R (IFRS 3R also permits non-controlling interest to be measured at its proportionate
share of the fair value of the acquirees identifiable net assets, that is, not including goodwill), an adjustment
may not be necessary to comply with IFRS 3R.
31
US GAAP Requirements
(Statement 141)
Negative goodwill
IFRS Requirements
(IFRS 3R)
Allocated on a pro rata basis to reduce the After reassessing the assignment of the
carrying amount of certain acquired
consideration transferred, recognized
assets with any excess recognized as an
immediately as income.
extraordinary gain.
Acquired in-process
Determine fair value and expense
research and development immediately if no alternative future use.
Recognized as indefinite-lived intangible

asset separately from goodwill at their
acquisition date fair values.
Restructuring liabilities
Recognized only if the restructuring

relates to the acquired business and
certain conditions are met shortly after
the acquisition.
Recognized only if the criteria for liability

recognition have been met at the
acquiree level as of the acquisition date.
Acquisition of less than

100% of acquiree
Net identifiable assets of acquiree are

recognized partly at fair value (to the
extent of the acquirers ownership
interest) and partly at historical book
value (to the extent of the minoritys
ownership interest).
Minority interest is measured at its
proportionate share of the historical book
value of the acquirees net identifiable
assets.
Net identifiable assets of acquiree are

recognized at their full fair value.
Companies have a choice of measuring
noncontrolling interest at either fair
value including goodwill or at the
proportionate share of the fair value of
the acquirees net identifiable assets,
exclusive of goodwill.
Acquisition of minority
interest
Accounted for as a step acquisition using

the purchase method.
Not a business combination. Accounted

for as an equity transaction pursuant to
IAS 27R.
Control obtained in stages
Each stage is accounted for separately

with purchase price allocated
proportionately
Accounted for at fair value upon

achieving control. Gains or losses
recognized on holdings prior to control.
Combination of entities
under common control
Accounted for in a manner similar to a

pooling of interests (historical cost).
Outside the scope of IFRS 3R. In practice,

either follow an approach similar to
US GAAP or apply the acquisition method
if there is substance to the transaction.
The table above does not include differences in the income tax accounting consequences of
the business combination. The significant differences relate to (a) decreases in the acquirers
valuation allowance as a result of the business combination which are included in the
accounting for the transaction under Statement 141, whereas they are excluded under
IFRS 3R, and (b) reductions in valuation allowances and uncertain tax liabilities subsequent to
the acquisition are first applied to reduce goodwill and other intangible assets to zero under
Statement 141, whereas they are recognized in income under IFRS 3R.
32
3.2.2
First-time adopter elects to restate prior business combinations
Excerpt from Appendix C of IFRS 1

C1.
A first-time adopter may elect not to apply IFRS 3 (as amended in 2008)
retrospectively to past business combinations (business combinations that occurred
before the date of transition to IFRSs). However, if a first-time adopter restates any
business combination to comply with IFRS 3 (as amended in 2008), it shall restate all
later business combinations and shall also apply IAS 27 (as amended in 2008) from
that same date. For example, if a first-time adopter elects to restate a business
combination that occurred on 30 June 20X6, it shall restate all business combinations
that occurred between 30 June 20X6 and the date of transition to IFRSs, and it shall
also apply IAS 27 (amended 2008) from 30 June 20X6.
If a first-time adopter elects to restate any pre-transition date business combination to

comply with IFRS 3R, then it must restate all later business combinations and apply IAS 27R
from that same date. For example, if a first-time adopter with a 1 January 2012 date of
transition to IFRS elects to restate a business combination that occurred on 30 June 2010,
then it must restate all later business combinations, but it would not be required to restate
any business combinations that occurred prior to 30 June 2010. As previously discussed, as
a result of the IASBs and FASBs convergence efforts, the effects of restating for the
business combination transaction in this scenario may be insignificant. However, if the firsttime adopter were to restate for a business combination that occurred prior to the effective
date of Statement 141R, the consequences could be significant,see section 3.2.1 above.
3.2.3
First-time adopter elects to not restate prior business

combinations
When the first-time adopter elects to not restate any pre-transition date business
combination, the requirements of IFRS 1 may nonetheless result in adjustments to the
opening IFRS balance sheet. Specifically, when the first-time adopter applies the IFRS 1
exemption to a prior business combination:
The method of accounting for the prior business combination does not change;
The assets acquired and liabilities assumed and included in the opening IFRS balance
sheet must qualify for recognition under IFRS as of the date of transition to IFRS;
The acquisition-date amounts of assets acquired and liabilities assumed represent their
deemed cost under IFRS immediately after the business combination for purposes of
the post combination accounting;
The carrying amount of assets acquired and liabilities assumed but not recognized under
previous GAAP may not always be zero in the opening IFRS balance sheet; and
33
Any goodwill must be tested for impairment as of the transition date.

The measurement of noncontrolling interests and deferred tax must be adjusted for the
effects of the above.
As discussed previously, any adjustments to the first-time adopters opening IFRS balance
sheet resulting from the above items generally should be recorded as an adjustment to
retained earnings or, if appropriate, another category of equity, rather than an adjustment of
goodwill. See section 3.2.3.6 for the limited adjustments that affect goodwill.
3.2.3.1
Classification of prior business combinations does not change

C4.
If a first-time adopter does not apply IFRS 3 [as amended in 2008] retrospectively to a
past business combination, this has the following consequences for that business
combination:
(a) The first-time adopter shall keep the same classification (as an acquisition by the
legal acquirer, a reverse acquisition by the legal acquiree, or a uniting of interests)
as in its previous GAAP financial statements.
If a first-time adopter elects to not restate any pre-transition date business combination, the
method of accounting for those prior business combinations is not required to be reassessed
even if the previous method is not permitted under IFRS 3R. For example, if a first-time
adopter accounted for a prior business combination using the pooling of interests method,
even though the pooling of interests method is not permitted under IFRS 3R, the first-time
adopter would not be required to reclassify and account for that business combination using
the acquisition method under IFRS 3R.
In addition, we believe that the exemption in IFRS 1 applies to any pre-transition date
transaction that qualifies as a business combination under IFRS 3R, regardless of the firsttime adopters previous accounting treatment. In this regard, because the definition of a
business under IFRS 3R is relatively broad, it is possible that transactions prior to the date of
transition to IFRS that were accounted for as asset acquisitions under the previous GAAP
would qualify as business combinations under IFRS 3R. In such situations, a first-time adopter
may elect not to restate those pre-transition date asset acquisitions as a business
combination. If a first-time adopter elects to restate an asset acquisition that qualifies as a
business combination under IFRS 3R, then the first-time adopter must restate all later
business combinations from that same date and also apply IAS 27R from that same date.
34
3.2.3.2
Recognized assets acquired and liabilities assumed in a prior business

combination

C4.
combination:
(b) The first-time adopter shall recognise all its assets and liabilities at the date of
transition to IFRSs that were acquired or assumed in a past business combination,
other than:
(i)
some financial assets and financial liabilities derecognised in accordance with

previous GAAP (see paragraph B2); and
(ii) assets, including goodwill, and liabilities that were not recognised in the
acquirer's consolidated statement of financial position in accordance with
previous GAAP and also would not qualify for recognition in accordance with
IFRSs in the separate statement of financial position of the acquiree (see (f)-(i)
below).
The first-time adopter shall recognise any resulting change by adjusting retained
earnings (or, if appropriate, another category of equity), unless the change results
from the recognition of an intangible asset that was previously subsumed within
goodwill (see (g)(i) below).
(c) The first-time adopter shall exclude from its opening IFRS statement of financial
position any item recognised in accordance with previous GAAP that does not
qualify for recognition as an asset or liability under IFRSs. The first-time adopter
shall account for the resulting change as follows:
(i)
the first-time adopter may have classified a past business combination as an

acquisition and recognised as an intangible asset an item that does not qualify
for recognition as an asset in accordance with IAS 38 Intangible Assets. It
shall reclassify that item (and, if any, the related deferred tax and noncontrolling interests) as part of goodwill (unless it deducted goodwill directly
from equity in accordance with previous GAAP, see (g)(i) and (i) below)
(ii) the first-time adopter shall recognise all other resulting changes in retained
earnings.
All assets acquired and liabilities assumed in a business combination that was not restated
from the previous GAAP should be included in the opening IFRS balance sheet only if those
assets and liabilities qualify for recognition as of the transition date under the relevant IFRS
standards. Despite the fact that the entity elected to not restate pre-transition business
combinations, this requirement of IFRS 1 could result in the recognition or derecognition of
certain assets and liabilities associated with the business combination. The change resulting
35
from the recognition or derecognition of such assets and liabilities generally should be
accounted for as an adjustment to retained earnings. However, if the change results from the
recognition of an intangible asset that was previously subsumed in goodwill, it should be
accounted for as an adjustment to goodwill. See section 3.2.3.6 of this publication for a
further discussion.
For example, a first-time adopter that recognized a restructuring liability in a prior business
combination under previous GAAP must evaluate whether the restructuring liability qualifies
for recognition under IAS 37 as of the transition date. Also, the provisions of paragraph B2 of
IFRS 1 should be followed for certain financial assets acquired and financial liabilities
assumed in a business combination that were derecognized under US GAAP prior to the date
of transition to IFRS. See section 2.3 of this publication for a further discussion of
derecognition of financial assets and financial liabilities.
Example 3.2.3.2 Restructuring Liability
Fact Pattern
On 31 December 2008, Entity A, a US GAAP reporter, acquired 100% of the outstanding
shares of Target and accounted for the business combination using the purchase method
in accordance with Statement 141. In connection with the business combination, Entity A
announced a plan to close Targets headquarters facility. The headquarters facility is
leased under an operating lease and, as of 31 December 2008, seven years remain on the
lease. The lessor will not release Entity A from the lease agreement and will not permit it to
sublease the facility. In its purchase price allocation, Entity A recognized a restructuring
liability of $120,000, which was an amount equal to the present value of the remaining
lease payments (as all of the conditions in EITF 95-3 were met as of that date).
Entity A will become a first-time IFRS adopter and will present its first IFRS financial
statements as of and for the year ending 31 December 2014. As part of its conversion,
Entity A elects to use the IFRS 1 exemption relating to business combinations business
combinations prior to the date of transition (1 January 2012) will not be restated. At 1
January 2012, the amount of the restructuring liability under US GAAP was $80,000.
Analysis
Entity A would not restate the amounts originally recorded in connection with the business
combination as it has elected to use the voluntary exemption pertaining to business
combinations. However, in preparing its opening IFRS balance sheet as of 1 January 2012,
Entity A must evaluate whether the current restructuring liability of $80,000 qualifies for
recognition under IAS 37. If it does, the restructuring liability should be included in the
first-time adopters opening IFRS balance sheet, and measured in accordance with IAS 37.
Otherwise, the restructuring liability of $80,000 should be excluded from the first-time
adopters opening IFRS balance sheet with the offsetting amount being recorded as an
adjustment to retained earnings (before any adjustment for income taxes).
36
3.2.3.3
Subsequent measurement under IFRS not based on cost

C4.
combination:
(d) IFRSs require subsequent measurement of some assets and liabilities on a basis
that is not based on original cost, such as fair value. The first-time adopter shall
measure these assets and liabilities on that basis in its opening IFRS statement of
financial position, even if they were acquired or assumed in a past business
combination. It shall recognise any resulting change in the carrying amount by
adjusting retained earnings (or, if appropriate, another category of equity), rather
than goodwill.
As indicated below (IFRS 1, Appendix C4 (e)), IFRS 1 provides that immediately after the
business combination, the acquisition-date amounts allocated to the assets acquired and
liabilities assumed represent their deemed cost 11 for the purposes of applying the relevant
IFRS standards to such assets and liabilities post combination. However, when the relevant
IFRS standard requires or permits such assets and liabilities to be subsequently measured on
a basis other than original cost (for example, fair value), the deemed cost amounts will not be
relevant if that other basis is used for purposes of determining the carrying amounts of these
assets and liabilities in the opening IFRS balance sheet. That is, to the extent that the entity is
required to or intends to measure such assets and liabilities on a basis other than original cost
(as required or permitted in IFRS) the first-time adopter also must measure these assets and
liabilities on that other basis in its opening IFRS balance sheet. Any adjustment to the
carrying amount of those assets and liabilities should be recorded as an adjustment to
retained earnings or, if appropriate, another category of equity, rather than to goodwill.
Example 3.2.3.3 Subsequent Measurement of Acquired Investment Property
Fact Pattern
On 1 January 2010, Entity A, a US GAAP reporter, acquired 100% of the outstanding
shares of Target and accounted for the business combination using the acquisition method
in accordance with Statement 141R. Targets identifiable net assets included investment
property, which had a fair value of $10,000 and a remaining useful life of 40 years at the
acquisition date. Under US GAAP, the entity accounted for the investment property at cost
less accumulated depreciation. Therefore, the carrying amount of the investment property
was $9,500 as of 1 January 2012 (the date of transition to IFRS). The fair value of the
investment property was $11,000 as of 1 January 2012.
11
IFRS 1 defines the term deemed cost as an amount used as a surrogate for cost or depreciated cost at a
given date.
37
Analysis
as of and for the year ended 31 December 2014. IAS 40 allows the first-time adopter to
account for the investment property using either the cost model or the fair value model. If
the first-time adopter elects to use the fair value model, the carrying amount of the
investment property in its opening IFRS balance sheet as of 1 January 2012 must be
restated to its fair value ($11,000). The difference between the carrying amount of the
investment property under US GAAP and the fair value of the investment property under
IFRS ($1,500) would be recorded as an adjustment to retained earnings (before any
adjustment for income taxes). Conversely, if the first-time adopter elected to account for
investment property using the cost model under IAS 40, the carrying amount under
US GAAP as of the date of transition ($9,500) would become the carrying amount of the
investment property in Entity As opening IFRS balance sheet, assuming that the
depreciation policy followed under US GAAP from the date of acquisition to the opening
balance sheet date complied with IFRS.
3.2.3.4
Subsequent measurement under IFRS based on cost

C4.
combination:
(e) Immediately after the business combination, the carrying amount in accordance
with previous GAAP of assets acquired and liabilities assumed in that business
combination shall be their deemed cost in accordance with IFRSs at that date. If
IFRSs require a cost-based measurement of those assets and liabilities at a later
date, that deemed cost shall be the basis for cost-based depreciation or
amortisation from the date of the business combination.
IFRS 1 provides that, when a prior business combination is not restated under IFRS 3R at an
entitys date of transition to IFRS, immediately after the business combination, the
acquisition-date amounts assigned to the assets acquired and liabilities assumed represent
their deemed cost for the purposes of applying the relevant IFRS standards to such assets
and liabilities post combination. (As previously noted, IFRS 1 defines the term deemed cost
as an amount used as a surrogate for cost or depreciated cost at a given date.) For
example, if an entity completed a business acquisition as of 1 November 2008, the amounts
allocated to property, plant and equipment as part of the purchase price allocation becomes
the deemed cost of those assets as of 1 November 2008. The entity would then have to
apply IFRS compliant policies from that date forward to determine the assets carrying
amount as of the opening balance sheet date.
38
If the relevant IFRS standard requires a cost-based measurement for any of the assets
acquired or liabilities assumed, that deemed cost amount will be the basis for the
subsequent measurement of those assets and liabilities. As a result, if a first-time adopters
previous accounting policy also required a cost-based measurement, it is likely that the
carrying amount of those assets and liabilities as of the date of transition to IFRS would not
be adjusted. However, if the previous accounting policy (for example, the depreciation
method) did not comply with IFRS, the carrying amount of those assets would have to be
adjusted as of the opening balance sheet date, with the effect of any adjustment to the
carrying amount of those assets and liabilities recorded as an adjustment to retained earnings
rather than to goodwill.
Example 3.2.3.4a Subsequent Measurement of Acquired Equipment
Fact Pattern
On 1 January 2010, Entity A, a US GAAP reporter, acquired 100% of the outstanding shares
of Target and accounted for the business combination using the acquisition method in
accordance with Statement 141R. Targets identifiable net assets included equipment, which
had a fair value of $10,000 and a remaining useful life of 10 years at the acquisition date.
Under US GAAP, Entity A accounted for the equipment at cost less accumulated
depreciation. Therefore, the carrying amount of the equipment was $8,000 as of 1 January
2012 (the date of transition to IFRS). Entity A will become a first-time adopter and will
present its first IFRS financial statements as of and for the year ended 31 December 2014.
Analysis
IAS 16 allows a first-time adopter to determine whether it will subsequently account for
the equipment using either the cost model or the revaluation model. If Entity A elects to
use the cost model, then the fair value of the equipment as of the acquisition date of
$10,000 represents the deemed cost under IFRS for purposes of the post combination
accounting. Entity A would then apply an depreciation policy in accordance with IFRS from
the date of acquisition forward to determine the carrying amount of the equipment in the
opening balance sheet. (If Entity As previous depreciation policy complied with IFRS, this
amount would be the $8,000 already recognized in the US GAAP financial statements as
of the date of transition to IFRS.) Despite the provisions of Appendix C4 as indicated
above, Entity A may choose to apply the deemed cost election at the date of transition
with respects to this asset. See section 3.5 of this publication.
While IFRS 1 does not define immediately after a business combination, we believe that
deemed cost cannot be determined until the acquisition accounting is complete. That is, it
would not be appropriate to use any provisionally determined fair values of assets acquired
and liabilities assumed as deemed cost. The deemed cost of the assets and liabilities should
reflect the final assignment of the consideration transferred, even if the final assignment
process does not occur until after the transition date.
39
Example 3.2.3.4b Provisionally Determined Fair Values

Fact Pattern
On 1 August 2011, Entity A, a US GAAP reporter, acquired 100% of the outstanding
shares of Target and accounted for the business combination using the acquisition method
in accordance with Statement 141R. On that date, Entity A made a provisional assessment
of Targets identifiable net assets, which were reflected in the entitys consolidated
US GAAP financial statements as of 31 December 2011. During 2012, Entity A completed
the initial accounting for the business combination and, in accordance with Statement
141R, the adjustments to the provisional values and corresponding goodwill were pushed
back to the acquisition date.
Analysis
as of and for the year ended 31 December 2014. In preparing its opening IFRS balance
sheet as of 1 January 2012, for purposes of determining deemed cost, Entity A should use
the amounts assigned to the identifiable net assets at the end of the measurement period
(as opposed to the provisional values) as if the accounting for the business combination
had been completed at the acquisition date (1 August 2011) (Because Entity As US GAAP
financial statements as of 31 December 2011 would have been revised to reflect the
effect of the final balances at the end of the measurement period, an adjustment to the
carrying amounts of the assets acquired and liabilities assumed would not be required as of
the date of transition if Entity As US GAAP accounting policies for example, its fixed
asset depreciation policies complied with IFRS.)
Note: For prior business combinations that were accounted for under Statement 141, any
final adjustments to the provisional values and corresponding goodwill generally were
accounted for prospectively. Some of these final adjustments might have occurred several
months after the acquisition date and could have been recorded in different fiscal years.
IFRS 1 states that immediately after the business combination, the carrying amount
under previous GAAP of assets acquired and liabilities in that business combination shall
be their deemed cost under IFRS at that date. Therefore, we believe that a retrospective
adjustment would be necessary for any material adjustments to the provisional values that
were recorded after the acquisition date.
40
3.2.3.5
Assets acquired and liabilities assumed but not recognized in a prior business
combination

C4.
combination:
(f) If an asset acquired, or liability assumed, in a past business combination was not
recognised in accordance with previous GAAP, it does not have a deemed cost of
zero in the opening IFRS statement of financial position. Instead, the acquirer shall
recognise and measure it in its consolidated statement of financial position on the
basis that IFRSs would require in the statement of financial position of the
acquiree. To illustrate: if the acquirer had not, in accordance with its previous
GAAP, capitalised finance leases acquired in a past business combination, it shall
capitalise those leases in its consolidated financial statements, as IAS 17 Leases
would require the acquiree to do in its IFRS statement of financial position.
Similarly, if the acquirer had not, in accordance with its previous GAAP,
recognised a contingent liability that still exists at the date of transition to IFRSs,
the acquirer shall recognise that contingent liability at that date unless IAS 37
Provisions, Contingent Liabilities and Contingent Assets would prohibit its
recognition in the financial statements of the acquiree. Conversely, if an asset or
liability was subsumed in goodwill in accordance with previous GAAP but would
have been recognised separately under IFRS 3, that asset or liability remains in
goodwill unless IFRSs would require its recognition in the financial statements of
the acquiree.
IFRS 1 makes clear that when an asset acquired or a liability assumed was not recognized
under the entitys previous GAAP in a pre-transition date business combination, that asset or
liability should not be presumed to have a deemed cost of zero in the first-time adopters
opening IFRS balance sheet. Rather, an evaluation is required to assess whether an asset or
liability would be recognized under IFRS. The first-time adopter should recognize and
measure an asset acquired or liability assumed in its opening IFRS balance sheet if that asset
or liability qualifies for recognition in the balance sheet of the acquiree when applying the
relevant IFRS standards to such assets and liabilities as of the date of transition to IFRS.
Apart from unrecognized intangible assets that were previously subsumed in goodwill, any
changes resulting from the recognition of such assets and liabilities generally should be
recorded as an adjustment to retained earnings, rather than to goodwill. See section 3.2.3.6
below for a discussion of unrecognized intangible assets that were previously subsumed in
goodwill in the prior business combination. We believe it would be rare for an entity that
previously reported under US GAAP to recognize in its opening IFRS balance sheet an asset
acquired or liability assumed that was previously not recognized under US GAAP.
41
3.2.3.6
Evaluation of goodwill

C4.
If a first-time adopter does not apply IFRS 3 retrospectively to a past business

combination, this has the following consequences for that business combination:
(g) The carrying amount of goodwill in the opening IFRS statement of financial
position shall be its carrying amount in accordance with previous GAAP at the date
of transition to IFRSs, after the following two adjustments:
(i)
If required by (c)(i) above, the first-time adopter shall increase the carrying
amount of goodwill when it reclassifies an item that it recognised as an
intangible asset in accordance with previous GAAP. Similarly, if (f) above
requires the first-time adopter to recognise an intangible asset that was
subsumed in recognised goodwill in accordance with previous GAAP, the firsttime adopter shall decrease the carrying amount of goodwill accordingly (and,
if applicable, adjust deferred tax and non-controlling interests).
(ii) Regardless of whether there is any indication that the goodwill may be
impaired, the first-time adopter shall apply IAS 36 in testing the goodwill for
impairment at the date of transition to IFRSs and in recognising any resulting
impairment loss in retained earnings (or, if so required by IAS 36, in
revaluation surplus). The impairment test shall be based on conditions at the
date of transition to IFRSs.
(h) No other adjustments shall be made to the carrying amount of goodwill at the date
of transition to IFRSs. For example, the first-time adopter shall not restate the
carrying amount of goodwill:
(i)
to exclude in process research and development acquired in that business

combination (unless the related intangible asset would qualify for recognition
in accordance with IAS 38 in the statement of financial position of the
acquiree);
(ii) to adjust previous amortisation of goodwill;

(ii) to reverse adjustments to goodwill that IFRS 3 would not permit, but were
made in accordance with previous GAAP because of adjustments to assets
and liabilities between the date of the business combination and the date of
(i)
If the first-time adopter recognised goodwill in accordance with previous GAAP as

a deduction from equity:
(i)
it shall not recognise that goodwill in its opening IFRS statement of financial
position. Furthermore, it shall not reclassify that goodwill to profit or loss if it
disposes of the subsidiary or if the investment in the subsidiary becomes
impaired.
(ii) adjustments resulting from the subsequent resolution of a contingency

affecting the purchase consideration shall be recognised in retained earnings.
42
Under IFRS 1, the effect of most adjustments to assets and liabilities in the first-time
adopters opening IFRS balance sheet are reflected in retained earnings. However, IFRS 1
requires certain limited adjustments to be recorded against goodwill, as described below.
However, as the accounting for the acquisition of intangible assets in a business combination
under IFRS 3R is generally consistent with Statement 141 and Statement 141R, we believe
adjustments to goodwill resulting from the reclassification of intangible assets as summarized
in the first two bullets should be rare.
Increasing goodwill by reclassifying acquired intangible assets to goodwill: A first-time

adopter should exclude from its opening IFRS balance sheet any intangible asset acquired
in a prior business combination that does not qualify for recognition when applying IAS 38
as of the date of transition to IFRS. (The first-time adopter should apply the provisions of
IAS 38 that relate to the acquisition of intangible assets as part of a business combination.
This ensures that any previously recognized intangible asset that would not qualify for
recognition separate from the business combination (for example, an internally generated
intangible asset) is not derecognized as of the transition date.) Any change in classification
should be accounted for prospectively. Therefore, the first-time adopter should not, for
example, reverse any prior amortization expense. In our view, for entities that previously
applied US GAAP it would be rare that an intangible asset previously recognized would not
qualify for recognition under IAS 38 as of the date of transition to IFRS.
Decreasing goodwill by reclassifying acquired intangible assets subsumed in goodwill: When
an acquired intangible asset was not separately recognized under previous GAAP in a prior
business combination but rather subsumed in goodwill, if that intangible asset qualifies for
recognition in the balance sheet (based on the principles of IAS 38) as of the date of
transition to IFRS, the first-time adopter should recognize the intangible asset separately
from goodwill if that intangible asset qualifies for recognition in the balance sheet of the
acquiree when applying IAS 38 as of the transition date. In our view, for entities that
previously applied US GAAP it should be rare that an intangible asset not previously
recognized will qualify for recognition as of the date of transition to IFRS because either (1)
the intangible asset does not meet the requirements for capitalization in IAS 38, or (2)
capitalization would require the use of hindsight, which is not permitted under IAS 38.
Impairing goodwill, if necessary, by performing a goodwill impairment test as of the date
of transition to IFRS: Regardless of whether there is any indication that the goodwill may
be impaired, the first-time adopter must perform a goodwill impairment test in
accordance with IAS 36 as of the date of transition to IFRS and recognize any resulting
impairment loss in retained earnings. The remaining goodwill balance will be subsequently
accounted for in accordance with IAS 36.
The estimates used to determine whether a first-time adopter recognizes an impairment
loss or provision at the date of transition to IFRS should be consistent with any
impairment estimates made under US GAAP as of the transition date, unless there is
43
objective evidence that those estimates were in error. If a first-time adopter needs to
make estimates as of the date of transition to IFRS that were not necessary under
US GAAP, those estimates and assumptions should reflect conditions that existed as of
the date of transition to IFRS and should not reflect conditions that arose thereafter.
This requirement may be significant for companies converting from US GAAP because of
the significant differences in the impairment model between Statement 142 and IAS 36.
One of those significant differences is the level to which goodwill must be allocated, and
therefore, the level at which the impairment test is carried out. While Statement 142
requires the allocation of goodwill at the reporting unit level (which is defined as the
operating segment or one level below), IAS 36 requires that goodwill be allocated, for
purposes of impairment testing, to the acquirers cash generating unit (CGUs) or group
of CGUs that are expected to benefit from the synergies of the combination. Under
IAS 36, CGUs represent the lowest level within the entity at which goodwill is monitored
for internal management purposes and should not be larger than an operating segment as
defined in IFRS 8. Therefore, the level at which goodwill is allocated for impairment
testing under IFRS could be different than the reporting unit level at which goodwill is
allocated under US GAAP. For example, a first-time adopter with a number of divisions
may have grouped those divisions together under US GAAP for purposes of goodwill
allocation and consideration of impairment, but under IFRS it may, depending on facts
and circumstances, be required to allocate goodwill to each division individually and
perform the impairment analysis at the individual division level.
Another significant difference relates to the method for calculating impairment. IAS 36
requires a one-step approach whereby companies must compare the carrying amount of
the CGU or group of CGUs (including goodwill) with its recoverable amount. On the other
hand, Statement 142 requires a two-step approach whereby companies must first
compare the reporting units carrying amount to its fair value and then, if necessary, the
carrying amount of the goodwill to its implied fair value.
Although IFRS 1 specifically prohibits adjustments to goodwill other than those listed above
and although a first-time adopter would not be permitted to reinstate goodwill that was
written off under the previous GAAP, there nonetheless may be differences between the
goodwill amount in the opening IFRS balance sheet and that in the financial statements under
previous GAAP. These differences could arise because:
44
goodwill may have to be restated as a result of a retrospective application of IAS 21 (see

section 3.2.3.7);
goodwill in relation to previously unconsolidated subsidiaries will have to be recognized
(see section 3.10.1);
goodwill in relation to transactions that do not qualify as business combination under IFRS
must be derecognized (it would be rare for a transaction to qualify as a business
combination under US GAAP and not qualify as a business combination under IFRS); and
negative goodwill that may have been included within goodwill under previous GAAP
should be derecognized under IFRS (note that prior to the adoption of Statement 141(R),
the recognition of negative goodwill on the balance sheet would be rare (for example,
mutual entity)).
Although IFRS 1 does not specifically address accounting for negative goodwill recognized
under a previous GAAP, negative goodwill should be derecognized by a first-time adopter
because it is not permitted to recognize liabilities if IFRS do not permit such recognition.
Negative goodwill does not meet the definition of a liability under the IASBs Framework for
the Preparation and Presentation of Financial Statements and its recognition is not permitted
under IFRS 3R.
3.2.3.7
Currency adjustments to goodwill

C2.
An entity need not apply IAS 21 The Effects of Changes in Foreign Exchange Rates
retrospectively to fair value adjustments and goodwill arising in business combinations
that occurred before the date of transition to IFRSs. If the entity does not apply IAS 21
retrospectively to those fair value adjustments and goodwill, it shall treat them as
assets and liabilities of the entity rather than as assets and liabilities of the acquiree.
Therefore, those goodwill and fair value adjustments either are already expressed in
the entity's functional currency or are non-monetary foreign currency items, which are
reported using the exchange rate applied in accordance with previous GAAP.
C3.
An entity may apply IAS 21 retrospectively to fair value adjustments and goodwill
arising in either:
(a) all business combinations that occurred before the date of transition to IFRSs; or
(b) all business combinations that the entity elects to restate to comply with IFRS 3,
as permitted by paragraph C1 above
IAS 21 requires that any goodwill arising on the acquisition of a foreign operation and any
fair value adjustments to the carrying amounts of assets and liabilities arising on the
acquisition of that foreign operation should be treated as assets and liabilities of the foreign
operation. For a first-time adopter it may be impracticable, especially after a corporate
restructuring, to determine retrospectively the currency in which goodwill and fair value
adjustments should be expressed. Consequently, under IFRS 1 a first-time adopter need not
apply this requirement of IAS 21 retrospectively. If IAS 21 is not applied retrospectively, a
first-time adopter should treat such fair value adjustments and goodwill as assets and
liabilities of the entity, rather than as assets and liabilities of the foreign operations. As a
result of this difference, any required adjustments to goodwill and fair value either are
already expressed in the entity's functional currency or are non-monetary foreign currency
items, which are reported using the exchange rate applied under previous GAAP.
45
However, a first-time adopter may apply IAS 21 retrospectively to fair value adjustments and
goodwill arising in either all business combinations that occurred before the date of transition
to IFRSs or all business combinations that the entity elects to restate to comply with IFRS 3R.
Given the practical difficulties associated with this, we do not anticipate many entities will
elect to this approach.
The decision to treat goodwill and fair value adjustments as either items denominated in the
parent's or the acquiree's functional currency also will affect the extent to which the net
investment in those foreign subsidiaries can be hedged. Goodwill or fair value adjustments
that are deemed denominated in the Parents functional currency cannot be hedged by the
Parent, as they are not subject to exchange rate variability for accounting purposes.
Since US GAAP and IFRS are quite similar in their approach to foreign currency translation, a
US reporter likely would not need to apply these accommodations.
3.2.4
Other issues
3.2.4.1
Contingent consideration
A first-time adopter may have an obligation to deliver cash, additional equity interests, or
other assets to former owners of an acquired business after the acquisition date if certain
specified events occur or conditions are met in the future. Under IFRS 3R, such contingent
consideration is accounted for as a liability or as equity in accordance with IAS 32 or other
applicable IFRS (for example, IAS 37 or IAS 39). If a first-time adopter elects not to restate a
pre-transition date business combination, it may still need to adjust its opening IFRS balance
sheet for any contingent consideration arrangements outstanding as of that date. However,
the entitys previous accounting for the contingent consideration likely will affect how the
entity reflects adjustments to its opening IFRS balance sheet.
Prior business combination accounted for under Statement 141R
For prior business combinations that were accounted for under Statement 141R, contingent
consideration obligations that are an element of the consideration transferred are recognized
at fair value as of the acquisition date. Further, the initial classification of the contingent
consideration as a liability or as equity is based on other US GAAP literature. A first-time
adopter must determine whether the classification of the contingent consideration
arrangement under US GAAP is consistent with the classification that would be required by
IAS 32 or other applicable IFRSs (for example, IAS 37 or IAS 39) as of the date of transition
to IFRS.
If the first-time adopter were required to reclassify the contingent consideration arrangement
from equity to a liability, the carrying amount of the liability that would be reflected in the
entitys opening IFRS balance sheet should be based on the fair value of the liability if the
liability is a financial instrument and is within the scope of IAS 39. Otherwise, the carrying
amount of the liability should be based on the measurement guidance in IAS 37 or other
46
IFRSs, as appropriate. Any difference between the carrying amount of the equity under
US GAAP and the carrying amount of the liability under IFRS should be recorded as an
adjustment to retained earnings. All subsequent changes (after the date of transition) in the
carrying amount of the liability, based on the appropriate measurement guidance in IAS 39,
should be recognized in the income statement.
In the unlikely event that the first-time adopter is required to reclassify contingent
consideration arrangement from a liability to equity, the carrying amount of the equity that is
reflected in the first-time adopters opening IFRS balance sheet should be based on the
carrying amount that would have been recorded as of the acquisition date under IFRS 3R.
Any difference between the carrying amount of the liability under US GAAP (as of the
transition date) and the carrying amount of the equity under IFRS (determined as of the
acquisition date) should be recorded as an adjustment to retained earnings.
Prior business combinations accounted for under Statement 141
For prior business combinations that were accounted for under Statement 141, contingent
consideration obligations were not recognized until the outcome was resolved beyond a
reasonable doubt. Therefore, if a contingent consideration arrangement was not resolved
beyond a reasonable doubt as of the date of transition to IFRS (and therefore, no obligation
was recognized), a first-time adopter must determine whether a liability should be recognized
based on the guidance in IAS 32, IAS 37 or other applicable IFRSs. Because IFRS 1 does not
permit any adjustments to goodwill other than those previously discussed, any recognition of
a liability as of the date of transition to IFRS should be recorded as an adjustment to retained
earnings, rather than to goodwill. This is the case even though Statement 141 would have
required the subsequent recognition of the contingent consideration obligation to be
recorded as an adjustment to goodwill. Adjusting retained earnings rather than goodwill also
is consistent with the requirements of IFRS 3R. That Standard does not permit subsequent
changes in the fair value of a contingent consideration obligation to be recorded as an
adjustment to goodwill, unless the changes result from new information obtained within the
measurement period about facts and circumstances that existed at the acquisition date.
Example 3.2.4.1 Contingent Consideration
Fact Pattern
On 1 January 2008, Entity A acquired 100% of the outstanding shares of Target and
accounted for the business combination in accordance with Statement 141. Also, pursuant
to the contractual terms of the purchase agreement, Entity A is required to make an
additional cash payment of $1 million to the former owners of Target on 1 January 2013 if
Target achieved sales of $100 million in 2012. Entity A will become a first-time adopter and
will present its first IFRS financial statements as of and for the year ended 31 December
2014. As of 1 January 2012 (that is, the date of transition to IFRS), the outcome of the
contingency was uncertain and, therefore, the amount of the contingent consideration that
was reflected in the first-time adopters US GAAP financial statements was $0.
47
Analysis
In preparing its opening IFRS balance sheet as of 1 January 2012, the first-time adopter must
determine whether the contingent consideration arrangement would meet the definition of a
liability under IAS 32, IAS 37 or other applicable IFRSs. Because the contingent consideration
arrangement meets the definition of a financial liability under IAS 32, the carrying amount of
the liability that is reflected in the opening IFRS balance sheet should be based on the fair
value of the liability since the liability is a financial instrument and is within the scope of IAS
39. Any difference between the carrying amount (fair value) of the liability and $0 should be
recorded as an adjustment to retained earnings (before any adjustment for income taxes).
The first-time adopter must then determine whether the liability will be subsequently
accounted either at fair value or at amortized cost under IAS 39.
3.2.4.2
Acquisition of non-controlling interest

B7.
A first-time adopter shall apply the following requirements of IAS 27 (as amended in
2008) prospectively from the date of transition to IFRSs:
(a) the requirement in paragraph 28 that total comprehensive income is attributed to
the owners of the parent and to the non-controlling interests even if this results in
the non-controlling interests having a deficit balance;
(b) the requirements in paragraphs 30 and 31 for accounting for changes in the
parent's ownership interest in a subsidiary that do not result in a loss of control;
and
(c) the requirements in paragraphs 34-37 for accounting for a loss of control over a
subsidiary, and the related requirements of paragraph 8A of IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations.
However, if a first-time adopter elects to apply IFRS 3 (as revised in 2008)
retrospectively to past business combinations, it also shall apply IAS 27 (as
amended in 2008) in accordance with paragraph C1 of this IFRS.
IAS 27R requires increases in a parents ownership interest in a subsidiary without a loss of
control to be accounted for as an equity transaction. IFRS 1 specifies that, among other
things, a first-time adopter should apply this requirement of IAS 27R prospectively from the
date of transition to IFRS. A first-time adopter that previously reported under US GAAP would
likely have originally accounted for such transactions in accordance with Statement 160. 12
Because IAS 27R and Statement 160 both require such transactions to be accounted for as
equity transactions, we would not expect any changes to the first-time adopters historical
accounting treatment of accounting for noncontrolling interests under US GAAP.
12
48
Statement 160 is effective for the first annual reporting period beginning on or after December 15, 2008. Earlier
application is prohibited.
A first-time adopter is prohibited from restating transactions with noncontrolling interests

that took place prior to the date of transition to IFRS, unless the first-time adopter elected to
restate business combinations that took place prior to the transition date. If the first-time
adopter elected to restate business combinations that occurred prior to the transition date, it
must also apply IAS 27R from that date. Otherwise, a first-time adopters historical
accounting is not adjusted, regardless of whether the transaction was accounted for as an
equity transaction under Statement 160 (for acquisitions of non-controlling interest on or
after 1 January 2009) or as a step acquisition under Statement 141 (for acquisitions of noncontrolling interest prior to 1 January 2009).
3.2.5
Acquisitions of investments in associates and of interests in

joint ventures

C5.
The exemption for past business combinations also applies to past acquisitions of
investments in associates and of interests in joint ventures. Furthermore, the date
selected for paragraph C1 applies equally for all such acquisitions.
If a first-time adopter elects to restate prior business combinations, the date of the earliest
restatement also applies to the subsequent acquisitions of associates and interests in joint
ventures. That is, the first-time adopter must restate all subsequent acquisitions of
investments in associates and interests in joint ventures to comply with IAS 28 and IAS 31
consistent with the date from which it elected to restate prior business combinations. In
addition, all the discussions in this section on the application of the business combination
exemptions also apply to the accounting for investments in associates and for interests in
joint ventures.
3.3
Share-based payment transactions
Excerpt from Appendix D of IFRS 1

D2.
A first-time adopter is encouraged, but not required, to apply IFRS 2 Share-based

Payment to equity instruments that were granted on or before 7 November 2002. A
first-time adopter is also encouraged, but not required, to apply IFRS 2 to equity
instruments that were granted after 7 November 2002 and vested before the later of
(a) the date of transition to IFRSs and (b) 1 January 2005. However, if a first-time
adopter elects to apply IFRS 2 to such equity instruments, it may do so only if the
entity has disclosed publicly the fair value of those equity instruments, determined at
the measurement date, as defined in IFRS 2. For all grants of equity instruments to
which IFRS 2 has not been applied (eg equity instruments granted on or before 7
November 2002), a first-time adopter shall nevertheless disclose the information
required by paragraphs 44 and 45 of IFRS 2. If a first-time adopter modifies the terms
or conditions of a grant of equity instruments to which IFRS 2 has not been applied,
the entity is not required to apply paragraphs 26-29 of IFRS 2 if the modification
occurred before the date of transition to IFRSs.
49
D3.
A first-time adopter is encouraged, but not required, to apply IFRS 2 to liabilities

arising from share-based payment transactions that were settled before the date of
transition to IFRSs. A first-time adopter is also encouraged, but not required, to apply
IFRS 2 to liabilities that were settled before 1 January 2005. For liabilities to which
IFRS 2 is applied, a first-time adopter is not required to restate comparative
information to the extent that the information relates to a period or date that is earlier
than 7 November 2002.
Although the transitional rules for first-time adopters are based on the transitional provisions
within IFRS 2, which are described below, the IASB specifically added the following
exemptions to IFRS 1 for first-time adopters:
a first-time adopter is encouraged, but not required to apply IFRS 2 to equity instruments
that were granted after 7 November 2002 but that vested before the date of transition to
IFRS; and
a first-time adopter is encouraged, but not required to apply IFRS 2 to liabilities arising
from cash-settled share-based payment transactions if those liabilities were settled before
1 January 2005 or before the date of transition to IFRS.
IFRS 2 states the following regarding the transitional provisions:
50
for equity-settled share-based payment transactions, the entity shall apply this IFRS to
grants of shares, share options or other equity instruments that were granted after 7
November 2002 and had not yet vested at the effective date of this IFRS;
the entity is encouraged, but not required, to apply this IFRS to other grants of equity
instruments if the entity has disclosed publicly the fair value of those equity instruments,
determined at the measurement date;
for all grants of equity instruments to which this IFRS is applied, the entity shall restate
comparative information and, when applicable, adjust the opening balance of retained
earnings for the earliest period presented;
for all grants of equity instruments to which this IFRS has not been applied (for example,
equity instruments granted on or before 7 November 2002), the entity shall nevertheless
disclose the information required by IFRS 2 paragraphs 44 and 45;
if, after the IFRS becomes effective, an entity modifies the terms or conditions of a grant
of equity instruments to which this IFRS has not been applied, the entity shall
nevertheless apply IFRS 2 paragraphs 26-29 to account for any such modifications; and
for liabilities arising from share-based payment transactions existing at the effective
date of this IFRS, the entity shall apply the IFRS retrospectively. For these liabilities, the
entity shall restate comparative information, including adjusting the opening balance of
retained earnings in the earliest period presented for which comparative information has
been restated.
3.3.1

As a result of applying the exemptions noted above, a first-time adopter will only have to apply
the provisions of IFRS 2 to all outstanding equity instruments that are unvested and liabilities
that have not been settled prior to the date of transition to IFRS (or 1 January 2012,
assuming a 31 December 2014 first reporting date). Therefore, a first-time adopter that elects
to apply these exemptions will not restate the effects of applying Statement 123(R) to all
equity instruments that have vested and liability awards that have settled prior to the
transition date of IFRS.
Given that entities that reported under US GAAP were required to adopt a fair value approach
to accounting for share-based payment transactions beginning in 2005, 13 it is unlikely that
first-time adopters will have many, if any, unvested share-based payment arrangements that
are not already being accounted for under a fair value approach. Because the fair value
measurement requirements in IFRS 2 and Statement 123(R) are very similar, we would not
expect the effect of applying the requirements to IFRS 2 to the unvested share-based
payment transactions to be significant. However, the entity should be aware that there are
certain differences between IFRS 2 and Statement 123(R) that may affect the opening
balance sheet and future accounting for the entitys share-based payment transactions.
Some of the more significant differences are discussed below.
3.3.1.1
Measurement and recognition of expense awards with graded vesting

features
An entity may make share-based payments that vest in installments (referred to as graded
vesting). For example, an entity might grant an employee 1,000 options, which vest 20
percent, 20 percent, 30 percent and 30 percent in years one, two, three and four,
respectively. Under Statement 123(R) an entity may elect either the accelerated recognition
method (that is, each installment is accounted for separately) or a straight-line recognition
method for an award with only service conditions that has a graded vesting schedule.
IFRS 2 does not provide an entity the option to use a straight-line recognition method for
awards with a graded vesting schedule. Each installment is required to be treated as a
separate share option grant. Therefore, first-time adopters that have elected the straight-line
recognition method under Statement 123(R) will need to apply this accelerated recognition
method to all unvested share-based payment awards as of the date of transition to IFRS. This
application could result in the acceleration of compensation cost from what had been
originally reported. Any difference is recorded as an adjustment to either additional paid in
capital (for equity awards) or liabilities (for liability-classified awards), with the offsetting
amount recognized in retained earnings.
13
Statement 123(R) was effective for fiscal years beginning after June 15, 2005 for public companies.
51
In addition, since a graded vesting award has different vesting periods, IFRS 2 requires a
different fair value measure for each installment. First-time adopters that determined a single
fair value for the award as a whole (rather than separate fair values for each vesting tranche)
will be required to remeasure each tranche of a share-based payment award with graded
vesting. In remeasuring the fair value, the entity should use similar inputs (for example,
volatility, risk-free rate, dividend yield) in the fair value calculation as were used when the
initial fair value calculation was performed, unless there is objective evidence that
demonstrates such inputs were erroneous.
Example 3.3.1.1 Application of the accelerated recognition method
Fact Pattern
Entity A awards 1,000 share options on 1 January 2009 that vest according to a graded
schedule of 20 percent for the first year of service (200 share options), 20 percent for the
second year (200 share options), 30 percent for the third year (300 share options) and
30 percent for the fourth year (300 share options). Under its previous accounting, Entity A
used the straight-line recognition method. Based on a grant date fair value of $8
(determined using a single fair value determination for the award as a whole), the total
award fair value of $8,000 ($8 x 1,000) was being recognized ratably over four years
($2,000 per year). Entity A will become a first-time adopter and will present its first IFRS
financial statements as of and for the year ended 31 December 2014.
Analysis
Since Entity A originally determined the fair value for the award as a whole, it would first
have to determine the grant date fair value of each tranche of the award (based on
information that was applicable at the date of grant). Based on Entity As revised fair value
estimate, the grant date fair value of each separate vesting tranche is $1,521, $1,600,
$2,475 and $2,520 for year one, two, three and four, respectively. (Note, based on the
revised fair value estimate, the total fair value of the award is now $8,116 rather than the
original $8,000 fair value estimate.)The compensation cost is recognized for each tranche
as follows:
2009
52
2010
2011
2012
Share options vesting in 2009
$1,521
$ 800
$ 800
$ 825
$ 825
$ 825
$ 630
$ 630
$ 630
$ 630
Cost for the year
$3,776
$2,255
$1,455
$ 630
Cumulative cost
$3,776
$6,031
$7,486
$8,116
In preparing its opening IFRS balance sheet as of 1 January 2012 (that is, the date of
transition), the first-time adopter will determine the unvested portion of share-based
payment awards. In this example, as of 1 January 2012, only 25% of the fourth tranche
remains unvested. All other compensation cost associated with the awards, or $7,486
($8,116 total compensation cost less the $630 associated with the unvested options)
must be recognized as of the opening balance sheet date under IFRS 2. The first-time
adopter had previously recognized $6,000 of compensation cost over three of the four
years using the straight-line recognition method. As a result, the first-time adopter will
record a $1,486 cumulative effect adjustment to retained earnings in the opening IFRS
balance sheet. The remaining $630 of unrecognized compensation cost will be recognized
during 2012 as year four compensation cost.
3.3.1.2
Modification of vesting terms
Both IFRS and US GAAP require that a modification of an equity instruments vesting terms
affect the amount of total compensation cost to be recognized. However, the modification to
a vesting condition when the award was not expected to vest at the modification date
pursuant to the original terms is treated differently under the two GAAPs. Under US GAAP,
since achievement of the original vesting condition is not probable at the modification date,
the original grant-date fair value is no longer used to measure compensation cost for the
award. By contrast, IFRS 2 treats modifications of awards that, at the modification date, are
probable of vesting and those that are not probable of vesting in the same way.
An example demonstrating the difference in accounting treatment is the modification of an
award with a performance condition that is not probable of vesting at the modification date.
Under Statement 123(R), if the modified award is not probable of vesting at the modification
date, then the final measurement of compensation cost will be based on the fair value of the
new award at the modification date. The grant-date fair value of the original award will no
longer be relevant since the original award is not probable of vesting at the modification date.
Under IFRS 2, the grant-date fair value of the award will continue to be recognized together
with any incremental fair value resulting from the modification. The fact that the original
award is not probable of vesting at the modification date does not factor into the final
measure of the compensation cost.
A first-time adopter will need to re-assess the accounting for any unvested awards (which
previously had been modified and accounted for under Statement 123(R)) as of its date of
transition to IFRS to assure compliance with IFRS 2 by determining the original awards fair
value immediately before the modification. Under IFRS 2, to the extent the fair value of the
modified award exceeds the fair value of the original award immediately before the
modification, that excess (the incremental fair value) along with the original awards grantdate fair value is recognized as compensation cost over the awards remaining vesting period.
If the vesting period was extended as a part of the modification, the incremental fair value, if
any, would be recognized over the new service period, and the grant date fair value of the
original award would continue to be recognized over the remainder of the original vesting
53
period. Any differences between the cumulative compensation costs recognized for unvested
awards at the date of transition to IFRS previously recognized in accordance with
Statement 123(R) compared with the cost that would have been recognized under IFRS 2 is
recognized as an adjustment to additional paid in capital, with the offsetting adjustment
recorded in retained earnings.
3.3.1.3
Equity repurchase features
Under US GAAP, equity instruments issued under share-based payment arrangements that
contain a cash repurchase feature at fair value at the employees election are not classified
as liabilities as long as the employee retains the risks and rewards of share ownership for a
reasonable period of time (that is, at least six months). However, IFRS 2 requires all instruments
with cash repurchase features at the employees election to be treated as liabilities. Similar
to US GAAP, liability awards must be remeasured at fair value at each reporting date until
settled. (IFRS 2 does not provide the option, which is provided under US GAAP, for nonpublic
entities to account for liability awards using the intrinsic-value method.)
Equity instruments that contain a cash repurchase feature that were settled as of the date
of transition to IFRS do not need to be accounted for as liabilities upon conversion to IFRS.
However, to the extent that such instruments have not been settled as of the date of
transition to IFRS, they should be accounted for as liabilities at the date of transition and
prospectively from that date.
Example 3.3.1.3 Equity repurchase feature
Fact Pattern
An entity, which is a US GAAP reporter, grants 1,000 at-the-money share options to its
employees on 1 January 2010. The award provides the employee the right to put the
underlying shares to Entity A for cash equal to the fair value of the shares on the put date.
The put cannot be exercised until six months after share option exercise. The fair value of
the share options at the date of grant is $12,000 and the share options are subject to cliff
vesting on 31 December 2012. The share options are exercised on 1 January 2013, and
the shares are redeemed on 1 August 2013.
Since the exercise price for the put is the fair value of the shares on the put date and the
put cannot be exercised less than six months after exercising the option, under Statement
123(R) the share options have been classified as equity. (Note: for public companies, the
share options would be classified outside of permanent equity in accordance with ASR 268
and related guidance. The accounting for instruments classified outside permanent equity
upon transition to IFRS is not the subject of this example.) The entity has been recognizing
a debit to compensation cost and a credit to additional paid-in capital of $4,000 in each of
the three years to reflect the compensation cost measured based on the grant date fair
value, recognized over the three year vesting period. The entity has a calendar year-end
and is transitioning to IFRS 1 January 2012.
54
Analysis
Under IFRS 2, since the share options have a repurchase feature and have not been settled
as of the date of transition to IFRS, they are classified as liabilities.
The fair value of the liability as of the opening IFRS balance sheet date of 1 January 2012
is $18,000. The pro rata portion of the liability must be recognized in the opening IFRS
balance sheet based on the amount of employee service that has been provided at the
transition date. As of the transition date (1 January 2012), the entity has recognized
$8,000 of compensation cost and an offset to additional paid-in capital ($12,000 x 2/3) in
its US GAAP financial statements. Upon transition to IFRS, the $8,000 in additional paid-in
capital is reclassified to share-based compensation liability. The additional $4,000 needed
to record the liability in the opening balance sheet based on the fair value of the liability as
of the date of transition ($18,000*(2/3) - $8,000) is reflected as an adjustment to
retained earnings.
The fair value of the liability award must be remeasured each reporting date until settled
on 1 August 2013 with any changes in the fair value reflected in the income statement in
the period they occur.
3.3.1.4
Deferred taxes
Similar to US GAAP, IFRS requires a company to record deferred taxes on certain sharebased payment arrangements. However, the methodology under which deferred taxes are
calculated is significantly different under the two GAAPs (see below). IFRS 1 requires full
retrospective application of the provisions in IAS 12 for determining the deferred taxes as if
IAS 12 had always been the governing standard, regardless of whether the share-based
payment arrangements have been accounted for in accordance with IFRS 2. A first-time
adopter will need to recalculate its deferred tax assets related to share-based payment
arrangements in the opening IFRS balance sheet.
A deferred tax asset should be established in accordance with IAS 12 for share-based
payment arrangements that are expected to result in a tax deduction and that are
outstanding and unexercised at the transition date, including those not accounted for under
IFRS 2 as a result of the exemptions discussed above. For example, consider a calendar yearend entity that previously accounted for its share-based payments in accordance with
Statement 123(R). The entity adopts IFRS as of 31 December 2014 and elects to apply both
of the voluntary exemptions related to share-based payments that is, it applies the
provisions of IFRS 2 only to outstanding equity instruments that are unvested and to liabilities
that have not been settled as of the date of transition (1 January 2012). However, IAS 12
should be applied to all outstanding, unexercised share-based payment arrangements as of 1
January 2012 (the first-time adopters date of transition), even though the compensation
cost for those awards was not recognized in accordance with IFRS 2.
55
The methodology for calculating deferred tax assets for share-based payment arrangements
under US GAAP and IFRS differs significantly, including how the deferred tax benefit itself is
calculated and the timing and amount (in certain circumstances) of income tax expense
recognized in the statement of income. Under US GAAP, the deferred tax benefit of a sharebased payment arrangement, and the related deferred tax asset, is calculated based on the
cumulative compensation cost recognized and is trued-up or down upon realization of the tax
benefit. A tax benefit is generally measured as the intrinsic value on the date of exercise (for
a share option) or the vesting date (for a share award), multiplied by the reporting entitys tax
rate. If the tax benefit exceeds the deferred tax asset, the excess (windfall benefit) is
credited directly to shareholder equity. These increases to additional paid-in capital are
accumulated into a pool of excess tax benefits (known as the APIC pool). A shortfall of
the tax benefit below the deferred tax asset is charged to shareholder equity to the extent of
prior windfall benefits (that is, an APIC pool exists) and to tax expense thereafter.
By contrast, IFRS calculates deferred tax benefits for share-based payment arrangements,
and the offsetting deferred tax assets, based on the estimated tax deduction determined at
each reporting date under applicable tax law (for example, intrinsic value) over the life of the
share-based payment award. This results in the recognition of deferred tax assets only for
those awards that have intrinsic value deductible for tax purposes at each reporting date. If
the estimated (for reporting periods prior to the taxable event) or actual (for reporting
periods when the taxable period occurs) tax deduction exceeds cumulative compensation
cost, the deferred tax benefit based on the excess is credited to shareholder equity. If the tax
deduction is less than or equal to cumulative compensation cost, deferred taxes are recorded
in income. Thus, IFRS excludes the concept of an APIC pool. (Although the APIC pool will be
eliminated upon transition to IFRS, there will be no accounting entry associated with the
elimination because it is a memo account under US GAAP and not recognized on the
balance sheet.)
First-time adopters that previously reported under US GAAP will need to identify all
outstanding, unexercised share-based payment arrangements, both vested and unvested,
that are expected to provide a tax deduction. For each arrangement identified, the estimated
tax deduction will be calculated by multiplying the intrinsic value as of the opening IFRS
balance sheet date by the number of shares, options, or similar instruments included in the
arrangement. The estimated tax deduction, multiplied by the first-time adopters tax rate, will
represent the tax benefit recorded as a deferred tax asset in the opening IFRS balance sheet.
56
Example 3.3.1.4 Deferred tax benefit

Fact Pattern
An entity grants 45,000 at-the-money (exercise price equal to the share price at the date
of grant) share options on 1 January 2010. The share options have a grant-date fair value
of $11.28 per share and are subject to cliff vesting on 31 December 2012. The first-time
adopters tax rate is 40%. The entity has a calendar year-end and its date of transition to
IFRS is 1 January 2012. The compensation cost, number of options to be exercised and
intrinsic value at each annual reporting date during the vesting period is as follows:
Fiscal year-end
Compensation cost
No. of options at year end
Intrinsic value
2010
$ 169,200
45,000
2011
$ 169,200
45,000
2012
$ 169,200
45,000
13
As of 1 January 2012, the first-time adopter has recognized cumulative compensation

cost and a deferred tax asset of $338,400 and $135,360 ($338,400 x 40%), respectively.
IFRS Analysis
The estimated tax deduction as of 1 January 2012 would equal $240,000 (45,000
options x $8 intrinsic value x2/3 vesting). Accordingly, the deferred tax asset at the date
of transition to IFRS in the opening IFRS balance sheet should be $96,000 ($240,000 x
40%). A transition adjustment of $39,360 ($135,360 - $96,000) will be recorded to
decrease the deferred tax asset, with an offsetting entry to retained earnings.
At each reporting date subsequent to the transition date, the amount of the tax benefit
recorded in equity or income will be determined based on a comparison of the estimated tax
deduction against cumulative compensation cost recognized, irrespective of the method used
prior to the date of transition to IFRS to record compensation cost unless that method
resulted in the recognition of zero compensation cost in income. If the method used to
account for share-based payment arrangements prior to the adoption of IFRS 2 resulted in
zero compensation cost (for example, APB 25), then we believe that all tax effects of those
share-based payment arrangements should be recorded within equity.
3.3.1.5
Nonvesting conditions (other than service, performance, and market conditions)
Nonvesting conditions under IFRS 2, which may be considered other vesting conditions
under US GAAP, are conditions other than service and performance conditions that must be
met in order for an employee to earn the award. Nonvesting conditions in IFRS 2 and other
vesting conditions in US GAAP are defined differently, and not everything considered a
nonvesting condition under IFRS would necessarily be considered an other vesting
57
condition under US GAAP. A common example of the difference between IFRS and US GAAP
is a non-compete agreement that contains a contingent feature whereby a vested award will
be forfeited if the employee terminates employment and goes to work for a competitor within
a stated timeframe. Under IFRS, a non-compete agreement is a nonvesting condition. Under
US GAAP, this type of feature is not considered an other vesting condition. The contingent
feature is accounted for if and when it occurs.
IFRS requires that the fair value measure of a share-based payment award include
consideration of all conditions that are not considered vesting conditions, as defined in IFRS
2. In contrast, under US GAAP only market or other vesting conditions are included in the
fair value measure. As a result, there may be some features of an award that are incorporated
into the fair value measure under IFRS 2 (for example, non-compete agreements) but are
excluded under US GAAP. As an additional difference, awards containing nonvesting
conditions are typically accounted for as equity-classified awards in IFRS 2, unless they
contain a cash settlement feature. In contrast, under US GAAP awards containing other
vesting conditions are classified as liabilities.
Under IFRS 2, if the nonvesting condition is attained, the grant date fair value of the award
is recognized as compensation cost. If the nonvesting condition is not attained but was in
the control of either the reporting entity or employee, then the award is accounted for like a
cancellation, with any remaining unrecognized compensation cost accelerated immediately.
Alternatively, if control does not reside with either the reporting entity or employee, the
compensation cost is recorded over the vesting period even if the condition is not attained.
First-time adopters that have unvested share-based payment awards containing nonvesting
conditions, such as a non-compete agreement, will need to account for those awards following
the guidance for nonvesting conditions under IFRS. This will result in a remeasurement of
the awards grant-date fair value to include this nonvesting condition. Should the nonvesting
condition be something other than a non-compete agreement it may require the award to be
reclassified from a liability award to an equity award. These differences likely will change the
amount of cumulative compensation cost that should have been recognized as of the opening
IFRS balance sheet date. Any differences between the cumulative compensation cost recorded
under US GAAP and the amount that would have been recorded under IFRS 2 will be reflected
in the opening IFRS balance sheet as a cumulative effect adjustment to retained earnings.
3.3.1.6
Transactions with non-employees
Under both US GAAP and IFRS, granting of share-based payment awards to non-employees
has accounting consequences.
Under US GAAP, either the fair value of the goods or services received or the equity
instruments granted, whichever is more reliably measurable, is used to measure the
transaction with a non-employee. If using the fair value of the equity instruments granted,
EITF 96-18 requires measurement at the earlier of (1) the date at which a commitment for
58
performance by the counterparty is reached, or (2) the date at which the counterpartys
performance is complete. Once performance is complete the award may become subject to
other accounting literature that may require continued remeasurement of the award at fair
value (that is, a liability award). For example, assume that Entity A grants a share-based
payment award to a non-employee that may be settled only with registered shares. Entity A
accounts for the award as an equity-settled award under Statement 123(R). However, once
the non-employees performance is complete, the award becomes subject to other
literature (EITF 00-19). Under EITF 00-19, because the award requires settlement by
delivering only registered shares, it is assumed Entity A could be required to net-cash settle
the contract resulting in liability classification.
IFRS states that share-based payment transactions with a non-employee should be
measured based on the fair value of the goods or services received. The fair value of the
equity instruments granted should be used if the fair value of the goods and services cannot
be reliably determined, which is supposed to be rare.
The measurement date under IFRS is the date the entity obtains the goods or the
counterparty renders the services. Unlike US GAAP, IFRS does not have a performance
commitment concept for purposes of identifying the measurement date. In addition, IFRS
does not have any specific guidance on the accounting for a non-employee award once
performance is completed. However, while not specifically addressed in IFRS 2, we believe
that share-based payment awards that are originally within the scope of IFRS 2 remain
within the scope of IFRS 2 and do not become subject to other literature once the nonemployees performance is complete. This would be viewed as a difference between
US GAAP and IFRS for non-employee awards.
In addition to differences in the measurement basis and the measurement date for nonemployee awards under US GAAP and IFRS, there also may be a difference in who is
considered to be a non-employee. IFRS 2 has a more general definition of employee that
includes individuals who provide services similar to those rendered by employees. In contrast,
the US GAAP definition of employee focuses mainly on the common law definition of an
employee (that is, IRS Revenue Ruling 87-41 Common Law Employee Guidelines). The
broader IFRS definition of employee could result in non-employee awards under US GAAP
being considered and accounted for as employee awards under IFRS.
First-time adopters will have to assess whether non-employee awards that are unvested at
the date of transition to IFRS should be accounted for as employee awards under IFRS 2. This
evaluation will likely require the use of significant judgment to determine whether the
services performed by a non-employee are similar to those rendered by an employee. Any
awards that should be considered employee awards under IFRS 2 should be accounted for as
such from the transition date. The differences between accounting for the awards as
employee awards instead of non-employee awards should be reflected as an adjustment to
additional paid in capital in the opening IFRS balance sheet, with the offsetting entry to
retained earnings.
59
First-time adopters will also need to re-evaluate the accounting for unvested non-employee
awards that will continue to be accounted for as non-employee awards under IFRS. Awards
that were measured based on the fair value of the equity instruments granted should be
evaluated to determine whether the fair value of the goods or services received was reliably
determinable. If the fair value of the goods or services received is reliably determinable and
that value exceeded the fair value of the equity instrument, then the unvested awards should
be remeasured. If the fair value of the goods and services was not reliably determinable, then
the fair value of the equity instruments should be used under IFRS 2, similar to US GAAP.
However, when a first-time adopter has previously measured non-employee awards at the
performance commitment date, the first-time adopter may still need to remeasure the fair
value of unvested equity instruments at the date of transition to IFRS using the revised
measurement date since IFRS 2 requires the awards to be measured when the goods and
services are received. The differences in the fair value of non-employee awards as of the
date of transition to IFRS should be recorded in the opening IFRS balance sheet as a
cumulative effect adjustment to retained earnings.
3.3.1.7
Performance conditions
Many entities have share-based payment awards with performance conditions that are tied to
reporting metrics determined in accordance with US GAAP. For example, a common type of
performance condition requires a company to achieve a specified amount of net income, as
determined in accordance with US GAAP, in order for the employees to vest in the awards. As
a result of the conversion to IFRS, entities may modify their performance conditions to
replace references to US GAAP with references to IFRS. However, since financial statements
prepared under IFRS may differ from financial statements prepared as of the same date
under US GAAP, performance metrics that are evaluated based on IFRS-compliant financial
information may be more or less likely of achievement than if those metrics are evaluated
based on US GAAP-compliant financial information. As a result, a first-time reporter will need
to consider whether the modification of those performance conditions will change the
recognition of compensation cost.
3.4
Insurance Contracts

D4.
A first-time adopter may apply the transitional provisions in IFRS 4 Insurance

Contracts. IFRS 4 restricts changes in accounting policies for insurance contracts,
including changes made by a first-time adopter.
Unlike the general provision in IFRS 1 that prohibits looking to the transitional provisions in
individual standards, IFRS 1 specifically allows a first-time adopter to apply the transitional
provision in IFRS 4. The transitional provisions within IFRS 4 allow a first-time adopter to
change its accounting policies for its insurance liabilities when it first applies IFRS 4,
permitting (but not requiring), an entity to reclassify some or all of its financial assets at fair
value through profit or loss.
60
IFRS 4 requires disclosure of actual claims compared with previous estimates (that is, claims
development). Claims development information should go back to the period when the
earliest claim arose for which there is still uncertainty about the amount and the timing of the
claims payments, but need not go back more than ten years. However, IFRS 4 allows a firsttime adopter relief from this provision. A first-time adopter need not disclose information
about claims development that occurred more than five years before the end of the first
financial year in which IFRS 4 is applied. Also, when a first-time adopter applies IFRS 4, if it is
impracticable to prepare information about claims development that occurred before the
beginning of the earliest period for which full comparative information is presented, this fact
should be disclosed. Therefore, a first-time adopter with a first IFRS reporting period ending
on 31 December 2014 is not required to disclose claims development information that
occurred before 1 January 2010 (that is, 5 years before 31 December 2014). For insurers
taking advantage of this relief, claims development information will be built up from five to
ten years in the subsequent years following adoption of IFRS 4.
3.4.1

The criteria used for classification of insurance contracts under US GAAP are generally
similar to IFRS. However, different classification of insurance contracts can result under IFRS.
Under IFRS, an insurance contract is a contract under which one entity accepts significant
insurance risk from another entity. Insurance risk is significant if, and only if, an insured
event could cause an insurer to pay significant additional benefits in any scenario, excluding
scenarios that lack commercial substance (that is, they have no discernable effect on the
economics of the transaction). If significant additional benefits would be payable in scenarios
that have commercial substance, this condition may be met even if the insured event is
extremely unlikely or even if the expected (that is, probability-weighted) present value of
contingent cash flows is a small proportion of the expected present value of all the remaining
contractual cash flows.
Although under both Statement 97 and Statement 113 there is a concept that insurance
contracts need to transfer significant insurance risk to qualify for insurance accounting, that
guidance has not been interpreted to use extremely unlikely outcomes to support the transfer
of significant insurance risk. Accordingly, there will likely be more contracts that meet the
definition of an insurance contract under IFRS than US GAAP.
In addition, under IFRS a contract is assessed for risk transfer for its entire life, and that
assessment is not split into an accumulation phase and payout phase. This requirement may
also cause more contracts to meet the definition of an insurance contract under IFRS than
under US GAAP. For example, under US GAAP a deferred annuity is considered a Statement
97 investment contract, while under IFRS it is considered an insurance contract as a result of
the annuity payout option. Therefore, at the date of transition a first-time adopter will need
to review all its insurance contracts to determine whether they met the definition of an
insurance contract under IFRS when the contract was written.
61
It is implicit within IFRS 4 that an assessment of whether a contract transfers significant

insurance risk should be made at the inception of a contract. However, investment contracts
may become insurance contracts if the insurance risk becomes significant during the period
of the contract. For example, a deferred annuity contract whereby the policyholder will
receive, or can elect to receive, a life-contingent annuity at rates prevailing when the annuity
begins is considered an investment contract. However, the deferred annuity contract will
become an insurance contract when the annuity rate becomes fixed (unless the contingent
amount is insignificant in all scenarios that have commercial substance). A first-time adopter
will need to review, at the transition date to IFRS, those investment contracts that have
converted to the annuity payout phase to determine if any of those investment contracts now
meet the definition of an insurance contract.
3.5
Fair value or revaluation as deemed cost

D5.
An entity may elect to measure an item of property, plant and equipment at the date
of transition to IFRSs at its fair value and use that fair value as its deemed cost at
that date.
D6.
A first-time adopter may elect to use a previous GAAP revaluation of an item of

property, plant and equipment at, or before, the date of transition to IFRSs as deemed
cost at the date of the revaluation, if the revaluation was, at the date of the
revaluation, broadly comparable to:
(a) fair value; or
(b) cost or depreciated cost in accordance with IFRSs, adjusted to reflect, for
example, changes in a general or specific price index.
D7.
The elections in paragraphs D5 and D6 are also available for:

(a) investment property, if an entity elects to use the cost model in IAS 40 Investment
Property and
(b) intangible assets that meet:
(i)
the recognition criteria in IAS 38 (including reliable measurement of original

cost); and
(ii) the criteria in IAS 38 for revaluation (including the existence of an active
market).
An entity shall not use these elections for other assets or for liabilities.
D8.
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A first-time adopter may have established a deemed cost in accordance with previous
GAAP for some or all of its assets and liabilities by measuring them at their fair value at
one particular date because of an event such as a privatisation or initial public offering.
It may use such event-driven fair value measurements as deemed cost for IFRSs at the
date of that measurement.
Under IAS 16, IAS 38 and IAS 40, an item of property, plant and equipment, an intangible
asset or an investment property are initially recorded at cost, if cost is reliably measureable.
IFRS 1 allows the entity to elect to treat the fair value of property, plant and equipment at the
date of transition as the deemed cost for IFRS. Alternatively, a company may also elect to use
a previous valuation of an item of property, plant and equipment at or before the transition
date as the deemed cost for IFRS, as long as the company appropriately depreciates the item
of property, plant and equipment in accordance with IAS 16 from that measurement date
forward. These exemptions also may be applied to investment property and certain intangible
assets. See section 3.5.1 below for a further discussion of the scope of this exemption.
A first-time adopter may not use this election for other assets or for liabilities.
IFRS 1 defines deemed cost as an amount used as a surrogate for cost or depreciated
cost at a given date. For example, a first-time adopter may have previously established
a deemed cost under its previous GAAP for some or all of its assets by revaluing them at
their fair value at a particular date, such as the values determined as part of a business
combination or an impairment analysis. Subsequent depreciation or amortization assumes
that the entity had initially recognized the asset at that particular date and that its cost was
equal to the deemed cost.
In the absence of this exemption, the requirements of IAS 16, IAS 38 and IAS 40 would have
to be applied as if the first-time adopter had always applied these standards. This could be
onerous because of the long-lived nature of these assets. If changes to capitalization and or
depreciation were required to amounts recognized under an entitys previous GAAP,
extensive effort likely would be involved, and in some situations the accounting records for
the applicable period may no longer be available.
Given the significance of these assets (and the large number of transactions affecting
property, plant and equipment), the IASB recognized that restatement may be difficult and
could involve undue cost and effort for most first-time adopters. Therefore, the IASB decided
to introduce the notion of a deemed cost that is not the true IFRS compliant cost basis of an
asset, but a surrogate that is deemed to be a suitable starting point.
3.5.1
Scope of the Fair value or revaluation as deemed cost exemption
It is important to note that the fair value as deemed cost exemption in IFRS 1 may be applied
on an item by item basis, rather than to an entire class or category of assets (for example,
land, buildings, machinery, ships, aircraft, motor vehicles, furniture and fixtures, office
equipment). Thus, a first-time adopter may apply the fair value as deemed cost exemption to
some and not all of its assets. For example it could apply the fair value as deemed cost
exemption to certain, but not all, investment properties; to certain, but not all, buildings; to
certain, but not all, components of a factory; or to certain, but not all, assets leased under a
single finance lease.
63
The IASB argued that it is not necessary to restrict application of the exemption to classes of
assets to prevent selective revaluations, because IAS 36 requires an impairment test if any
indication that an asset is impaired is present. Thus, if an entity uses fair value as deemed
cost for assets whose fair value is above cost, it cannot ignore indications that the
recoverable amount of other assets may have fallen below their carrying amounts.
Nevertheless, it seems doubtful that the quality of financial information would benefit from a
revaluation of a haphazard selection of assets. Therefore, a first-time adopter should exercise
judgment in selecting the items which it believes is appropriate to apply the fair value as
deemed cost exemption.
The use of fair value as deemed cost for intangible assets will be very limited in practice
because of the restrictive criteria for revaluation existing in IAS 38. In particular, IAS 38
requires an intangible asset to be measured by reference to an active market, but also states
that it is uncommon for an active market to exist for an intangible asset. In particular, IAS 38
states that an active market cannot exist for unique assets such as brands, newspaper
mastheads, music and film publishing rights, or patents and trademarks. As a result, we
believe it is unlikely that a first-time adopter will be able to apply this exemption to intangible
assets.
3.5.2
Determining deemed cost
IFRS 1 states the deemed cost that a first-time adopter uses can be any of the following:
1. the fair value of the item at the date of transition to IFRS;
2. a revaluation under previous GAAP at or before the date of transition to IFRS, if the
revaluation was broadly comparable to the fair value or the cost or depreciated cost
under IFRS; or
3. the deemed cost under the previous GAAP that was established by measuring items at
their fair value at one particular date because of an event such as a privatization or initial
public offering.
The revaluations referred to in (2) above need only be broadly comparable to fair value or
reflect an index applied to a cost that is broadly comparable to cost determined under IFRS.
It appears that in the interest of practicality, the IASB has allowed a good deal of flexibility in
this matter. The IASB explains in the basis for conclusions that it may not always be clear
whether a previous revaluation was intended as a measure of fair value or differs materially
from fair value. The flexibility in this area permits a cost-effective solution for the unique
problem of transition to IFRS. It allows a first-time adopter to establish a deemed cost using a
measurement that is already available and is a reasonable starting point for a cost-based
measurement.
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The deemed cost of an asset can be determined before the actual date of transition to IFRS.
Note that there are no criteria within IFRS 1 for when a previous valuation had to be
performed by (such as within the last five years) in order for that valuation amount to be used
as deemed cost. In such situations, the entity must apply appropriate IFRS accounting policies
to the asset (cost or revaluation) and appropriate IFRS depreciation policies to that asset
from the deemed cost determination date through the date of transition to determine the
opening IFRS balance sheet amount. The depreciation policy applied during the intervening
period from the deemed cost determination date to the date of transition to IFRS would have
to be in accordance with IAS 16 requirements.
Based on specific facts and circumstances, a first-time adopter will need to assess whether
the fair value or revaluation as deemed cost exemption is beneficial in its adoption of IFRS.
For example, if this exemption is not used, a first-time adopter must present its property,
plant and equipment in its opening balance sheet as if the requirements of IAS 16 had always
been applied. If a first-time adopters depreciation methods under previous GAAP are
acceptable under IFRS, this likely will not be difficult for the entity as the current carrying
amount of the assets will also be the amount reflected in the opening balance sheet. Further,
any future changes in the estimated useful life or depreciation method are accounted for
prospectively from the time of change. However, if the depreciation methods and rates are
not acceptable under IFRS (for example, if they were adopted for regulatory, tax or
contractual purposes and do not reflect a reasonable estimate of the useful life) this may
present a challenge to reporting entities. In such situations, a first-time adopter would have
to adjust the accumulated depreciation recognized on such assets as if the new IFRS method
had always been applied, since the original acquisition of the asset. This restatement of the
depreciation methods and rates may prove to be onerous. As such, a first-time adopter may
find it beneficial to elect either the fair value or revaluation amount as the deemed cost.
The fact that IFRS 1 offers different bases for valuation means that a first-time adopter can
influence its future reported performance by carefully selecting a first-time adoption policy
for the valuation of its assets. Users of the financial statements of a first-time adopter should
therefore be mindful that historical earnings trends under previous GAAP might not continue
in a first-time adopters IFRS financial statements.
65
The following table summarizes the application of IFRS 1 paragraph D8:

Application of the fair value as deemed cost exemption under paragraph D8 of IFRS 1
(1) Determine which assets and liabilities are recognizable under IFRSs. (2) Determine whether
an event-driven fair value measurement was performed (for example, privatization or IPO).
(3) Apply the fair value as deemed cost exemption under IFRS 1, paragraph D8, if 100% of
the fair value of the assets and liabilities were remeasured.
Assets and liabilities recognizable

under IFRS
Full retrospective
application of
relevant IFRS
Use fair value

at the date
of transition
as deemed cost
(par D5-D8)
Assets and liabilities not recognizable

under IFRS
Elect
fair value as
deemed cost
(para D5-D8)
IFRS 1
policy
choice
(FN1)
Derecognize in opening B/S Offset to

opening retained earnings or goodwill
as appropriate
Has the entity remeasured

its assets and liabilities prior
to transition date?
No
Policy choice
for: PPE,
investment property,
intangible
assets
Yes
No
Was the
remeasurement
event-driven (for
example,
privatization or
IPO)?
Use of
revaluation as
deemed cost
(par D6(a)-(b), D8)
Option to use
fair value at the
date of the event
as deemed cost
for assets and
liabilities recognizable
under IFRS
(para D8)
Yes
No
Did the remeasurement result in recognition of 100%

of the fair value of assets and liabilities affected by the
event at the date of the event?
Yes
FN1 - A first-time adopter has a policy choice whether to apply the fair value as deemed cost exemption. Depending on
the policy choice selected, a first-time adopter will be guided down the flowchart in two different directions.
66
3.5.3
Evaluating impairment indicators
IFRS 1 requires a first-time adopter to evaluate its assets for impairment in accordance with
IAS 36. If impairment indicators exist, an impairment test should be performed. Under
IAS 36, impaired assets must be written down to the higher of their value in use or their
fair value less costs to sell.
In preparing for the adoption of IFRS, a first-time adopter that is required to evaluate assets
for impairment under its previous GAAP also should consider simultaneously evaluating such
assets under IFRS. If an entity evaluates its assets for impairment under both its existing
GAAP and IFRS, the entity will likely avoid the unnecessary burden of collecting or
reconstructing prior period information at the date of transition to IFRS.
3.5.4

3.5.4.1
Determining deemed cost
As discussed above, the IASB requires that in order for a revaluation amount to be used as
the deemed cost, that revaluation amount must be broadly comparable to the fair value as
determined under IFRS. While the revaluation amount that an entity determines under
US GAAP as the result of, for example, a business combination or an impairment analysis will
not be exactly the same amount as a fair value calculation determined in accordance with
IFRS, we believe that such revaluation amounts are generally broadly comparable to fair
value as determined under IFRS. As a result, we believe it is appropriate to use such amounts
as the deemed cost for purposes of this exemption.
3.5.4.2
Calculating accumulated depreciation upon transition to IFRS
A potentially significant difference exists between US GAAP and IFRS in relation to

depreciation of property, plant and equipment. IFRS requires property, plant and equipment
to be segregated into its significant parts and each such part be depreciated over its useful
life. For example, under IFRS the significant components of a building (for example, heating
and cooling, roof, electrical, and remainder of the building) should be depreciated separately
from one another if their expected useful lives are different. While this approach is allowed
under US GAAP (often referred to as the component approach), it is not frequently
applied. Therefore, as part of a first-time adopters conversion to IFRS, it would need to
recalculate the life-to-date depreciation on any property, plant and equipment under the
component approach, which could be difficult since the component information might not be
readily available.
Alternatively, if fair value as deemed cost is used upon first-time adoption of IFRS, the
components would still need to be identified, but the depreciation for each component would
be calculated prospectively from the date of transition.
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If an entity uses a fair value or revaluation amount determined prior to the opening balance
sheet as the deemed cost under IFRS, the entity must apply a depreciation policy that is
compliant with IFRS from the date the fair value or revaluation amount was determined
going forward.
Example 3.5.4.2 Calculating accumulated depreciation upon transition to IFRS
Fact Pattern:
Entity A, a US GAAP reporter, purchased a building 10 years ago for which the historical
cost is $1,200,000. Upon further evaluation, Entity A determines that the building had
four separate components heating and cooling, roof, electrical (including telephone and
internet) and the remainder of the building. However, as permitted under US GAAP,
Entity A has been depreciating the building as a single component over 40 years. Entity A
will become a first-time adopter and will present its first IFRS financial statements as of
and for the year ended 31 December 2014. Entity A has determined that the fair value of
the building at the date of transition to IFRS (1 January 2012) is $1,100,000.(The fair
value of the heating and cooling is $200,000, the roof is $100,000, electrical is $250,000
and the rest of the building is $550,000.)
Analysis:
Under IFRS 1, Entity A has the option to use the current fair value of the building and the
individual components as itsdeemed cost in its opening IFRS balance sheet and to base
the future component depreciation on that amount. A first-time adopter may prefer this
approach when recalculation of historic depreciation using the component approach could
be cumbersome.
Alternatively, if Entity A did not know the fair value of the building on its date of transition,
but evaluated the building for impairment two years prior to the transition date (for
example, on 1 January 2010), and determined the fair value of the building to be
$900,000 at that time, Entity A may also elect to use that amount as the deemed cost at
1 January 2010 and calculate the appropriate depreciation amount under IFRS for each
component from that date forward, as long as the valuation meets certain criteria. Under
this approach, an entity would still have to determine the fair value of the buildings
components as of the date of the impairment analysis in order to have the necessary
information for its component depreciation calculations.
If the first-time adopter elected to use either the current fair value or a previous valuation
amount as the deemed cost, any adjustments to the historical carrying amount of the
property, plant and equipment would be reflected in opening retained earnings at the
transition date.
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Another area in which US GAAP and IFRS differ relates to the treatment of major overhauls.
Under IFRS, overhauls are depreciated based on the expected time to the next overhaul.
Under IFRS, if a new heating and cooling unit was installed in a building, the cost of such
should be fully depreciated by the time the next heating and cooling unit was due to be
installed. However, under U.S. GAAP diversity in practice exists and the cost of the heating
and cooling unit either is expensed at the time it was installed or may be included in the
carrying amount of the building as a whole and the estimated useful life of the building may
be reevaluated. If an entity frequently performs such overhauls and expects that the amounts
associated with the overhauls is material, the entity may find it easier to use the fair value as
deemed cost alternative upon conversion to IFRS discussed above in order to value property,
plant and equipment upon conversion, rather than recalculate life-to-date depreciation on
these assets.
3.5.4.3
Effect of existing impairment indicators
Under US GAAP and IFRS, the impairment indicators that result in the need to perform an
impairment evaluation are generally similar. However, there are differences in the calculation
of impairment. That is, for long-lived and definite-lived intangible assets, US GAAP requires a
two-step test in which undiscounted cash flows are first considered to determine whether the
asset is recoverable. If the asset is determined to be recoverable, based on the undiscounted
cash flow analysis, an impairment loss is not recorded. If the asset is determined to not be
recoverable (based on an undiscounted cash flow analysis), an impairment loss is recorded
for the difference between the carrying amount of the asset or asset group and its fair value.
IFRS requires a different approach, whereby recoverability is determined and any impairment
loss is calculated based on the difference between the recoverable amount and the carrying
amount of the assets. In this calculation, recoverable amount is the higher of the fair value
less cost to sell or the value in use. The differences between the determination of
recoverability and in calculation methodologies under the two GAAPs may result in the
recognition of impairment charges earlier under IFRS (because impairment under IFRS is
always assessed with a present value calculation undiscounted cash flows are not
considered), and the amount of the impairment loss calculated likely will be different.
As a result, during the period of transition (2012 2014 for large accelerated filers in the
SECs proposed Roadmap) entities converting to IFRS should consider preparing impairment
analyses under both US GAAP and IFRS contemporaneously to capture the differences. This
exercise would save entities the burden of attempting to go back in time to recreate previous
impairment analyses.
A first-time adopter that elects to retrospectively apply IFRS (that is, a first-time adopter that
does not elect fair value as deemed cost for its PP&E, investment property and intangible
assets upon first-time adoption of IFRS) and has taken an impairment charge also should be
mindful of another significant difference between the IFRS and US GAAP impairment models
for long-lived assets other than goodwill. This difference relates to the reversal, in future
69
periods, of recognized impairments when events or circumstances that led to the impairment
have abated. US issuers that recognized impairments on long-lived assets may have to
reinstate the cost of the assets at transition if the circumstances that led to the impairment
no longer exist at the date of transition to IFRS. Consider the following example:
Example 3.5.4.3 Reversal of an Impairment Charge
Fact Pattern
On 1 January 2003, Entity A, a US GAAP reporter, purchased a plant for $3.2M. The plant
is used for the manufacture of plastic bins and has an estimated useful life of 20 years.
The plant uses petroleum to manufacture the plastic bins. The price of petroleum
significantly affects the production cost of the bins and therefore, the sales of the bins.
An increase in the cost of petroleum forced Entity A to increase the selling price of the
bins which correspondingly decreased the number of bins sold in a year.
On 31 December 2007, Entity A recorded an impairment charge of $0.6M. The entity
determined that the carrying amount of the plant that manufactures the plastic bins was
not recoverable because the price of petroleum increased to a point that sales of the
plastic bins decreased significantly. Entity A determined that the decrease in sales of the
plastic bins is a result of the increased cost of the petroleum, which required Entity A to
increase the selling price of the bins.
Immediately prior to recognizing the impairment charge in 2007, Entity A had recognized
$.8M depreciation on the plant, and the plant had a net carrying amount of $2.4M ($3.2M
original purchase price less 5 years of depreciation). Subsequent to recognition of the
impairment charge of $0.6M, the plant has a carrying amount of $1.8M. Entity A will
depreciate this revised carrying amount over the plants remaining 15-year life.
During 2014, the price of petroleum dropped to pre-2008 levels. As a result, Entity A
reduced the selling price of its plastic bins, and sales of the plastic bins recovered to
previous levels. Under US GAAP, Company P is prohibited from reversing any previously
recognized impairment charges.
Analysis
as of and for the year ended 31 December 2014. Entity As date of transition to IFRS is
1 January 2012.
Upon adoption, IFRS 1 requires a first-time adopter to measure all recognized assets in
accordance with IFRS. See section 1.3.5.4. This means that upon transition to IFRS, any
impairment previously recognized under US GAAP would be remeasured in accordance with
IAS 36. It also means that upon adoption an entity also must assess whether there has been
an indication that an impairment loss previously recognized no longer exists or may have
decreased. And if any such indication exists, the entity estimates the recoverable amount
and reverses the impairment if permitted (IAS 36. 110 and IAS 36.114).
70
As part of its transition to IFRS, Entity A elects not to used fair value as deemed cost of its
PP&E and, therefore, will assess whether there is an indication that the 2008 impairment
charge no longer exists and should be reversed in the 2014 financial statements. If it
determines such a reversal is appropriate, Entity A will revise the carrying amount of the
plant. (Note however, that carrying amount of the asset after the reversal of the
impairment charge cannot exceed the carrying amount that would have been recorded
(historical cost less depreciation) if no impairment charge had ever been recognized.) For
purposes of this example, assume that the measurement of depreciation is the same under
US GAAP and IFRS.
In this example, if Entity A had never recognized any impairment on the plant, at 31
December 2014, the carrying amount of the plant would have been $1.28M ($3.2M
purchase price less 12 years of depreciation). Under US GAAP, the carrying amount of the
plant at 31 December 2014 would be $0.84M ($1.8M carrying value after the impairment
charge less seven years of additional deprecation after the date of impairment.) As a
result, Entity A potentially could reverse up to $0.44M ($1.28M - $0.84M) of the previous
impairment charge, if the updated impairment analysis supports such a reversal.
3.6
Leases

D9.
A first-time adopter may apply the transitional provisions in IFRIC 4 Determining

whether an Arrangement contains a Lease. Therefore, a first-time adopter may
determine whether an arrangement existing at the date of transition to IFRSs contains
a lease on the basis of facts and circumstances existing at that date.
IFRS 1 requires a first-time adopter to classify leases as operating or finance leases based on
the circumstances that exist at the inception of the lease and not those that exist at the date
of transition to IFRS. However, that determination is based on the lease terms that are
effective at the first-time adopters date of transition to IFRS; the lease classification is not
based on lease terms that are no longer effective (for example, due to a lease modification
prior to the date of transition to IFRS).
IFRIC 4 contains guidance on determining whether an arrangement contains a lease requiring
an assessment to be performed at the inception of the arrangement or upon modification of
the arrangement on the basis of facts or circumstances existing at that date. IFRIC 4 contains
transitional provisions that allow an entity to apply the requirements of the Interpretation to
arrangements existing at the beginning of the earliest period for which comparative
information under IFRS is presented on the basis of facts and circumstances existing at the
start of that period, as opposed to the arrangements inception date. A different conclusion
may be reached when performing an assessment of whether an arrangement contains a lease
on the basis of facts and circumstances at a date other than the arrangements inception or
modification date.
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Given the practical difficulties in going back potentially many years, IFRS 1 extends the
transitional provisions of IFRIC 4 to first-time adopters such that they may apply the
transitional provisions of IFRIC 4 as of the date of transition to IFRS. That is, first-time
adopters may assess arrangements existing as of the date of transition to IFRS to determine
if the arrangements contain a lease on the basis of facts and circumstances as of the date of
transition, as opposed to facts and circumstances as of date of inception or modification of
the arrangements. This voluntary exemption only applies to the assessment of whether an
arrangement contains a lease. If an arrangement is determined to contain a lease, a first-time
adopter applies IAS 17 to determine the classification of the lease as an operating or finance
lease,from the inception of the arrangement.
3.6.1

Although the criteria used to classify leases under US GAAP are similar to the indicators
provided in IFRS, different classification of leases can result under IFRS. EITF 01-8 which
provides guidance on determining whether an arrangement contains a lease under US GAAP,
is virtually identical to IFRIC 4. First-time adopters that reported under US GAAP could elect
to utilize the voluntary exemption provided under IFRS 1 and assess arrangements based
upon the facts and circumstances existing at the date of transition to IFRS. First-time
adopters that previously reported under US GAAP and that perform an assessment under
IFRIC 4 based upon the facts and circumstances existing at the date of transition to IFRS may
reach a different conclusion than the conclusion previously reached under EITF 01-8 if facts
and circumstances have changed between the inception or modification of the lease and the
date of transition to IFRS. In addition, EITF 01-8 only applies to arrangements beginning or
modified after the beginning of an entitys next reporting period beginning after 28 May 2003.
As a result, first-time adopters that previously reported under US GAAP would not have
performed evaluations using the criteria in EITF 01-8 for arrangements that were in place
prior to and not modified subsequent to 28 May 2003. Therefore, as of its date of transition
to IFRS an entity could have arrangements in place that have not been evaluated under
EITF 01-8 to determine whether or not such arrangements contain a lease.
3.6.2
Future Developments
In September 2008, the IASB issued an Exposure Draft of Proposed Amendments to IFRS 1
Additional Exemptions for First-Time Adopters. If adopted (final amendments are planned to
be issued in the second half of 2009), a first-time adopter that made the same determination
under its previous GAAP as that required by IFRIC 4, but at a date other than that required by
IFRIC 4, need not reassess that determination when it adopts IFRS 1. As discussed above, the
guidance in EITF 01-8 and IFRIC 4 to determine whether an arrangement contains a lease is
virtually identical. We therefore expect that, if the Exposure Draft is adopted as a final
standard, reassessment would not be required upon the date of transition for those
arrangements that were evaluated under EITF 01-8.
72
First-time adopters that previously reported under US GAAP would still need to assess under
IFRIC 4 any arrangements existing as of the date of transition that were not previously
evaluated under EITF 01-8, and would perform that assessment based upon facts and
circumstances as of the date of transition (rather than at the inception of the lease) under the
voluntary exemption in IFRS 1.
3.7
Employee benefits

D10. In accordance with IAS 19 Employee Benefits, an entity may elect to use a 'corridor'
approach that leaves some actuarial gains and losses unrecognised. Retrospective
application of this approach requires an entity to split the cumulative actuarial gains
and losses from the inception of the plan until the date of transition to IFRSs into a
recognised portion and an unrecognised portion. However, a first-time adopter may
elect to recognise all cumulative actuarial gains and losses at the date of transition to
IFRSs, even if it uses the corridor approach for later actuarial gains and losses. If a
first-time adopter uses this election, it shall apply it to all plans.
For defined benefit plans, IFRS 1 allows a first-time adopter to reset to zero all cumulative
actuarial gains and losses at the date of transition to IFRS, even if the first-time adopter
intends to select a different accounting treatment for such gains and losses going forward
(for example, to use the corridor approach). If this exemption is used, it must be used for all
employee benefit plans. This gives first-time adopters the ability to start their accounting
under IFRS with a clean state as it pertains to actuarial gains and losses.
3.7.1
Actuarial assumptions
A first-time adopters actuarial assumptions at its date of transition to IFRS should be

consistent with the ones it used for the same date under previous GAAP, unless there is
objective evidence that those assumptions were in error. The effect of any later revisions to
those assumptions is an actuarial gain or loss of the period in which the first-time adopter
makes the revisions. In particular, discount rates and the fair value of plan assets at the date
of transition to IFRS should reflect market conditions at that date. Similarly, the first-time
adopters actuarial assumptions about future employee turnover rates at the date of
transition should not be adjusted from the original assumptions used in order to reflect a
curtailment of the pension plan that occurred after the date of transition to IFRS.
3.7.2
Exemption from presenting historical summary information

D11. An entity may disclose the amounts required by paragraph 120A(p) of IAS 19 as the
amounts are determined for each accounting period prospectively from the date of
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IAS 19 includes a requirement to disclose for the current annual period and previous four
annual periods the following for the entitys defined benefit plans:
(a) the present value of the defined benefit obligation, the fair value of the plan assets and
the surplus or deficit in the plan; and
(b) the experience adjustments arising on the plans assets or liabilities.
A first-time adopter that applied the employee benefits exemption above will not be able to
comply with this requirement for periods prior to its date of transition to IFRS. IFRS 1
therefore permits a first-time adopter to disclose the above information for each accounting
period prospectively from the date of transition to IFRS.
3.7.3

While IFRS 1 provides an exemption related to the cumulative actuarial gains and losses, a
number of additional issues could arise as part of an entitys first time adoption of IFRS that
are not addressed by the exemptions provided in IFRS 1. Each of these items is discussed
further below.
3.7.3.1
Actuarial gains and losses
Adjustments to the recognized retirement benefit

At the date of transition to IFRS, first-time adopters will need to elect a method for recognizing
actuarial gains and losses. The three IFRS methods available include (1) immediately record
actuarial gains and losses in the income statement (2) defer actuarial gains and losses using
a corridor approach (discussed further below) or (3) record actuarial gains and losses
immediately outside the income statement through the statement of other comprehensive
income. Actuarial gains and losses recognized under the last option will be reflected in other
comprehensive income, similar to US GAAP. However, in a key difference with US GAAP,
actuarial gains and losses recognized in other comprehensive income are not subsequently
amortized into income.
Similar to US GAAP, IFRS allows an entity to use a corridor approach to determine the
amount of actuarial gains and losses that must be amortized and expensed each period
(option 2 in the preceding paragraph). However, as a result of differences in US GAAP
compared to IAS 19, the amounts calculated using the corridor approach under US GAAP
may differ from the amounts that would have been calculated under IAS 19. Without the
IFRS 1 exemption to zero out all cumulative actuarial gains and losses, a first-time adopter
applying the corridor approach would have to re-calculate actuarial gains and losses from the
date of inception of the plan in order to determine the cumulative amounts at the date of
transition to IFRS. The effort required to reperform such calculations from inception of the
plan likely would make such an approach prohibitive.
74
The amount of the retirement benefit reported on the balance sheet is affected by this
accounting policy election. One of the most significant differences between IAS 19 and
US GAAP is the reporting of retirement benefits on the balance sheet. Entities reporting
under US GAAP are required to present the funded status of the plan on the balance sheet
as the difference between the fair value of plan assets and the defined benefit obligation.
Unrecognized actuarial gains/losses and prior service costs are recognized in other
comprehensive income.
By contrast, IAS 19 does not require the recognition of the funded status on the balance
sheet. Under IAS 19, the defined benefit obligation plus or minus any unrecognized actuarial
gains/losses (if not recognized immediately in comprehensive income), minus unrecognized
past service costs and minus the fair value of plan assets is presented on the balance sheet.
As a result, a first-time adopters recognized retirement benefit may have to be adjusted, due
to both the entitys use of the exemption for cumulative gains and losses and the on-going
accounting policy election made for actuarial gains and losses. The required adjustment to
properly state the retirement benefit obligation/asset would affect other comprehensive
income and retained earnings as demonstrated below.
Example 3.7.3.1 Recognized retirement benefit
Fact Pattern
Entity A, a US GAAP reporter has a defined benefit pension plan and on 31 December
2011, that plan has the following characteristics:
Defined benefit obligation
Fair value of plan assets
(2,700)
1,700
Funded status recorded on the balance sheet
Unrecognized actuarial losses
Unrecognized prior service costs

Total
(1,000)
200
350
550
Under US GAAP, the total unrecognized actuarial losses and prior service costs of $550 is
reflected within accumulated other comprehensive income after tax and will be recognized
in the income statement in future periods as a component of net periodic pension cost.
Analysis
as of and for the year ended 31 December 2014. At the date of transition to IFRS (1
January 2012), the first-time adopter has elected to apply the IFRS 1 exemption to zero
out all cumulative actuarial gains and losses at the date of transition. Under IAS 19 the
retirement benefit obligation would be presented as follows (in thousands) in the opening
balance sheet on 1 January 2012:
75
Defined benefit obligation
Fair value of plan assets
(2,700)
1,700
Funded status
(1,000)
Unrecognized past service costs

Net defined benefit liability recorded on the balance sheet
350
$
(650)
As a result, the first-time adopter will record an adjustment to remove unrecognized actuarial
losses from accumulated other comprehensive income, with an offsetting entry to retained
earnings. In addition, the entity will also record an adjustment to remove unrecognized past
service costs from accumulated other comprehensive income, with an offsetting adjustment
to the net pension liability and a reversal of related deferred tax liability.
Amortization of actuarial gains and losses
Even if a first-time adopter elects to use the corridor approach under IAS 19, differences in
the amortization of actuarial gains and losses under this approach between US GAAP and
IAS 19 could be significant. Under US GAAP, deferred actuarial gains and losses are
amortized over the average remaining service period of active employees expected to receive
benefits in the plan. Amortization occurs over participants average remaining life expectancy
if all or almost all participants are inactive.
Under IFRS, deferred actuarial gains and losses are amortized over the average remaining
service period of employees in the plan. There is no distinct amortization method for plans
with inactive participants. Thus, the application of the corridor approach under IAS 19 will
differ for plans with all or almost all inactive participants.
3.7.3.2
Unrecognized past service cost
It is worth mentioning that the employee benefits exemption discussed at the beginning of
this section only applies to unrecognized actuarial gains or losses. It does not apply to
unrecognized past service costs (referred to as prior service costs under US GAAP) that
relate to unvested benefits. A first-time adopter therefore needs to look at periods before its
date of transition to IFRS to determine the amount of unrecognized past service costs in
accordance with IAS 19. This difference may affect first-time adopters that have prior service
costs associated with their benefit plans as US GAAP requires such costs to be recognized
over the expected remaining service life of the employees, whether or not the benefits are
vested. Since IFRS requires immediate recognition for vested benefits and recognition over
the remaining vesting period for unvested benefits, it is likely that first-time adopters will
have to adjust any unrecognized prior services costs upon adoption of IFRS with a
corresponding adjustment to retained earnings.
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3.7.3.3
Plan assets
Similar to US GAAP, IFRS requires plan assets to be measured at fair value as of the end of
the reporting period. Under IAS 19, fair value should be used for the determination of the
expected return on plan assets. This is different than US GAAP, which permits the expected
return on plan assets to be calculated based on either the fair value of plan assets or a
calculated value (the market-related value of plan assets) that recognizes changes in fair
value over a period of not more than five years. A first-time adopter that previously reported
under US GAAP using the market-related value of plan assets and that does not elect the
IFRS 1 exemption to reset to zero all cumulative actuarial gains and losses will have to adjust
its benefit obligation to include unrecognized actuarial gains and losses on plan assets
(differences between expected and actual returns on assets) at the date of transition to IFRS.
IAS 19 sets a limitation (that is, ceiling) on the net asset that can be reported on the balance
sheet when plan assets exceed the benefit obligation. US GAAP does not limit the amount of a
net benefit asset on the balance sheet. To the extent a first-time adopter has plan assets in
excess of the benefit obligation at the date of transition to IFRS, that excess (an asset) will
need to be evaluated to determine whether a reduction in the asset or an additional liability
(in certain circumstances) should be reported.
3.7.3.4
Curtailments
IFRS and US GAAP have a similar definition of a curtailment. However, the IFRS definition is
based on a material reduction in the number of employees covered by the plan while the
US GAAP definition is based on a significant reduction in employees expected future service.
First-time adopters could encounter a transition adjustment in the recognition of curtailment
gains or losses. Under US GAAP, curtailment gains are recognized when employees terminate
or the plan amendment is adopted, while curtailment losses are recognized when it is
probable that the curtailment will occur and the effects are reasonably estimable. IFRS states
that both curtailment gains and losses are recognized when the curtailment event occurs. To
the extent a first-time adopter had a curtailment prior to the date of transition to IFRS, the
first-time adopter may need to record an adjustment of a curtailment gain not yet recognized
under US GAAP to the amount that would have been recognized under IFRS. Further, if a
curtailment loss resulted under US GAAP based upon the probability of the curtailment
occurring, but the curtailment has not yet occurred at the transition date, the first-time
adopter may need to reverse the effects of the curtailment under IFRS. Any net effect is
recognized in retained earnings.
3.7.3.5
One-time termination benefits
An example of a one-time termination benefit is a benefit provided as part of a restructuring

event. Under US GAAP, entities are required to follow Statement 146, which requires a liability
generally to be recognized when the plan of termination meets specific criteria and has been
communicated to employees. On the other hand, IAS 19 requires liability recognition once the
entity has committed to the plan, which may result in the accrual of one-time benefits in an
77
earlier reporting period than under US GAAP. A first-time adopter will need to consider this
difference between US GAAP and IFRS when preparing its opening IFRS balance sheet with
respect to a one-time termination program that straddles the transition date.
Example 3.7.3.5 One-time termination benefit
Fact Pattern
An entity, which is a US GAAP reporter, has committed to exit a part of its operations.
Under the plan, the entity will close four manufacturing facilities, which will result in 1,000
employees being terminated. The timing and termination benefits for each job classification
have been identified. The plan was committed to and approved 15 December 2011, at which
time the main features were announced to the employees. On 15 January 2012, the entity
communicated the plan, which meets the specific criteria in Statement 146 and included a
one-time benefit arrangement in sufficient detail to enable employees to determine the type
and amount of benefits they would receive, if terminated. All employees will be terminated
within a three-month period.
The entitys date of transition to IFRS is 1 January 2012.
Analysis
Statement 146 would require the one-time termination benefit to be recognized as of 15
January 2012 (plan communication date). Under IAS 19, the one-time termination benefit
would be recognized as of 15 December 2011 (plan commitment date), resulting in an
IFRS transition adjustment.
3.7.3.6
Full actuarial valuation
It is important to note that despite the IFRS 1 exemption to zero-out cumulative actuarial
gains and losses at the date of transition to IFRS, most first-time adopters will still need to
obtain new actuarial valuations for their defined benefit plans as part of their conversion to
IFRS because of multiple differences between US GAAP and IFRS defined benefit plan
accounting, including the following:
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US GAAP allows a number of alternatives with respect to the actuarial method used, but
IFRS requires use of the projected unit credit method (sometimes known as the accrued
benefit method pro-rated on service or as the benefit/years of service method)
Differences in the treatment of vested prior service costs under US GAAP and IFRS
(discussed at section 3.7.3.2 above)
Differences in amortization periods for unrealized gains and losses, especially for plans
with mostly retired participants (discussed at section 3.7.3.1 above)
All of these differences affect the results of the actuarial valuation and make it likely that
first-time adopters will need to obtain a new valuation performed in accordance with IAS 19
as part of their conversion to IFRS. Further, it is important that first-time adopters verify that
their actuaries understand these detailed differences in the actuarial valuations under
US GAAP and IFRS.
The SEC may require SEC registrants to present four balance sheets in its first IFRS financial
statements; for large accelerated filers as contemplated in the proposed Roadmap, at the
date of transition, 1 January 2012 and for each of the years ending 31 December 2014,
2013 and 2012. Therefore, a first-time adopters first IFRS financial statements would reflect
its defined benefit liabilities at four different dates, that is, the first IFRS reporting date (that
is, 31 December 2014 using the previous example date) and the end of the comparative
periods and the opening balance sheet (that is, 31 December 2013 and 2012 as well as 1
January 2012). Clearly, it is quite costly to require a first-time adopter to perform four
actuarial valuations. However, the IASB decided against permitting a first-time adopter to use
a single actuarial valuation based, for example, on assumptions valid at the first IFRS
reporting date, with service costs and interest costs based on those assumptions for each of
the periods presented as the Board believed it would conflict with the objective of providing
understandable, relevant, reliable and comparable information for users. Nevertheless, the
IASB agreed to the compromise position that if a first-time adopter obtains a full actuarial
valuation at one or two dates, it is allowed to roll forward (or roll back) to another date but
only as long as the roll forward (or roll back) reflects material transactions and other material
events between those dates (including changes in market prices and interest rates).
3.7.3.7
Future convergence
In March 2008, the IASB published a discussion paper (DP), Preliminary Views on
Amendments to IAS 19 for Employee Benefits. The DP is the first step in the IASBs two-phase
project to reconsider accounting for employee benefits. Significant changes proposed in the
DP that could affect the items addressed within this section include: (1) the elimination of
smoothing mechanisms currently permitted for recognition of gains/losses (for example,
corridor approach) and unvested prior service costs, and (2) the recognition of gains/losses
and the related effect on the income statement. Entities considering future adoption of IFRS
should closely monitor the IASBs deliberations and assess future convergence developments
as part of the IFRS transition process.
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3.8
Cumulative translation differences

D12. IAS 21 requires an entity:
(a) to recognise some translation differences in other comprehensive income and
accumulate these in a separate component of equity; and
(b) on disposal of a foreign operation, to reclassify the cumulative translation
difference for that foreign operation (including, if applicable, gains and losses on
related hedges) from equity to profit or loss as part of the gain or loss on disposal.
D13. However, a first-time adopter need not comply with these requirements for cumulative
translation differences that existed at the date of transition to IFRSs. If a first-time
adopter uses this exemption:
(a) the cumulative translation differences for all foreign operations are deemed to be
zero at the date of transition to IFRSs; and
(b) the gain or loss on a subsequent disposal of any foreign operation shall exclude
translation differences that arose before the date of transition to IFRSs and shall
include later translation differences.
The accounting for exchange differences that form part of a reporting entitys net investment
in a foreign operation are recognized initially in a separate component of equity under
IAS 21, similar to its treatment under many other local GAAPs, including US GAAP. Despite
these similarities however, the amounts accumulated in this separate component of equity as
cumulative translation differences under a previous GAAP might not be the same as if that
which would have accumulated under IAS 21.
The IASB was concerned about the costs of restatements for reporting entities, because,
when there are differences in the determination of cumulative translation adjustments under
the previous GAAP and IFRS, the full retrospective application of IAS 21 would require a firsttime adopter to restate all financial statements of its foreign operations to IFRS from their
date of inception or later acquisition onwards, and then determine the cumulative translation
differences arising in relation to each of these foreign operations. For this reason, IFRS 1
provides a first-time adopter with the option to restate to zero all of the cumulative
translation differences existing as of the date of transition to IFRS, including any gains or
losses on related hedges residing in the cumulative translation difference account.
IAS 21 and IAS 39 require that, on disposal of a foreign operation, the cumulative amount of
the exchange differences deferred in the separate component of equity relating to that
foreign operation (which includes, for example, the cumulative translation difference for that
foreign operation, the exchange differences arising on certain translations to a different
presentation currency and any gains and losses on related hedges) be recognized in profit or
loss. Accordingly, for a first-time adopter that elects to use this exemption, the gain or loss
80
on a subsequent disposal of any foreign operation would exclude translation differences

that arose before the date of transition to IFRS and would include only the subsequent
translation differences.
3.8.1
Hyperinflation
The IASB decided not to exempt first-time adopters from retrospective application of IAS 29.
Although the cost of restating financial statements for the effects of hyperinflation in
periods before the date of transition to IFRS might exceed the benefits, particularly if the
currency is no longer hyperinflationary, the IASB concluded that a full retrospective
restatement should be required because hyperinflation can make unadjusted financial
statements meaningless or misleading.
As a result, in preparing its opening IFRS balance sheet, a first-time adopter should apply the
requirements of IAS 29 on hyperinflation to any periods during which the economy of the
functional currency or presentation currency was hyperinflationary.
To make the restatement process less onerous, a first-time adopter may want to consider
using fair value as deemed cost for long-lived assets such as property, plant and equipment,
investment properties and certain intangible assets. If a first-time adopter applies the
exemption to use fair value or a revaluation as deemed cost, it would apply IAS 29 to
subsequent periods from the date the revalued amount or fair value was determined.
3.8.2
Changes in functional currency
Certain European companies upon conversion to IFRS determined that the functional
currency of one or more subsidiaries, particularly entities such as intermediate holding
companies and treasury and tax-related structures, changed from that used under their
previous GAAP. When the functional currency is different under IFRS than under the previous
GAAP, restating non-monetary assets measured at historical cost (using the exchange rate
on the date of the transaction) could be onerous, depending on when it is determined the
functional currency changed. One possible option to ease the restatement obligation in this
situation is for a first-time adopter to revalue its property, plant and equipment upon
adoption of IFRS (that is, to use the fair value as deemed cost) rather than to restate the
carrying amount of these assets to reflect a change in the functional currency.
3.8.3

Cumulative translation differences as calculated in accordance with US GAAP may differ from
the amounts that would have been calculated in accordance with IFRS. This difference is
primarily due to the fact that US GAAP requires the functional currencies of intermediary
companies in the ownership alignment of a consolidated group to be considered, whereas no
such requirement exists under IFRS. Therefore, it is possible that exchange differences that
were recognized in profit or loss under US GAAP would be recognized as cumulative
81
translation differences in a separate component of equity under IFRS, or vice versa. As a

result, entities with complex ownership alignments may find it especially beneficial to use the
exemption to zero out translation differences at the date of transition rather than to
recalculate from inception the cumulative translation amounts under IFRS.
IFRS 1 allows all first-time adopters to use the election of zeroing-out the cumulative
translation account in equity upon transition, even if their previous accounting policies
complied with IFRS. As a result, first-time adopters that previously followed US GAAP and do
not anticipate any accounting differences from IFRS in this area are still eligible to use this
voluntary exemption and reset their cumulative translation differences to zero upon
conversion to IFRS. It has been our experience that virtually every entity adopting IFRS
elects to use this exemption because of the difficulty associated with attempting to calculate
any translation adjustment associated with all opening balance sheet adjustments. For
example, if a first-time adopter recorded an opening balance sheet adjustment related to an
asset or liability of a foreign subsidiary, that adjustment also would require a related foreign
currency translation adjustment under IAS 21. Accordingly, the zeroing-out election is
particularly helpful.
If a first-time adopter does not use this election, they should ignore the currency translation
adjustment that accumulated historically under US GAAP and re-calculate the cumulative
translation difference in accordance with IAS 21. Any adjusting entries to the foreign
currency translation reserve would be taken against the balance in retained earnings.
3.8.3.1
Hyperinflation
The determination of whether or not an economy is hyperinflationary differs slightly

between IFRS and US GAAP. First-time adopters will need to determine if an economy is
hyperinflationary under IFRS in order to appropriately apply IAS 29. In practice, we would
expect that a differing conclusion as to whether or not an economy is hyperinflationary to
rarely occur. However, even if both IFRS and US GAAP reach the same conclusion that an
economy is hyperinflationary, the subsequent accounting is quite different. Under US GAAP,
the functional currency must be changed to a stable currency, with all financial statement
items remeasured into the stable currency. Under IFRS, the functional currency remains the
hyperinflationary currency, but all the items in the financial statements must be subjected to
indexation for increases in the general price index, with such changes reflected in profit
and loss.
3.8.3.2
Available-for-sale monetary assets; foreign exchange gains and losses
Under US GAAP, changes in fair value due to movements in foreign exchange rates are
reflected in other comprehensive income and transferred to income on sale of the
instrument. Under IFRS, changes in fair value due to movements in foreign exchange rates
are recognized directly in profit or loss for monetary assets. As such, a first-time adopter
needs to implement a methodology to appropriately segregate the movements in fair value of
available-for-sale securities that are attributable to changes in foreign exchange rates.
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3.9
Investments in a subsidiary, jointly controlled entity or associate

D14. When an entity prepares separate financial statements, IAS 27 (as amended in 2008)
requires it to account for its investments in subsidiaries, jointly controlled entities and
associates either
(a) at cost or
(b) in accordance with IAS 39.
D15. If a first-time adopter measures such an investment at cost in accordance with
paragraph D14, it shall measure that investment at one of the following amounts in its
separate opening IFRS statement of financial position:
(a) cost determined in accordance with IAS 27 or
(b) deemed cost. The deemed cost of such an investment shall be its:
(i)
fair value (determined in accordance with IAS 39) at the entity's date of
transition to IFRSs in its separate financial statements; or
(ii) previous GAAP carrying amount at that date.

A first-time adopter may choose either (i) or (ii) above to measure its
investment in each subsidiary, jointly controlled entity or associate that it
elects to measure using a deemed cost
IFRS 1 allows a first-time adopter, in its separate non-consolidated financial statements, to
determine the cost of investments in subsidiaries, jointly controlled entities or associates in
its opening IFRS financial statements as either (1) cost determined in accordance with IAS 27
or (2) deemed cost. If deemed cost is selected as the accounting policy, the entity can choose
the fair value of the investment at the date of transition to IFRS, determined in accordance
with IAS 39, or the previous GAAP carrying amount of the investment at the date of
transition to IFRS. This determination of deemed cost is to be made for each investment
rather than being a policy decision.
As separate non-consolidated financial statements are not frequently prepared by US
reporting companies, this exemption is not likely to be frequently used. However, in addition
to consolidated financial statements, in situations where the transfer of assets from
subsidiaries to the parent are restricted, pursuant to the SECs Regulation S-X Rule 12-04,
condensed non-consolidated financial information may be required with respect to the parent
entitys financial position, cash flows and results of operations. A first-time adopter may use
this exemption in determining the cost of its investments in subsidiaries, jointly controlled
entities or associates in its opening IFRS financial statements for the purposes of the
condensed non-consolidated financial information. This exemption may also be used in the
determination of goodwill in situations where a first-time adopter did not consolidate a
subsidiary acquired in a past business combination, see 3.10.1 of this publication.
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3.10
Assets and liabilities of subsidiaries, associates and joint ventures
3.10.1
Previously unconsolidated subsidiaries
Excerpt from Appendix C IFRS 1

C4.
If a first-time adopter does not apply IFRS 3 retrospectively to a past business

combination, this has the following consequences for that business combination:
(j)
In accordance with its previous GAAP, the first-time adopter may not have
consolidated a subsidiary acquired in a past business combination (for example,
because the parent did not regard it as a subsidiary in accordance with previous
GAAP or did not prepare consolidated financial statements). The first-time adopter
shall adjust the carrying amounts of the subsidiary's assets and liabilities to the
amounts that IFRSs would require in the subsidiary's statement of financial
position. The deemed cost of goodwill equals the difference at the date of
transition to IFRSs between:
(i)
the parent's interest in those adjusted carrying amounts; and
(ii) the cost in the parent's separate financial statements of its investment in the
subsidiary.
Under its previous GAAP, a first-time adopter may not have consolidated a subsidiary
acquired in a past business combination. In that case, a first-time adopter applying the
business combinations exemption (see section 3.2 of this publication) should adjust the
carrying amounts of the subsidiary's assets and liabilities to the amounts that IFRS would
require in the subsidiary's balance sheet. In such situations, the deemed cost of goodwill
would be the difference between the parent's interest in those adjusted carrying amounts and
the cost in the parent's separate non-consolidated financial statements of its investment in
the subsidiary at the date of transition to IFRS.
The cost of a subsidiary in the parent's separate financial statements will depend on which
option the parent has taken to measure the cost under IFRS 1, see also section 3.9 of this
publication. Nevertheless, a first-time adopter does not have to calculate what the goodwill
would have been at the date of the original acquisition. The deemed cost of goodwill should,
however, be capitalized as an asset in the opening IFRS balance sheet. If the cost of the
subsidiary (as measured under IFRS 1) is lower than the net asset value at the date of
transition to IFRS, the difference is taken to retained earnings.
3.10.2
Previously consolidated entities that are not subsidiaries
A first-time adopter may have consolidated an investment under its previous GAAP that does
not meet the definition of a subsidiary under IFRS and should not be consolidated. See
section 3.10.7.3 of this publication for further discussion. In this case, the first-time adopter
should first determine the appropriate classification of the investment under IFRS and then
apply the first-time adoption rules in IFRS 1.
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Generally previously consolidated investments should be accounted for as either:
an associate: If it is determined that an investment should be accounted for using the

equity method of accounting as described in IAS 28, first-time adopters applying the
business combinations exemption (that is, prior business combinations are not restated in
accordance with IFRS 3R) also should apply that exemption to past acquisitions of
investments in associates. If the business combinations exemption is not applicable or the
entity did not acquire the investment in the associate through an acquisition, IAS 28
should be applied retrospectively;
a joint venture: If it is determined that an investment should be accounted for as an
interest in a joint venture as per IAS 31, first-time adopters applying the business
combinations exemption should also apply that exemption to past acquisitions of
investments in joint ventures. If the business combinations exemption is not applicable or
the entity did not acquire the investment in the joint venture through an acquisition,
IAS 31 should be applied retrospectively;
an investment under IAS 39: if it is determined that an investment is not a subsidiary,
associate, or joint venture ; or
an executory contract or service concession arrangement: There are no first-time
adoption exemptions that apply; therefore, IFRS should be applied retrospectively.
3.10.3
Subsidiary becomes a first-time adopter later than its parent (for

purposes of separate subsidiary financial statements)
Excerpt from Appendix D IFRS 1

D16. If a subsidiary becomes a first-time adopter later than its parent, the subsidiary shall,
in its financial statements, measure its assets and liabilities at either:
(a) the carrying amounts that would be included in the parent's consolidated financial
statements, based on the parent's date of transition to IFRSs, if no adjustments
were made for consolidation procedures and for the effects of the business
combination in which the parent acquired the subsidiary; or
(b) the carrying amounts required by the rest of this IFRS, based on the subsidiary's
date of transition to IFRSs. These carrying amounts could differ from those
described in (a):
(i)
when the exemptions in this IFRS result in measurements that depend on the
date of transition to IFRSs.
(ii) when the accounting policies used in the subsidiary's financial statements
differ from those in the consolidated financial statements. For example, the
subsidiary may use as its accounting policy the cost model in IAS 16 Property,
Plant and Equipment, whereas the group may use the revaluation model.
A similar election is available to an associate or joint venture that becomes a firsttime adopter later than an entity that has significant influence or joint control over it
85
Within consolidated groups, some subsidiaries, associates and joint ventures may have a later
date of transition to IFRS than the parent/investor (for example, a US separately listed
subsidiary of an EU parent). When a subsidiary converts (for the purposes of its stand-alone
financial statements) to IFRS at a later date than its parent, IFRS 1 provides the subsidiary
certain choices in how it may measure its assets and liabilities, as described above.
Similar choices may be made by associates or joint ventures that adopt IFRS later than the
organization that exercises significant influence or joint control over them.
Under the option described in paragraph D16 (b) above, in IFRS 1, a subsidiary would prepare
its own IFRS financial statements, without regard to the IFRS 1 options that its parent used
when it prepared its opening balance sheet. Electing this alternative could result in
permanent differences between the IFRS amounts in a subsidiarys own financial statements
and those used by the parent to consolidate the subsidiary. In turn, this alternative could
force a subsidiary to keep two parallel sets of accounting records based on different dates of
transition to IFRS.
Under the option described in paragraph D16(a), the amounts in a subsidiarys IFRS financial
statements would be as close to those used by its parent as possible. However, differences
other than those arising from consolidation procedures and business combinations will still
exist in many cases. For example, a subsidiary may have hedged an exposure by entering
into a transaction with a fellow subsidiary. Such transaction could qualify for hedge
accounting in the subsidiarys own financial statements but not in the parents consolidated
financial statements. Application of this option also would be more difficult when a parent
and its subsidiary (joint venture or associate) have different financial years. In that case, the
option described in paragraph D16(a) of IFRS 1 seems to require the IFRS information for
the subsidiary (joint venture or associate) to be based on the parents date of transition to
IFRS, which may not even coincide with an interim reporting date of the subsidiary (joint
venture or associate).
A subsidiary may become a first-time adopter later than its parent even though it previously
prepared a reporting package under IFRS for consolidation purposes but did not present a full
set of financial statements under IFRS. The option described in paragraph D16(a) is available
not only when a subsidiarys reporting package complies fully with the recognition and
measurement requirements of IFRS but also when the subsidiarys reporting package is
adjusted centrally for matters such as post-balance sheet events review and central allocation
of pension costs. See section 1.2 for a further discussion of this topic. Adjustments made
centrally to an unpublished reporting package are not considered to be corrections of errors
for the purposes of the disclosure requirements in IFRS 1 primarily because the reporting
package is not considered to be IFRS compliant financial statements
If a subsidiary was acquired after the parents date of transition to IFRS, the subsidiary
cannot apply the option described in paragraph D16(a) because the carrying amounts that
would be included in the parents consolidated financial statements, based on the parents
date of transition to IFRS would not exist.
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The exemption is also available to associates and joint ventures. This means that in many
cases an associate or joint venture that wants to apply option D16(a) will need to choose
which shareholder it considers its parent for IFRS 1 purposes and determine the IFRS
carrying amount of its assets and liabilities by reference to that parents date of transition to
IFRS. (An associate or joint venture may choose to apply option D16(a) in order to avoid
having permanent differences between the IFRS amounts it recognizes and those used by at
least one of its investors to account for the associate or joint venture and to avoid having to
keep two parallel sets of accounting records with at least one of its investors.)
3.10.4
Parent becomes a first-time adopter later than its subsidiary
Excerpt from Appendix D IFRS 1

D17. However, if an entity becomes a first-time adopter later than its subsidiary (or
associate or joint venture) the entity shall, in its consolidated financial statements,
measure the assets and liabilities of the subsidiary (or associate or joint venture) at the
same carrying amounts as in the financial statements of the subsidiary (or associate or
joint venture), after adjusting for consolidation and equity accounting adjustments and
for the effects of the business combination in which the entity acquired the subsidiary.
Similarly, if a parent becomes a first-time adopter for its separate financial statements
earlier or later than for its consolidated financial statements, it shall measure its assets
and liabilities at the same amounts in both financial statements, except for
consolidation adjustments.
If a parent adopts IFRS later than its subsidiary, associate or joint venture, the parent must
measure the assets and liabilities of the subsidiary, associate or joint venture in its
consolidated financial statements at the same carrying amounts as reported in the IFRS
standalone financial statements of the subsidiary, associate, or joint venture after adjusting
for consolidation and equity accounting adjustments, unifying accounting policies and for the
effects of the business combination in which the entity acquired the subsidiary.
IFRS 1 does not elaborate on exactly what constitutes consolidation adjustments but in our
view it would encompass adjustments required in order to harmonize the groups accounting
policies so that they are uniformly applied by all as well as purely mechanical consolidation
adjustments such as the elimination of intra-group balances, profits and losses.
Many entities that have not yet adopted IFRS with global operations may be affected by this
requirement, as it is likely some of those foreign subsidiaries, associates or joint ventures
have already adopted IFRS in their standalone financial statements. In such situations, the
parent cannot revise the amounts reported at the subsidiary, associate, or joint venture
levels. Since the subsidiary, associate or joint venture has already converted to IFRS, it
cannot convert to IFRS a second time that is, it cant apply the exemptions or exceptions
within IFRS 1 to its accounts again. Instead, except for uniform accounting policies,
consolidation, and equity accounting adjustments for the effect of business combinations, the
parent continues to report the balances already being reported in the standalone financials of
the subsidiary, associate or joint venture.
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In certain circumstances, an entity may be considered to have adopted IFRS regardless of its
legal status. For example, if an entity which is a branch, and hence not a legal entity on its
own, has prepared and issued general purpose financial statements to users outside of the
branch with an explicit and unreserved statement of compliance with IFRS, then that entity
would be considered to have adopted IFRS and could not apply IFRS 1 again.
As discussed more fully in section 1.2 an entity that previously reported in accordance with a
GAAP that was essentially the same as IFRS, will not be deemed to have already adopted
IFRS, unless the entity also made an explicit and unreserved statement of compliance with
IFRS as issued by the IASB.
It is important to note, however, that the exemptions under IFRS 1 do not change the IAS 27
requirement that uniform accounting policies be used for all entities within a group. For
example, a parent may elect to recognize unrealized actuarial gains and losses on defined
benefit plans immediately in profit and loss while a subsidiary applies corridor approach. As
part of its consolidation procedures, the parent will need to adjust the amounts reported in
the subsidiarys standalone financial statements to conform with the parents policies and to
therefore immediately recognize any unrealized gains and losses of the subsidiary in the
consolidated financial statements. Note, however, that amounts reported in the subsidiarys
standalone financial statements would not change.
When a subsidiary adopts IFRS before its parent, the parents ability to choose first-time
adoption exemptions in IFRS 1 as it relates to the assets and liabilities in the subsidiarys
financial statements will be limited. For example, consider the following fact patterns:
Example 3.10.4 Parent becomes a first-time adopter later than its subsidiary
Fact Pattern
Scenario 1
Parent A plans to adopt IFRS in its consolidated financial statements for the first time in
2014 (date of transition, 1 January 2012), and its Subsidiary B adopted IFRS in 2005.
Subsidiary B and Parent A both account for their property, plant and equipment at
historical cost under IAS 16. Upon first time adoption, Parent A may only adjust the
carrying amounts of Subsidiary Bs assets and liabilities for the effects of consolidation and
business combination for its purchase of Subsidiary B. Although Parent A elected to use
the fair value or revaluation as deemed cost exemption to value property, plant and
equipment upon its transition to IFRS on 1 January 2012 it cannot apply that exemption to
Subsidiary Bs property, plant and equipment at Parent As date of transition to IFRS.
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Scenario 2
Parent A plans to adopt IFRS in its consolidated financial statements for the first time in
2014 (date of transition, 1 January 2012), and its Subsidiary B adopted IFRS in 2005.
Subsidiary B accounts for its property, plant and equipment at revalued amounts under
IAS 16 while Parent A intends to use historical cost. A consolidation adjustment would be
necessary to adjust Subsidiary Bs revalued amounts to amortized historical cost because
Parent A and Subsidiary B are required to have the same accounting policies under IFRS.
Parent A would not be allowed to apply the exemption to use fair value or revaluation as
deemed cost for Subsidiary Bs property, plant and equipment at the date of Parent As
first time adoption of IFRS because Subsidiary B adopted IFRS in 2005 and made its IFRS 1
elections at that time. IFRS 1 will not allow Subsidiary B to adopt IFRS again at the date of
transition of Parent A.
3.10.5
Implementation guidance on accounting for assets and liabilities of

subsidiaries, associates and joint ventures
When a first-time adopter applies the rules discussed above in sections 3.10.3 Subsidiary
becomes a first-time adopter later than its parent and 3.10.4 Parent becomes a first-time
adopter later than its subsidiary, it is important to understand that these rules do not
override the requirements to apply Appendix C of IFRS 1 to assets acquired, and liabilities
assumed in a business combination that occurred prior to the acquirers date of transition to
IFRS. See section 3.2 for a further discussion of this topic. However, the first-time adopter is
required to apply the provisions discussed in Parent becomes a first-time adopter later than
its subsidiary to new assets acquired and liabilities assumed by the acquiree (subsidiary)
after that business combination and still held at the first-time adopters date of transition to
IFRS (for example, 1 January 2012).
When a parent acquired a subsidiary through a business combination before the date of
transition and the parent becomes a first-time adopter later than its subsidiary, the parent is
required to segregate the assets and liabilities of the subsidiary at the date of the parents
transition to IFRS into two categories: those acquired through the business combination in
which the subsidiary was acquired and those that were acquired subsequent that business
combination. The assets and liabilities that were acquired through the business combination are
measured in accordance with Appendix C of IFRS 1. Those acquired subsequent to the business
combination will have to reflect the IFRS 1 elections previously made by the subsidiary.
Also, the rules do not override a first-time adopter from applying the remainder of IFRS 1 in
measuring all assets and liabilities. Finally, a first-time adopter must still provide all of the
disclosures required by IFRS 1 as of the first-time adopters own date of transition to IFRS,
not the date of transition to IFRS for the subsidiary, associate or joint venture.
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3.10.6
Adoption of IFRS in separate non-consolidated financial statements
In certain circumstances, a parent company may have the ability to prepare separate nonconsolidated financial statements. For example, Subsidiary B is wholly owned by Company A,
a non-public US entity. Company A is wholly-owned by Parent EU, a public entity in Europe
that produces consolidated financial statements for public use that comply with IFRS. Under
IFRS, Subsidiary B may be consolidated directly into Parent EU. In this scenario, under IFRS,
Company A is not required to prepare consolidated financial statements that include
Subsidiary B and may prepare separate non-consolidated financial statements.
If the first-time adopter is also a separate reporting entity, and the first-time adopter adopts
IFRS in its stand-alone non-consolidated financial statements at a date different than when it
adopts IFRS for its consolidated financial statements, IFRS 1 requires the parent to measure
its assets and liabilities at the same amounts in both financial statements, except for
consolidation adjustments.
As written, the requirement is merely that the same basis be used, without being explicit as
to which set of financial statements should be used as the benchmark. However, we believe,
based on the context in which the phase is used in the standard, that the IASB intends that
the measurement basis used in whichever set of financial statements first comply with IFRS
must also be used when IFRS is subsequently adopted in the other set.
3.10.7

3.10.7.1
Different reporting dates of parent and subsidiary
Under US GAAP, a parent and its subsidiary may have different year-ends as long as that
difference is not greater than three months. Significant events that occur during this gap
generally would not be adjusted in the consolidated statements but rather would be disclosed.
IFRS also permits a three-month lag but only if it is impracticable to adjust the subsidiary's
financial statements. IAS 27 does not define what is meant by impracticable in this context.
However, it is reasonable to assume that the IASB intended the same meaning as in IAS 1 (that
is, that the entity cannot comply with the requirement after making every effort to do so).
If a three-month lag is permitted because it is impracticable to adjust the subsidiarys
statements, IFRS still requires an adjustment to be made in the consolidated financial
statements of the parent for the effect of significant transactions or events that occur
between the two reporting dates. For example, assume a subsidiary has a 30 September
year-end and a parent has a 31 December year-end. In the parents consolidated financial
statements, if it is impracticable to obtain financial statements for the subsidiary for the year
ended 31 December, the subsidiary would be consolidated based on the latest 30 September
year-end. However, on consolidation, the parent would adjust for significant events that
occurred at the subsidiary between 30 September and 31 December.
90
As a result, first-time adopters that previously reported under US GAAP that have different
reporting dates between the parent and the subsidiary will have to determine if it is
impracticable to adjust the subsidiarys financial statements to the same period end as the
parent. If it is not impracticable, they will need to have processes in place to be able to obtain
the financial statements of the subsidiary as of the same period end as the parent. Even if the
impracticability clause is met, the parent will still need to have processes in place to be able to
obtain the necessary information in a timely manner to make appropriate adjustments for the
effect of significant transactions that occur between the two reporting dates. As part of
preparing the opening balance sheet, the entity also will have to reflect in the opening
balance sheet any adjustments for activity between the subsidiarys year-end and the entitys
year-end, with an offsetting adjustment to retained earnings.
The above discussion also applies to equity method investments (associates) and joint
ventures. Unlike a parent-subsidiary relationship, since the investor does not control the
investee, obtaining the investee or joint venture information as of the same period end as
that of the investor may be much more difficult. In anticipation of adopting IFRS, first-time
adopters should consider initiating discussions with their investees to obtain a thorough
understanding of the investees financial reporting procedures and determine what additional
procedures and controls may be required to obtain the investees necessary information on a
timely basis.
3.10.7.2
Uniform accounting policies
Under US GAAP, a parent and its subsidiary(ies) are permitted in certain circumstances to
have different accounting policies. This situation occurs more frequently when a subsidiary
was recently acquired or when the subsidiary is a public entity or when the subsidiary has
specialized industry accounting practices (for example, when the subsidiary applies the
specialized industry practices for investment companies, venture capital organizations,
mutual funds, unit trusts and other similar entities). Under IFRS, however, the accounting
polices of all entities in a groups consolidated financial statements must be the same. When
the accounting policies differ, an adjustment in consolidation is required to conform the
subsidiarys accounting policies to those of the parent.
The requirement for uniform accounting policies under IFRS also applies to equity method
investments (associates) and joint ventures. Since an investor does not control associates or
joint ventures but rather has only significant influence, obtaining the necessary information in
a timely manner can prove challenging, particularly if the investee does not report under IFRS.
In anticipation of adopting IFRS, first-time adopters should consider initiating discussions with
their investees to obtain a thorough understanding of the investees financial reporting
procedures and determine what additional procedures and controls may be required to obtain
the investees necessary IFRS information on a timely basis.
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3.10.7.3
Consolidation models
Under US GAAP, the consolidation analysis first starts with FIN 46(R) and the evaluation of
whether entities are considered to be variable interest entities (VIE). If an entity is a VIE,
consolidation is based on the entitys variable interests and not its outstanding shares. If the
entity is determined not to be a VIE, but rather a voting interest entity, the control
consolidation model of ARB 51, Statement 94, and related guidance is applied.
Under IFRS, all entities are evaluated for consolidation based on the control model of IAS 27.
Special purpose entities (SPE) are evaluated for consolidation under SIC 12, which is an
expansion of the definition of control under IAS 27 but many believe incorporates elements
of risks and rewards in the consolidation evaluation. In evaluating consolidation under IAS 27,
IFRS requires that entities consider potential voting rights, de facto control, and certain
contractual arrangements, as discussed below.
In determining control under IFRS, potential voting rights are considered if currently
exercisable. Potential voting rights include instruments like warrants, options, convertible
debt or equity that are currently exercisable. A first-time adopter needs to examine all facts
and circumstances that affect the potential voting rights including similar rights held by
others. Potential voting rights are considered regardless of managements intent or financial
ability to exercise or to convert them. Voting rights that cannot be exercised or converted
until a future date or until the occurrence of a future event are not considered currently
exercisable or currently convertible.
Under US GAAP, the determination of control is focused on existing voting rights and
generally does not consider potential voting rights.
Furthermore, the concept of de facto control exists under IFRS whereby an entity that holds a
minority interest can control another entity in the absence of any formal arrangements that
would give it a majority of the voting rights, although this is rarely achieved in practice.
However, de facto control is not possible under US GAAP.
Finally, under IFRS, control also may be obtained or lost through contractual arrangements
between shareholders. Under US GAAP, in certain situations, control also may be obtained
through contractual arrangements. However, one of the criteria to be met is that the contract
be for a period of at least ten years. IFRS does not include a bright-line for evaluating control
by contract. As a result of differences in the models of determining when to consolidate
under US GAAP and IFRS, it is possible that different consolidation conclusions may be
reached under IFRS than were previously reached under US GAAP. As a result, a first-time
adopter that reported under US GAAP may have investments that previously were
consolidated under US GAAP that would not be consolidated under IFRS. Likewise, a firsttime adopter that previously reported under US GAAP may have investments that were not
previously consolidated but which will be required to be consolidated on the first-time
adopters date of transition to IFRS.
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3.10.7.4
Equity method accounting
Both US GAAP and IFRS require the equity method of accounting to be applied to those
investments over which the investor has the ability to exercise significant influence. Also,
under both GAAPs, there is a rebuttable presumption that a voting interest of 20% or more
results in significant influence. However, there are certain differences between the two
GAAPs in the determination of significant influence. As with consolidation, under IFRS
potential voting rights that are currently exercisable are considered in the determination of
significant influence. Under US GAAP, potential voting rights generally would not be
considered. Furthermore, under US GAAP, the SEC staffs position (as explained in EITF D-47)
is that investments in all limited partnerships should be accounted for pursuant to SOP 78-9,
which requires the use of the equity method unless the investors interest is so minor (less
than 3% to 5%) that the limited partner may have virtually no influence over partnership
operating and financial policies. Under IFRS, there is no similar bright line, and such
investments would be evaluated under the general criteria of significant influence of IAS 28.
Under US GAAP, Statement 159 provides entities the option to account for their equity
method investments at fair value instead of using the equity method. This fair value option is
not available for these investments under IFRS.
As a result of these differences, a first-time adopter may have applied the equity method
under US GAAP to a particular investment but will not apply it under IFRS, or vice versa. As
such, first-time adopters will have to reassess the appropriateness of whether or not to apply
the equity method. If a first-time adopter previously used the fair value option to account for
its equity method investment, it will have to restate the balances for such investments in the
opening balance sheet to comply with the measurement principles of IFRS (with any resulting
adjustments being reflected in the appropriate components of shareholders equity).
3.10.7.5
Qualified special-purpose-entity (QSPE) and Investment companies
Under US GAAP, QSPEs, as defined under Statement 140 are exempt from consolidation
even under FIN 46(R). There is no QSPE concept under IFRS. As a result, QSPEs are not
exempt from applying consolidation.
Under US GAAP, the separate financial statements of investment companies (venture capital
organizations, mutual funds, unit trusts and similar entities) report their investments at fair
value. That is, they do not consolidate their subsidiaries. If the investment company is itself a
subsidiary, the specialized industry accounting is reflected in the parents consolidated
financial statements even if the parent is not an investment company. Under IFRS,
investment companies are not exempt from applying consolidation. In other words, if an
investment company has a subsidiary, it is subject to the normal consolidation rules.
Since these differences may result in consolidation of entities under IFRS that were not
consolidated under US GAAP, first-time adopters need to be prepared to obtain the necessary
information to perform consolidation accounting accurately and in a timely manner upon
their adoption of IFRS.
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3.10.8
Future Developments
FIN 46(R) has recently been amended with the issuance of Statement 167, which is effective
for fiscal years beginning after 15 November 2009 (that is, 1 January 2010 for calendaryear companies). The IASB proposed amendments to IAS 27 in December 2008 (Exposure
Draft 10). The new guidance is expected to be issued in the second half of 2009. Although
revisions of the consolidation standards are not formally designated as a joint project, and
each Board is working separately to deliver timely improvements to their standards on
consolidation, both Boards have been actively discussing their respective proposed
amendments. Following are issues that may be affected by these amendments.
3.10.8.1
Consolidation models
Based on the proposed IASB and new FASB consolidation guidance, differences will continue
to exist for potential voting rights and de facto control in evaluating entities for consolidation.
However, after the proposed IASB amendments and new FASB consolidation guidance
becomes effective, the move towards a more qualitative assessment in determining the
consolidating party under US GAAP is likely to reduce the circumstances in which a first-time
adopter reaches different consolidation conclusion under US GAAP versus IFRS.
3.10.8.2
Joint venture proportionate accounting
In September 2007, the IASB issued an Exposure Draft on Joint Arrangements, and a final
standard is scheduled to be issued in the third quarter of 2009. The project is part of the
short-term project with the FASB to reduce differences between IFRS and US GAAP. The
principal change to IAS 31 from an IFRS-US GAAP convergence perspective is that
proportionate consolidation of jointly controlled entities will no longer be allowed. If
approved, the equity method will be used to account for all interests in jointly controlled
entities, thereby bringing IFRS more in line with US GAAP.
3.10.8.3
Qualified special-purpose-entity (QSPE)
Statement 140 has recently been amended with the issuance of Statement 166. See
section 2.3 of this publication for more information. Statement 166 and Statement 167 are
effective for fiscal years beginning after 15 November 2009 (that is, 1 January 2010 for
calendar-year companies) and remove both the concept of QSPE and its exemption under
FIN 46(R) for consolidation analysis.
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3.11
Compound financial instruments and debt instruments with

embedded derivatives

D18. IAS 32 Financial Instruments: Presentation requires an entity to split a compound
financial instrument at inception into separate liability and equity components. If the
liability component is no longer outstanding, retrospective application of IAS 32
involves separating two portions of equity. The first portion is in retained earnings and
represents the cumulative interest accreted on the liability component. The other
portion represents the original equity component. However, in accordance with this
IFRS, a first-time adopter need not separate these two portions if the liability
component is no longer outstanding at the date of transition to IFRSs.
Compound financial instruments are instruments that contain both a liability and equity
component. IAS 32 requires an issuer to split a compound financial instrument at inception
into separate liability and equity components. The substance of the contractual
arrangement, rather than the legal form, governs the classification of the components of
compound financial instruments. The measurement of the components is determined based
on the circumstances existing at the date when the instrument was first issued. For example,
a convertible bond contains an obligation to pay interest and principal (a liability component)
and an embedded conversion option (an equity component). The fair value of the liability
component, excluding the conversion option, is measured at the fair value of expected
cash flows at inception and recorded as a liability. The residual amount of the issuance
proceeds is recorded in equity. (This is sometimes referred to as split accounting.
See paragraphs 28 32 of IAS 32 and IAS 32 AG 30 - AG 35.)
Split accounting as required by IAS 32 and as discussed above applies only when the
conversion option is considered to be a fixed for fixed feature. If the fixed for fixed
criterion is not met, then IAS 39 requires the issuer of the instrument to separate (or
bifurcate) the equity conversion option (the embedded derivative) and to account for the
embedded derivative at fair value.
IFRS 1 requires a first-time adopter to apply IAS 32 retrospectively and separate all
compound financial instruments into their debt and equity components. Under that general
principle, if the liability component of a compound financial instrument is no longer
outstanding at the date of transition, retrospective application of IAS 32 would result in two
separate equity portions: (1) a portion recorded in retained earnings that represents the
cumulative interest accretion on the liability component and (2) the equity component initially
allocated at inception. Because retrospective application under this situation would not affect
the total amount of equity recorded for this instrument, IFRS 1 provides an exemption under
which a first-time adopter need not identify separately the two portions of equity if the
liability component of the instrument is no longer outstanding at the date of transition.
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The general principles of IFRS 1 require a first-time adopter to retrospectively recognize and
derecognize all financial assets and financial liabilities (including derivatives) in its opening
IFRS balance sheet in accordance with IAS 32 and IAS 39. The exemption described above
that allows first-time adopters to not separately identify and account for compound
instruments when the liability portion no longer is outstanding is only relevant for the issuers
of compound financial instruments that require split accounting. That is, the exemption
applies to compound instruments with a component accounted for as a liability and a
component accounted for as equity. However, this exemption does not extend to the issuer of
a convertible instrument in which the equity component is an embedded equity-linked
instrument (that is, it does not meet the fixed for fixed criterion) and is required to be
separately accounted for (bifurcated) as a derivative under IAS 39.
3.11.1
Retrospective application of split accounting and measurement

challenges
IFRS 1 requires full retrospective application of IAS 32 as of the financial instruments original
issuance date for all compound instruments with liability components outstanding at the
transition date for which split accounting is required under IFRS. A first-time adopter therefore
will be required to measure the fair value of the liability component as of the issuance date.
Consequently, the issuer is required to use assumptions and market inputs that would have
been appropriate at the date of issuance to estimate the fair value of the liability component.
Practical issues likely will arise for many issuers when determining the fair value of the liability
component, because relevant historical information or inputs that are needed to determine
the fair value may not always be readily available. Similar practical issues will arise for the
issuers of an instrument that is required to be bifurcated under IFRS but which was accounted
for as a single instrument under the first time adopters previous GAAP.
Early in the process of planning and budgeting for the conversion process, companies that
are preparing for adoption of IFRS may want to identify the instruments for which they will
need historical valuations or data for different applications of split accounting or bifurcation
and consider the related effort, lead time, and expense to identify the appropriate resources
and assistance.
3.11.2

To successfully adopt IFRS, a first-time adopter should understand that significant differences
can exist between US GAAP and IFRS in the classification of a compound financial instrument
as an equity instrument or a financial liability. These differences may require the
reclassification of certain items between equity and liabilities at the date of transition to IFRS.
First time adopters likewise should be alert for differences in the classification and accounting
for embedded derivatives.
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US GAAP and IFRS share two similar concepts in the area of financial instrument accounting
that result in a single legal instrument being accounted for by the instruments issuer in two
pieces. Each set of standards includes the concept of splitting out a component of a
compound financial instrument and reflecting that component as either a separate liability or
separate component of equity. Also, both sets of standards require in some circumstances an
embedded derivative to be bifurcated from a financial instrument and accounted for at fair
value with the remaining host instrument accounted for under other applicable standards.
However, despite these conceptual similarities, a single instrument may be treated very
differently under the two sets of standards. The standards that address split accounting of
compound instruments differ in terms of the trigger for split accounting and potentially in the
measurement attributes of the components. The circumstances in which bifurcation of
embedded derivatives is required also potentially differ between IFRS and US GAAP.
A few high level examples that illustrate these differences are as follows:
A convertible debt instrument is deemed to include an embedded derivative that is

required to be bifurcated under IAS 39 if the embedded conversion option is not
considered to be a fixed for fixed feature. However, that same instrument potentially
may be accounted for as a single instrument under US GAAP under an exception from
bifurcation in Statement 133 if the embedded conversion option is considered indexed
to the issuers own stock under EITF 07-5, which has a different application of the fixed
for fixed concept. (Under US GAAP FSP APB 14-1 -- the convertible debt instrument
may nonetheless be subject to split accounting by the issuer of the instruments if there is
a possibility of cash settlement.)
IAS 32 may require the liability component of a convertible debt instrument with a
beneficial conversion feature to be recognized at its fair value and the equity component
as the residual. However, US GAAP (EITF 00-27) may require the conversion option to be
measured at intrinsic value and classified in equity, with the residual allocated to the debt
host instrument.
A preferred share that is (1) convertible into a fixed number of common shares, (2) pays
dividends at the issuers discretion and (3) is also redeemable at the option of the holder
has, under IAS 32, a redemption feature that is treated as a liability because the issuer
has an obligation to pay cash to the holder that cannot be avoided. In this circumstance,
the residual portion is classified as a component of equity that comprises (a) the
conversion option and (b) the potential future dividends. US GAAP would require the
issuer to classify the entire instrument as equity (temporary equity for a public company
as a result of the redemption feature).
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The previous examples illustrate only a few of the differences in accounting for compound
instruments under IFRS and US GAAP that result from different models and different
exceptions under the two sets of standards. The analysis of compound instruments under
both sets of GAAP is complicated and there will be differences in the accounting that will
require reclassifications upon the adoption of IFRS. In general, because of the differences in
the classification criteria for equity instruments and liabilities (including derivatives) and the
bifurcation rules, a first-time adopter should not be surprised to find the following:
Convertible debt instruments that were presented as a single instrument under US GAAP
will, at a minimum, require split accounting under IFRS, with a portion presented as a
liability and a portion presented as equity. Many convertible debt instruments will require
bifurcation under IFRS that result in derivative treatment for the conversion option.
Convertible debt instruments that were presented with split accounting (liability and
equity components) under US GAAP will likely require bifurcation into debt and derivative
components under IFRS. This will be especially true for instruments that received split
accounting in US GAAP under FSP APB 14-1.
3.12
Designation of previously recognized financial instruments

D19. IAS 39 permits a financial asset to be designated on initial recognition as available for
sale or a financial instrument (provided it meets certain criteria) to be designated as a
financial asset or financial liability at fair value through profit or loss. Despite this
requirement exceptions apply in the following circumstances:
(a) an entity is permitted to make an available-for-sale designation at the date of
(b) an entity is permitted to designate, at the date of transition to IFRSs, any financial
asset or financial liability as at fair value through profit or loss provided the asset
or liability meets the criteria in paragraph 9(b)(i), 9(b)(ii) or 11A of IAS 39 at
that date.
At the date of transition to IFRS, a first-time adopter must recognize and measure all financial
assets and financial liabilities in its opening IFRS balance sheet in accordance with IAS 39
except for those non-derivative financial assets and non-derivative financial liabilities that
would qualify for derecognition pursuant to the provisions of IFRS 1, see section 2.3 of this
publication for further discussion. In that regard, a first-time adopter will need to make
certain classification choices for those financial instruments. Normally, these designations
are made when the financial instruments are initially recognized.
The need to classify financial instruments into specific categories arises from the mixed
measurement model of IAS 39, under which some financial instruments are carried at
amortized cost while others are carried at fair value. Consequently, a particular financial
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instruments classification that is made at initial recognition (or, in the case of a first-time
adopter, at the date of transition) drives the subsequent treatment. Once financial
instruments have been classified, reclassifications are generally not permitted except for
certain reclassifications that are specifically permitted in IAS 39.
IAS 39 requires that financial assets and financial liabilities be classified into one of five
categories, as outlined in the table below, which dictate the accounting treatment.
Category
Description
Measurement
Held-to-maturity
(HTM)
Financial assets with fixed or determinable payments and Amortized cost

fixed maturity, other than loans and receivables, for
which there is a positive intent and ability to hold to
maturity and which have not been designated at fair
value through profit or loss or as available-for-sale.
Loans and
Receivables (L&R)
Financial assets with fixed or determinable payments that Amortized cost

are not quoted in an active market, do not qualify as
trading assets and have not been designated as at fair
value through profit or loss or as available-for-sale.
Fair value through

profit or loss
(FVPL)
All derivatives (except for those designated for hedge

Fair value, with changes in fair
accounting)
value reported in profit or loss.
Financial instruments that are intended to be actively
traded (that is, held for trading; FVPL-Trading).
Any financial instrument that meets certain criteria and is
designated as such at initial recognition (FVPLDesignated).
Available-for-sale
(AFS)
Financial assets that are designated as such or are not

classified as L&R, HTM or at FVPL.
Fair value, with changes

reported in equity, unless
impaired. Upon impairment, the
revaluation reserve in equity is
released into profit or loss.
Other financial
liabilities
Non-trading liabilities
Amortized cost
Because IAS 39 only permits an entity to designate (a) a financial asset as AFS or (b) a
financial asset or a financial liability at FVPL-Designated (provided the financial asset or
financial liability qualifies for such designation) on initial recognition, absent an exemption in
IFRS 1 a first-time adopter would not be permitted to classify a financial instrument as either
AFS or FVPL in their opening IFRS balance sheet if the financial instrument had been acquired
prior to the date of transition to IFRS. Accordingly, IFRS 1 includes a voluntary exemption
that permits a first-time adopter, at the date of transition to IFRS, to designate a previously
recognized financial asset as available-for-sale or a previously recognized financial asset or
financial liability as FVPL-Designated (provided it meets certain criteria). The basis for this
exemption is that a first-time adopter that had applied a previous GAAP at the date the
financial asset or financial liability was initially recognized would not have been able to take
advantage of the election that would have been available upon initial recognition of the
instruments if the entity were already reporting under IFRS.
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A first-time adopter that applies this exemption would be required to make certain additional
disclosures.
3.12.1
Implementation guidance on other categories of financial instruments
The implementation guidance to IFRS 1 clarifies how, in preparing its opening IFRS balance
sheet, a first-time adopter should apply the criteria in IAS 39 to identify those financial assets
and financial liabilities that are measured at fair value and those that are measured at
amortized cost:
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Fair value through profit or loss -Trading in order to classify a financial asset or financial
liability as at FVPL-Trading, the financial asset or financial liability must have been
acquired or incurred principally for the purpose of selling or repurchasing it in the near
term; or, at the date of transition to IFRS, the instrument must be part of a portfolio that
is managed together and for which there is evidence of a recent actual pattern of shortterm profit taking;
Held-to-maturity investments classification of financial assets as held-to-maturity
investments relies on a designation made by the entity in applying IAS 39 reflecting the
entitys intention and ability at the date of transition to IFRS. That intent and ability
begins at the date of transition to IFRS, and a pattern or history of frequent selling of
securities before the date of transition would not trigger the tainting rules in IAS 39 and
prevent the use of this category;
Loans and receivables - the ability to designate a financial asset as loans and receivables
depends on whether the financial asset meets the definition of loans and receivables when
the financial asset first satisfied the recognition criteria in IAS 39. For example, a financial
asset that has fixed or determinable payments and is not quoted in an active market as of
the date of transition to IFRS would meet the definition of L&R at that date. However, if the
financial asset was quoted in an active market as of the date it was acquired it would not
be eligible for classification as a L&R on the date of transition to IFRS;
Derivatives derivative financial assets and derivative financial liabilities are always
deemed held-for-trading (except for a derivative that is a financial guarantee contract or a
designated and effective hedging instrument). The result is that an entity always
measures at fair value all derivative financial assets and derivative financial liabilities that
are not financial guarantee contracts.
Financial assets and financial liabilities measured at amortized cost - the cost of financial
assets and financial liabilities measured at amortized cost in the opening IFRS balance
sheet should be determined on the basis of circumstances existing when the assets and
liabilities first satisfied the recognition criteria in IAS 39, unless they were acquired in a
past business combination in which case their carrying amount under previous GAAP
immediately following the business combination is their deemed cost under IFRS at that
date; and
Loan impairments - similar to the treatment for all other estimates, an entitys estimates of
loan impairments at the date of transition to IFRS should 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 assumptions were in
error. Any later revisions to those estimates should be treated as impairment losses (or
reversals of impairment losses) of the period in which it makes the revisions.
When a first-time adopters previous GAAP required an entity to measure investments at fair
value and recognized the revaluation gain outside profit or loss, then upon transition to IFRS ,
if the investment is classified under IAS 39 as:
at fair value through profit or loss, any pre-IAS 39 unrealized gains that had been
recognized in equity under previous GAAP (that is, unrealized gains that were recognized
in equity under the entitys previous GAAP before transitioning to IFRS), are reclassified
into retained earnings on initial application of IAS 39 (that is, upon initial adoption of IFRS);
available-for-sale, any pre-IAS 39 unrealized gains (that is, unrealized gains recognized
under previous GAAP before transitioning to IFRS)are recognized in a separate
component of equity. Subsequently, the entity recognizes gains and losses on the
available-for-sale financial asset in that separate component of equity until the
investment is impaired, sold, collected or otherwise disposed of. On subsequent
derecognition or impairment of the available-for-sale financial asset, the first-time
adopter transfers to profit or loss the cumulative gain or loss remaining in equity.
3.12.2

Financial asset classifications under US GAAP and IFRS are restrictive in nature. Therefore, a
first-time adopter should consider the following when classifying financial assets.
Fair value through profit or loss trading Under IAS 39, an entity must classify a
financial asset as FVPL-Trading if certain criteria are met (see above). If the financial
asset does not meet these criteria, the financial asset may not be classified as FVPLTrading. Likewise, US GAAP requires classification as trading if the financial asset was
bought or held principally for the purpose of selling it in the near term. However,
US GAAP also allows an entity to classify a financial instrument as trading even if the
entity does not intend to sell it in the near term (see Statement 115 Q&A). As a result,
certain financial instruments that could be classified as trading under US GAAP may not
meet the criteria in IFRS for classification as trading. Likewise, a financial asset that was
not classified as trading for US GAAP (presumably because it was not bought or held
principally for the purpose of selling it in the near term) is not likely to meet the definition
of FVPL-Trading for IFRS.
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Fair value through profit or loss designated As discussed above, an entity is permitted
to designate, at the date of transition to IFRS, any financial asset or financial liability as at
FVPL-Designated, provided the asset or liability meets certain criteria at that date. This
election is permitted at the date of transition to IFRS whether or not the financial asset
was previously designated as at FVPL pursuant to the fair value option (FVO) described in
Statement 159. The criteria in IAS 39 regarding the use of FVPL-Designated are more
restrictive than the criteria for the use of the FVO in Statement 159.
A first-time adopter wishing to designate a financial asset or financial liability as at FVPLDesignated as of the date of transition to IFRS that meets the criteria for such
designation, must document that election as of the date of transition (that is, as of the
opening IFRS balance sheet date). A first-time adopter that previously used the FVO of
Statement 159 in their US GAAP financial statements, may be able to use their US GAAP
designation documentation as documentation of their IFRS designations as of the date of
transition to IFRS. When an entity chooses to simply carryover their US GAAP FVO
designations (for those financial assets that meet the criteria for FVPL-Designated)
and they use their existing US GAAP documentation to document those designations as
FVPL-Designated for IFRS, then all financial instruments previously recorded at fair value
through earnings for US GAAP pursuant to the FVO of Statement 159 that meet the
criteria for FVPL-Designated for IFRS would continue with such classification at the date
of transition, unless specifically de-designated. An entity will not have the opportunity
to de-designate at a later date. The preceding notwithstanding, a first-time adopter is not
required to designate as at FVPL-Designated in their opening IFRS balance sheet those
financial assets and financial liabilities designated as at FVPL pursuant to the FVO of
Statement 159.
Held to maturity Although an entitys use of the held-to-maturity classification under

US GAAP requires an assertion of the positive intent and ability to hold a debt security to
maturity, a first-time adopter is nevertheless not required to classify a security that is
classified as HTM for US GAAP as of the date of transition to IFRS, as HTM in the first-time
adopters IFRS opening balance sheet. Even though an entity may have the positive intent
and ability to hold a security to maturity, IAS 39 permits that entity to nevertheless
designate that security as available for sale. However, as long as the first-time adopter
continues to prepare US GAAP financial statements, that entity must continue to abide by
the US GAAP held-to-maturity requirements (that is, the entity cannot sell or transfer the
security out of the held-to-maturity category except in certain circumstances as
permitted by Statement 115).
A sale or transfer prior to maturity of a security classified as HTM for US GAAP would
trigger the tainting rules for US GAAP (unless the sale or transfer was made in certain
limited circumstances). The question arises as to whether a sale or transfer out of HTM
for US GAAP subsequent to the date of transition to IFRS (that is, date of opening IFRS
balance sheet) but before the first-time adopter publishes their first IFRS financial
102
statements, would also taint the first-time adopter for IFRS purposes as well (that is,
would require the first-time adopter to reclassify all HTM securities to AFS and would
preclude them from classifying any financial assets as held to maturity for a period of two
years following the occurrence of the sale or transfer). As discussed above, the
classification of financial assets as held-to-maturity investments for IFRS relies on a
designation made by the entity in applying IAS 39 reflecting the entitys intention and
ability at the date of transition to IFRS. As a consequence, only sales of securities
classified as HTM for IFRS can trigger the IFRS tainting rules.
Likewise, if a first-time adopter has a debt security that is classified as AFS for US GAAP
as of the date of transition to IFRS, the first-time adopter is free to classify that debt
security as HTM for IFRS in the first-time adopters IFRS opening balance sheet. However,
if the first-time adopter were to sell or transfer that security out of the HTM category
prior to its maturity, even prior to the time the first-time adopter publishes their first set
of IFRS financial statements, the first-time adopter would trigger the HTM tainting rules,
provided that the sale or transfer did not meet one of the limited exceptions in IAS 39
permitting such sales or transfers. In that regard, if the sale or transfer did not meet one
of the limited exceptions, the first-time adopter would trigger the IFRS tainting rules.
Loans and receivables Generally, a financial asset classified as a loan for US GAAP
would meet the definition of a loan and receivable (L&R) for IFRS. In addition, a debt
security that was not quoted in an active market as of the date the debt security first
satisfied the recognition criteria in IAS 39 and is not intended to be sold in the near term
may also be classified as a L&R for IFRS.
A loan classified as held for sale (HFS) under US GAAP may be classified as a L&R for IFRS
at the date of transition to IFRS provided the loan is not expected to be sold in the near
term, in which case it should be classified as FVPL-Trading. IFRS also permits a financial
asset that would otherwise meet the definition of a L&R to be classified as AFS. Except for
financial assets previously classified as AFS that were transferred into the L&R category
subsequent to acquisition, use of the L&R category does not require an assertion that an
entity has the intent and ability to hold the loan for the foreseeable future (a criteria that
does exist under US GAAP for the held for investment classification).
Available-for-sale IFRS 1 permits an entity to designate any non-derivative financial

asset as available-for-sale at the date of transition to IFRS provided that the financial
asset is not classified as L&R, HTM or FVPL.
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3.12.3 Future Developments

As part of their convergence efforts, the IASB and the FASB currently have a number of joint
projects to improve and simplify the accounting for financial instruments. In one such project,
both the IASB and the FASB are reconsidering the classification, measurement and
impairment of financial instruments, which is expected to result in new standards being
issued by both Boards.
The classification and measurement approach being developed by the IASB would measure
almost all financial assets and financial liabilities at either amortized cost or fair value. If
financial instruments have only basic loan features and are managed on a contractual yield
basis, they would be measured at amortized cost. All other financial instruments would be
measured at fair value. The existing categories of loans and receivables, held-to-maturity
investments and available-for-sale financial assets would no longer exist
At the time of this publication, the project was very fluid, with tentative decisions being made
and various issues debated. As with all ongoing projects, first-time adopters should determine
the current status of this project when considering the effect of adopting IFRS.
3.13 Fair value measurement of financial assets or financial liabilities

D20. Notwithstanding the requirements of paragraphs 7 and 9, an entity may apply the
requirements in the last sentence of IAS 39 AG76 and in AG76A, in either of the
following ways:
(a) prospectively to transactions entered into after 25 October 2002; or
(b) prospectively to transactions entered into after 1 January 2004.
Excerpt from Application Guidance of IAS 39

AG76.
The best evidence of the fair value of a financial instrument at initial recognition is
the transaction price (ie the fair value of the consideration given or received) unless
the fair value of that instrument is evidenced by comparison with other observable
current market transactions in the same instrument (ie without modification or
repackaging) or based on a valuation technique whose variables include only data
from observable markets.
AG76A. The subsequent measurement of the financial asset or financial liability and the
subsequent recognition of gains and losses shall be consistent with the
requirements of this Standard. The application of paragraph AG76 may result in no
gain or loss being recognised on the initial recognition of a financial asset or
financial liability. In such a case, IAS 39 requires that a gain or loss shall be
recognised after initial recognition only to the extent that is arises from a change in
a factor (including time) that market participants would consider in setting a price.
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As paragraphs 7 and 9 of IFRS 1 relate to the requirement to use consistent accounting

policies for all periods presented and the requirement to disregard the transitional provisions
in other IFRS standards, this exemption was provided in order to grant entities that adopted
IFRS in 2005 relief from the requirement to measure their financial instruments at fair value
in accordance with IAS 39 for all periods presented. Current first-time adopters of IFRS will
have a choice to measure the fair value of financial instruments in accordance with IFRS 1
D20 either retrospectively, prospectively for transactions entered into after 25 October
2002 or prospectively for transactions entered into after 1 January 2004. In contrast to the
European Union countries that adopted IFRS with a transition date of 1 January 2004, as
written, this exemption will be of limited benefit to those countries adopting IFRS at some
point in the future as it only provides relief from the requirements of IAS 39 for transactions
entered into prior to 1 January 2004.
3.13.1

Under US GAAP, fair value is explicitly based on an exit price notion, while IFRS is neither
an explicit exit nor entry price. Statement 157s clarification that exit prices and entry prices
(that is, transaction prices) are conceptually different, allows for the recognition of day one
gains or losses when the transaction price for an asset or liability is not deemed to equal its
exit price at initial recognition. US GAAP contains no specific requirements regarding the
observability of inputs, thereby allowing for the recognition of day one (or initial
recognition) gains or losses even when the fair value measurement is based on a valuation
model in which significant inputs are not observable. IAS 39, however, states that the best
evidence of fair value at initial recognition is the transaction price unless the fair value of the
instrument is evidenced by observable market data. As such, the ability to recognize day one
gains and losses is more restricted under IFRS than under US GAAP. Upon adoption of IFRS,
US entities would be required to reverse previously recognized day one gain or losses not
supported by observable inputs for transactions entered into after 1 January 2004 (or earlier
based on an election).
While generally similar in principle, certain other differences between US GAAP and IFRS with
respect to fair value measurements may also result in potential adjustments to financial
assets and liabilities measured at fair value upon the adoption of IFRS.
For example, US GAAP allows for the measurement of financial instruments at mid-market
prices as a practical expedient, whereas IFRS states that the appropriate quoted market price
to be used in measuring the fair value of assets held is the current bid price, and that the ask
price should be used to measure liability positions.
Another difference between US GAAP and IFRS in the area of fair value measurement that
may affect entities that previously reported under US GAAP relates to the market in which
the asset or liability being measured is assumed to be exchanged. Statement 157 assumes
the transaction to sell an asset (or transfer a liability) occurs in the principal market for the
105
asset or liability (the market where the entity would sell the asset or transfer the liability with
the greatest volume and level of activity for that asset or liability). In contrast, IFRS does not
contain consistent guidance about which market should be used as a basis for measuring fair
value when more than one market exists. Accordingly, differences may arise when the
principal market for an asset or liability does not represent the most advantageous market to
which the reporting entity has access.
As a result of these and other differences, first-time adopters may encounter certain
situations in which the recognized amounts of financial instruments measured at fair value
will need to be adjusted in the opening balance sheet in order to be in accordance with IFRS.
3.13.2
Future Developments
The convergence efforts between US GAAP and IFRS in the area of fair value are ongoing.
The IASB continues to work on its fair value measurements project, the objectives of which
are consistent with those of Statement 157. In June 2009, the IASB issued an Exposure
Draft, Fair Value Measurement, proposing to clarify the definition of fair value, establish a
single framework on measuring fair value and enhance the disclosures when fair value is
used. A final IFRS is expected to be issued in 2010. If finalized, the proposed guidance on
measuring fair value in the exposure draft would replace the existing guidance.
3.14
Changes in existing decommissioning, restoration, and similar

liabilities included in the cost of property, plant and equipment

D21. IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
requires specified changes in a decommissioning, restoration or similar liability to be
added to or deducted from the cost of the asset to which it relates; the adjusted
depreciable amount of the asset is then depreciated prospectively over its remaining
useful life. A first-time adopter need not comply with these requirements for changes
in such liabilities that occurred before the date of transition to IFRSs. If a first-time
adopter uses this exemption, it shall:
(a) measure the liability as at the date of transition to IFRSs in accordance with IAS 37;
(b) to the extent that the liability is within the scope of IFRIC 1, estimate the amount
that would have been included in the cost of the related asset when the liability
first arose, by discounting the liability to that date using its best estimate of the
historical risk-adjusted discount rate(s) that would have applied for that liability
over the intervening period; and
(c) calculate the accumulated depreciation on that amount, as at the date of transition
to IFRSs, on the basis of the current estimate of the useful life of the asset, using
the depreciation policy adopted by the entity in accordance with IFRSs.
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When an entity purchases or constructs certain assets, such as oil wells, it may be liable for
certain contractual or statutory costs to decommission or restore the asset site to certain
minimum standards at the end of the assets life. Under IFRS, these costs should be
capitalized (generally as part of the assets carrying value) when the entity becomes obligated
to incur such costs as discussed in IAS 16. IFRIC 1 provides guidance on accounting for
changes in a decommissioning, restoration or similar liability that have been previously
recognized as part of the cost of an item of property, plant and equipment and as a liability.
IFRIC 1 requires that changes in such liabilities due to the estimated timing or amount of the
outflow of resources required to settle the obligation, or a change in the discount rate, are
accounted for based on whether the underlying asset is carried at cost or a revaluation
amount. If an asset is carried at cost the changes to the decommissioning liability generally
are added to or deducted from the asset cost. If an asset is carried at a revaluation amount
the change in the liability alters the revaluation surplus or deficit previously recognized on
that asset. IFRS 1 provides an exemption for alternative treatment for changes in such
liabilities that occurred before the date of transition to IFRS.
Generally, applying this exemption will make it simpler to calculate these decommissioning
liabilities, especially when an entity had not previously calculated such provisions. (This is the
case because the entity is allowed to estimate a provision as of the transition date and work
back in time, rather than try to go back in time to come up with an estimate of what the
liability would have been based on the facts and circumstances at that time.) However, in
many cases the difference between the method under IFRIC 1 and the exemption above will
be insignificant, except when an entity made major adjustments to the estimate of the
decommissioning costs near the end of the life of the related assets.
3.14.1

Under US GAAP, asset retirement obligations (ARO) are liabilities associated with the
retirement of a tangible long-lived asset whereas asset retirement costs are amounts
capitalized that increase the carrying amount of the long-lived asset when an ARO is
recognized. An ARO is recognized if it results from a legal obligation associated with the
retirement of a tangible long-lived asset resulting from its acquisition, construction,
development or normal use and the fair value of the ARO is reasonably estimable. When an
ARO is initially recognized, the related asset retirement costs increase the carrying value of
the long-lived assets by the same amount of the liability. The asset retirement costs are
allocated to expense using a systematic and rational method over the assets useful life.
Changes to an ARO due to the passage of time are measured by applying an interest method
of accretion to the amount of the liability at the beginning of the period. The interest rate
used to measure that change is the credit-adjusted risk-free rate that existed when the
liability, or portion thereof, was initially measured. That change, is recognized as an increase
in the carrying amount of the ARO and as accretion expense (not interest). Changes due to
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revisions in the timing or the amount of the original estimated undiscounted cash flows are
recognized as an increase or decrease in the ARO and the related capitalized asset retirement
cost. Upward revisions are discounted using the current credit-adjusted risk-free rate.
Downward revisions are discounted using the credit-adjusted risk-free rate that existed when
the original liability was recognized.
The adjusted depreciable amount of the asset is depreciated over its useful life. Once the
related asset has reached the end of its useful life, all subsequent changes in the liability are
recognized in profit or loss as they occur.
The more significant differences between IFRS and US GAAP will arise because of differences
in the treatment of changes in cost estimates or discount rates associated with AROs. Under
US GAAP, a liability is not remeasured for changes in the risk-free rate because the creditadjusted risk-free rate used to initially measure the obligation is used for subsequent
accretion and all subsequent reductions in the estimated gross future cash flows. Only if the
estimated gross future cash flows are increased is the discount rate changed to reflect the
current risk-free rate. IFRS requires the discount rate used to estimate the liability to be
based on current discount rates at each balance sheet date. The use of different discount
rates to measure changes in an ARO under US GAAP creates a layering of ARO liabilities (that
is, each new layer is treated as a new ARO) that does not exist for decommissioning liabilities
under IFRS because the entire liability is discounted at current rates. Accordingly, differences
in the timing and amount of AROs likely will occur.
Although the IFRIC considered convergence with US GAAP when issuing IFRIC 1 and changes
in the estimated cash flows may be treated similarly under both GAAPs, differences do exist.
For example under IFRS;
both the cost of the underlying asset and the liability should reflect the effect of changes
in the current market-based discount rates.
entities may elect to carry property, plant and equipment at a revalued amount with a
revaluation surplus or deficit for changes in the value of the asset. And as such, changes
in the decommissioning liability alter the revaluation surplus or deficit with cumulative
deficits taken to profit and loss and a cumulative surplus taken to equity.
increases in the liability that reflect the passage of time are recognized in profit or loss
as interest.
The requirements under IFRIC 1 to account for changes in decommissioning liabilities differ
significantly from US GAAP. This difference results from the US GAAP requirement to use
different discount rates to adjust for changes in the liability based on the reason for the
change (for example, the passage of time and/or changes in estimates of cash flows) whereas
under IFRS all changes in the liability are discounted using current discount rates. If an asset
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is carried at cost, the changes to the decommissioning liability generally are added to or
deducted from the asset cost. If an asset is carried at a revaluation amount the change in the
liability alters the revaluation surplus or deficit previously recognized on that asset.
As noted above, IFRIC 1 requires specified changes in a decommissioning, restoration or
similar liability to be added to or deducted from the cost of the asset to which it relates; the
adjusted depreciable amount of the asset is then depreciated prospectively over its remaining
useful life.
However, a first-time adopter need not comply with these requirements for changes in such
liabilities that occurred before the date of transition to IFRS. If a first-time adopter uses this
exemption, it should:
measure the liability as at the date of transition to IFRS in accordance with IAS 37;
estimate the amount that would have been included in the cost of the related asset when
the liability first arose (to the extent that the liability is within the scope of IFRIC 1) by
discounting the liability back to the date the liability first arose using its best estimate of
the historical risk-adjusted discount rate(s) that would have applied for that liability over
the intervening period;
add the discounted liability to the corresponding asset to which the decommissioning
liability relates; and
calculate the accumulated depreciation on that amount, as at the date of transition to
IFRSs, based on the current estimate of the useful life of the asset, using the
depreciation policy adopted by the entity in accordance with IFRS.
This exemption is likely to provide a practical way for first-time adopters that previously
reported under US GAAP to determine the amount at which to record such assets and
liabilities in its opening IFRS balance sheet. Retrospective application of IFRIC 1 and IAS 37
would require an entity to reconstruct historical records. For example, as a result of
differences between US GAAP and IFRS in the manner in which changes in market-based
discount rates should be treated for purposes of these provisions, an entity would be required
to identify all of the revisions to the discount rate and/or changes in the estimated cash flows
that would have been recognized since the inception of the decommissioning liability and
recalculate depreciation from that date to the date of transition.
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Example 3.14.1 Decommissioning Liabilities

Fact Pattern and Analysis
An entity, which is a US GAAP reporter, has a nuclear power plant and has reported in its
US GAAP financial statements a decommissioning liability and related net asset carrying
amount of $14.2M and $6.4M, respectively, as of 31 December 2011. The entity plans
to adopt IFRS and estimates that the liability to remediate the site is $13 million as of
1 January 2012 (that is, the date of transition). The $13M represents the amount of the
legal obligation that is probable of occurrence and estimable in accordance with IAS 37.
The liability and related asset arose 1 January 2008. Using its best estimate of the
historical risk-adjusted discount rate the liability would have been $10.2M at that date. The
cost of the asset on 1 January 2008 was $5M. The $10.2M estimated liability is added to
the cost of the asset such that the assets estimated IFRS carrying value at 1 January 2008
is $15.2M. The plant is expected to be retired in 2014 and as such the asset would be
depreciated over 7 years. Accordingly, the decommissioning liability, as determined in
accordance with the IFRS 1 exemption, is $13M and the net asset carrying amount of
$6.5M [$15.2-($15.2/7*4)]. These amounts are compared to the corresponding US GAAP
amounts. The differences of ($0.1M) in the carrying amounts of the net assets and
($1.2M) in the liability are recognized in retained earnings at the date of transition to IFRS.
3.15
Service concession arrangements

D22. A first-time adopter may apply the transitional provisions in IFRIC 12.
Service concession arrangements have evolved over recent years as a mechanism for
providing public services. Under such arrangements, private capital is used to provide major
economic and social facilities for public use, such as roads, bridges, tunnels, prisons,
hospitals, airports, water distribution facilities, energy supply and telecommunication
networks. Today, it is common practice to set up concession arrangements in order to
construct, operate and/or service these public service facilities.
IFRIC 12 applies to public-to-private service concession arrangements if 1) the grantor
controls or regulates what services the operator must provide with the infrastructure, to
whom it must provide them, and at what price and 2) the grantor controls through
ownership, beneficial entitlement or otherwise any significant residual interest in the
infrastructure at the end of the term of the arrangement.
Infrastructure within the scope of IFRIC 12 should not be recognized as property, plant and
equipment of the operator, irrespective of the extent to which the operator bears the risk and
rewards incidental to ownership and regardless of which party has legal title to it during the
term of the arrangement, since the asset is controlled by the grantor. This concept applies
equally to infrastructure items constructed or acquired by the operator or to which it is given
110
access for the purpose of the arrangement. Instead, the operator recognizes a financial asset
to the extent that it has an unconditional right to receive consideration from the grantor or
the grantor has guaranteed the operators cash flow and/or an intangible asset to the extent
it has a right to charge users of the public service.
IFRS 1 permits a first-time adopter to apply the transitional provision in IFRIC 12. That
interpretation requires retrospective application unless it is, for any particular service
arrangement, impracticable for the operator to apply IFRIC 12 retrospectively at the start of
the earliest period presented, in which case it should:
(a) recognize financial assets and intangible assets that existed at the start of the earliest
period presented;
(b) use the previous carrying amounts of those financial and intangible assets (however
previously classified) as their carrying amounts as at that date; and
(c) test financial and intangible assets recognized at that date for impairment, unless this is
not practicable, in which case the amounts shall be tested for impairment as at the start
of the current period.
3.15.1

Although service concession arrangements historically have not been commonly entered into
by US reporting entities, these arrangements are becoming more prevalent in certain
industries (such as the construction industry)and there is diversity in practice within the US
on how to account for these arrangements. Although this voluntary exemption is likely to
have minimal impact for many industries, it will need to be evaluated by a first-time adopter
providing public services as defined by IFRIC 12. In addition, first-time adopters with foreign
operations may have a greater likelihood to have these types of arrangements and may have
to apply this guidance.
3.16
Borrowing Cost

D23. A first-time adopter may apply the transitional provisions set out in paragraphs 27 and
28 of IAS 23, as revised in 2007. In those paragraphs references to the effective date
shall be interpreted as 1 July 2009 or the date of transition to IFRSs, whichever is later.
IAS 23R defines borrowing costs as interest and other cost that an entity incurs in
connection with the borrowing of funds. IAS 23R requires that all borrowing costs be
capitalized if they are directly attributable to the acquisition, construction or production of a
qualifying asset. The policy election to immediately recognize such costs as an expense has
been eliminated effective 1 January 2009 with earlier application permitted.
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IAS 23R allows a first-time adopter to apply capitalization prospectively to new qualifying
assets or retrospectively to assets whose construction, manufacture or production commenced
at an earlier specified date. IAS 23R defines a qualifying asset as an asset that necessarily
takes a substantial period of time to get ready for its intended use or sale. IFRS 1 also states
that the effective date of the revised standard shall be interpreted as 1 January 2009 or the
date of transition to IFRS, whichever is later.
3.16.1

While the revisions to IAS 23R were intended to substantively converge the accounting for
capitalized interest with US GAAP, some differences still remain. However, we do not believe
this exemption would have a significant impact on first-time adopters that previously
reported under US GAAP.
BC19-24 of IAS 23R describes continuing differences between IAS 23R and Statement 34.
US entities may find this description useful in modifying their accounting policies and
processes relating to borrowing costs upon conversion to IFRS. These differences relate to
IAS23Rs inclusion as borrowing costs, exchange differences arising from foreign currency
borrowings, if such costs are regarded as an adjustment to interest costs. In addition, the
definition of interest cost under US GAAP includes obligations having explicit interest rates,
while the definition under IAS23R includes interest and other costs that an entity incurs in
connection with the borrowing of funds. This difference may permit companies to capitalize
more interest cost under IFRS than under US GAAP.
Entities that anticipate differences in borrowing cost capitalization may chose to avail
themselves of the transition provision in paragraph 28 of IAS 23R that permits an entity to
designate any date before the effective date of IAS 23R (annual periods beginning on or after
1 January 2009) as the date to apply the Standard to any qualifying asset, which is defined
as an asset that necessarily takes a substantial period of time to get ready for its intended
use or sale.
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4 Presentation and Disclosures

Excerpt from IFRS 1

20.
This IFRS does not provide exemptions from the presentation and disclosure
requirements in other IFRSs.
IFRS 1 does not provide exemptions from the presentation and disclosure requirements in
other standards. IASB decided that such disclosures are essential because they help users
understand the effect and implications of the transition to IFRS and how they need to change
their analytical models to make the best use of information presented using IFRS.
4.1
Comparative information
Excerpt from IFRS 1

21.
To comply with IAS 1, an entity's first IFRS financial statements shall include at least
three statements of financial position, two statements of comprehensive income, two
separate income statements (if presented), two statements of cash flows and two
statements of changes in equity and related notes, including comparative information.
IFRS 1 requires a first-time adopter to prepare and present an opening IFRS balance sheet as
of its transition date to IFRS (for example, 1 January 2012). This opening IFRS balance sheet
must be in accordance with the IFRS in effect as of the entitys first IFRS reporting date (for
example, 31 December 2014). The opening balance sheet forms the starting point for
subsequent reporting under IFRS. IAS 1 also requires (unless a standard or interpretation
permits or requires otherwise) comparative information in respect of the previous period for
all amounts reported in the financial statements and narrative and descriptive information
when it is relevant to the understanding of the current periods financial statements.
4.1.2

While IFRS only requires one comparative reporting period be presented in a complete set of
financial statements, the SECs reporting requirements require two comparative periods for
all financial statements other than the statement of financial position (that is, the balance
sheet). 14 As a result, upon adoption of IFRS, an SEC reporter will have to present comparative
income statements for the three years ended 31 December 2014 (assuming the entity is a
large accelerated filer and the SECs ultimate requirement for mandatory adoption remains
consistent with the timeline in the proposed Roadmap). Therefore, the entitys opening IFRS
balance sheet would be as of 1 January 2012, as that is the beginning of the earliest
comparative period. As a result, we expect that SEC registrants likely may be required to
present four balance sheets (1 January 2012, and 31 December 2012, 2013 and 2014) in
14
A smaller reporting company is required to provide only one comparative period for all financial statements. A
smaller reporting company is an SEC registrant with public float less than $75 million or for those registrants
without publicly traded equity, less than $50 million in revenue.
113
its first IFRS financial statements and three years of financial information for all other
financial statements presented.15 In addition, IFRS 1 requires the related footnote disclosures
for all periods presented.
While the SEC has provided foreign private issuers some relief from these comparative
requirements in their year of initial adoption of IFRS (requiring only two years of comparative
income statements, instead of three), at this point the SEC has indicated that it does not
anticipate providing similar relief to registrants who do not meet the definition of a foreign
private issuer.
4.2
Non-IFRS comparative information and historical summaries
Excerpt from IFRS 1

22.
Some entities present historical summaries of selected data for periods before the first
period for which they present full comparative information in accordance with IFRSs.
This IFRS does not require such summaries to comply with the recognition and
measurement requirements of IFRSs. Furthermore, some entities present comparative
information in accordance with previous GAAP as well as the comparative information
required by IAS 1. In any financial statements containing historical summaries or
comparative information in accordance with previous GAAP, an entity shall:
(a) label the previous GAAP information prominently as not being prepared in
accordance with IFRSs; and
(b) disclose the nature of the main adjustments that would make it comply with IFRSs.
An entity need not quantify those adjustments.
IFRS requires comparative information that is prepared on the same basis as information
relating to the current reporting period. However, when a first-time adopter presents
historical summaries of selected data for periods before the first period for which they
present full comparative information under IFRS, the Standard does not require such
summaries to comply with the recognition and measurement requirements of IFRS.16
If a first-time adopter presents historical summaries or comparative information under
previous GAAP within its financial statements (in addition to the comparative information
required by IFRS) the first-time adopter should label the previous GAAP information
prominently as not being prepared under IFRS and disclose the nature of the main
adjustments that would make it comply with IFRS. The first-time adopter need not quantify
those adjustments.
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15
A literal read of the reporting requirements of IFRS 1 would indicate that in this situation, an entity might only
file balance sheets as of 1 January 2012, and 31 December 2013 and 2014.
16
Note, for SEC registrants, we anticipate that the SEC also will provide guidance as to what periods of historical
data and under what basis (that is, US GAAP or IFRS) will be required to be presented in an SEC filing.
4.3
Explanation of transition to IFRS
Excerpt from IFRS 1

23.
An entity shall explain how the transition from previous GAAP to IFRSs affected its
reported financial position, financial performance and cash flows.
IFRS 1 requires a first-time adopter to explain how the transition from previous GAAP to IFRS
affected its reported financial position, financial performance and cash flows.
As discussed throughout this publication, IFRS 1 offers a wide range of exemptions that a
first-time adopter may elect to apply. However, the Standard does not explicitly require an
entity to disclose which exemptions it has applied and how it applied them. In some
circumstances it will be clear whether an entity has adopted the exemption allowed by IFRS 1
(for example, those exemptions relating to employee benefits and cumulative translation
differences). In other cases, users will have to rely on a first-time adopter disclosing those
transitional accounting policies that are relevant to an understanding of the financial
statements. In practice most first-time adopters in Europe voluntarily disclosed which IFRS 1
voluntary exemptions they elected to apply and which mandatory exceptions apply to them.
4.3.1

In its instructions to foreign private issuers that were first-time adopters of IFRS, the SEC
required that the issuer include in the notes to the IFRS financial statements:
The reconciliation from an issuers previous GAAP to IFRS required by IFRS 1 in a form
and level of information sufficient to explain all material adjustments to the balance sheet
and income statement and, if presented under previous GAAP, to the cash flow
statement, and
To the extent the primary financial statements reflect the use of exemptions permitted or
required by IFRS 1:
An indication of the items or class of items to which the exemption was applied, and
A description of what accounting principle was used and how it was applied.
While the proposed Roadmap does not specifically address this point, we would expect that the
SEC rules regarding adoption of IFRS by US issuers would require in the first reporting period
financial statements, disclosures similar to that required above for foreign private issuers.
The SEC also may determine it is appropriate to require certain disclosures in anticipation of a
conversion to IFRS, with which all SEC registrants would have to comply. For example, the
SECs existing guidance in SAB 74 (Topic 11M) requires disclosure of the effects that recently
issued accounting standards will have on the financial statements of a registrant when those
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new standards are adopted in a future period. We believe that the SEC likely will require
entities to make similar disclosures regarding the effect of adopting IFRS, although it is
currently unclear what those disclosure requirements will be.
4.4
Reconciliations
Excerpt from IFRS 1

24.
To comply with paragraph 23, an entity's first IFRS financial statements shall include:
(a) reconciliations of its equity reported in accordance with previous GAAP to its
equity in accordance with IFRSs for both of the following dates:
(i)
the date of transition to IFRSs; and
(ii) the end of the latest period presented in the entity's most recent annual
financial statements in accordance with previous GAAP.
(b) a reconciliation to its total comprehensive income in accordance with IFRSs for the
latest period in the entity's most recent annual financial statements. The starting
point for that reconciliation shall be total comprehensive income in accordance
with previous GAAP for the same period or, if an entity did not report such a total,
profit or loss under previous GAAP.
(c) if the entity recognised or reversed any impairment losses for the first-time in
preparing its opening IFRS statement of financial position, the disclosures that IAS
36 Impairment of Assets would have required if the entity had recognised those
impairment losses or reversals in the period beginning with the date of transition
to IFRSs.
25.
The reconciliations required by paragraph 24(a) and (b) shall give sufficient detail to
enable users to understand the material adjustments to the statement of financial
position and statement of comprehensive income. If an entity presented a statement
of cash flows under its previous GAAP, it shall also explain the material adjustments to
the statement of cash flows.
IFRS 1 requires a first-time adopter to include a number of reconciliations in its first financial
statements presented under IFRS to explain how the transition from previous GAAP to IFRS
affected their reported financial position, financial performance and cash flows. A first-time
adopter with a 31 December 2014 first IFRS reporting date that previously applied US GAAP
would be required to provide the following reconciliations:
reconciliations of its equity reported under US GAAP to its equity under IFRS for the
following dates:
116
the date of transition to IFRS (1 January 2012); and

the end of the latest period presented in the entitys most recent annual financial
statements under US GAAP (31 December 2013);
a reconciliation of the total comprehensive income reported under US GAAP for the latest
period in the entitys most recent annual financial statements (31 December 2013) to its
total comprehensive income under IFRS for the same period; and
an explanation of the material adjustments to the cash flow statement for 31 December 2013.
These reconciliations should be sufficiently detailed to enable users to understand the

material adjustments to the balance sheet and income statement and the first-time adopter
should distinguish the correction of errors from changes in accounting policies. While the
Standard does not prescribe a layout for these reconciliations, the implementation guidance
contains an example of a reconciliation of equity and profit or loss that contains a line-by-line
reconciliation of both balance sheet and income statement. See Appendix 6 of Ernst &
Youngs Good Group (International) Limited International GAAP illustrative financial
statements for the year ended 31 December 2008 for illustrative disclosures for a first-time
adopter of IFRS. A line-by-line reconciliation may be particularly appropriate when a first-time
adopter needs to make transitional adjustments that affect a significant number of line items
in the primary financial statements. If the adjustments are less pervasive a straightforward
reconciliation of the equity and profit or loss figures may provide an equally effective
explanation of how the adoption of IFRS affects the reported financial position, financial
performance and cash flows.
If a first-time adopter recognized or reversed any impairment losses on transition to IFRS, it
should disclose the information that IAS 36 would have required if the entity had recognized
those impairment losses or reversals in the period beginning with the date of transition to
IFRS. The purpose of this disclosure requirement is that while there is inevitably subjectivity
about impairment losses [the] disclosure provides transparency about impairment losses or
reversals recognized on transition to IFRS. These losses might otherwise receive less
attention than impairment losses recognized in earlier or later periods. If a first-time adopter
revalued its long-lived assets at fair value as a result of an impairment, we believe that fair
value generally will be broadly comparable to fair value as determined under IFRS for
purposes of recording the assets at deemed cost upon the adoption of IFRS. See section 3.5
for additional information regarding deemed cost.
4.5
Correction of errors
Excerpt from IFRS 1

26.
If an entity becomes aware of errors made under previous GAAP, the reconciliations
required by paragraph 24(a) and (b) shall distinguish the correction of those errors
from changes in accounting policies.
27.
IAS 8 does not deal with changes in accounting policies that occur when an entity first
adopts IFRSs. Therefore, IAS 8's requirements for disclosures about changes in
accounting policies do not apply in an entity's first IFRS financial statements
28.
If an entity did not present financial statements for previous periods, its first IFRS
financial statements shall disclose that fact.
117
If a first-time adopter becomes aware of errors made under previous GAAP, the
reconciliations required by IFRS 1 should distinguish the correction of those errors from
changes in accounting policies. As discussed in section 2.2, a first-time adopter is required to
use consistent estimates under its previous GAAP and IFRS in preparing financial statements
for the same period, unless there is objective evidence that those previous GAAP estimates
were in error. In that case, the entity should correct the error in the IFRS financial statements
of the same period and disclose the facts and the effects in the footnote that contains the
reconciliation. Careful assessment and judgment is often required in determining whether a
previous estimate was in error.
IAS 8 does not deal with changes in accounting policies that occur when an entity first adopts
IFRS. Therefore, IFRS 1 states that IAS 8s requirements for disclosures about changes in
accounting policies do not apply in a first-time adopters first IFRS financial statements.
IFRS 1 also requires a first-time adopter that did not present financial statements for previous
periods, to disclose that fact in its first IFRS financial statements.
4.6
Designation of financial assets and financial liabilities
Excerpt from IFRS 1

29.
An entity is permitted to designate a previously recognised financial asset or financial

liability as a financial asset or financial liability at fair value through profit or loss or a
financial asset as available for sale in accordance with paragraph D19. The entity shall
disclose the fair value of financial assets or financial liabilities designated into each
category at the date of designation and their classification and carrying amount in the
previous financial statements.
If a first-time adopter designates a previously recognized financial asset or financial liability

as a financial asset or financial liability at fair value through profit or loss or a financial asset
as available-for-sale, IFRS 1 requires the entity to disclose for each category the fair value of
any financial assets or financial liabilities designated into it at the date of designation and
their classification and carrying amount in the previous financial statements.
4.7
Use of fair value as deemed costs
Excerpt from IFRS 1

30.
If an entity uses fair value in its opening IFRS statement of financial position as deemed
cost for an item of property, plant and equipment, an investment property or an
intangible asset (see paragraphs D5 and D7), the entity's first IFRS financial statements
shall disclose, for each line item in the opening IFRS statement of financial position:
(a) the aggregate of those fair values; and
(b) the aggregate adjustment to the carrying amounts reported under previous GAAP.
118
If an entity uses fair value in its opening IFRS balance sheet as deemed cost for some items of
property, plant and equipment, investment property or intangible assets, IFRS 1 requires the
entity to disclose in its first IFRS financial statements for each line item in the opening IFRS
balance sheet the aggregate of those fair values and the aggregate adjustment to the
carrying amounts reported under previous GAAP.
4.8
Use of deemed cost for investments in subsidiaries, jointly

controlled entities and associates
Excerpt from IFRS 1

31.
Similarly, if an entity uses a deemed cost in its opening IFRS statement of financial
position for an investment in a subsidiary, jointly controlled entity or associate in its
separate financial statements (see paragraph D15), the entity's first IFRS separate
financial statements shall disclose:
(a) the aggregate deemed cost of those investments for which deemed cost is their
previous GAAP carrying amount;
(b) the aggregate deemed cost of those investments for which deemed cost is fair
value; and
(c) the aggregate adjustment to the carrying amounts reported under previous GAAP.
If a first-time adopter measures its investments in subsidiaries, jointly controlled entities or

associates at deemed cost in the parent company's opening IFRS consolidated balance sheet,
the entity's first IFRS separate financial statements should disclose the aggregate deemed
cost of those investments for which deemed cost is their previous GAAP carrying amount, the
aggregate deemed cost of those investments for which deemed cost is fair value and the
aggregate adjustment to the carrying amounts reported under previous GAAP.
119
5 Interim Financial Statements

Excerpt from IFRS 1

32.
To comply with paragraph 23, if an entity presents an interim financial report in

accordance with IAS 34 for part of the period covered by its first IFRS financial
statements, the entity shall satisfy the following requirements in addition to the
requirements of IAS 34:
(a) Each such interim financial report shall, if the entity presented an interim financial
report for the comparable interim period of the immediately preceding financial
year, include:
(i)
a reconciliation of its equity in accordance with previous GAAP at the end of

that comparable interim period to its equity under IFRSs at that date; and
(ii) a reconciliation to its total comprehensive income in accordance with IFRSs

for that comparable interim period (current and year to date). The starting
point for that reconciliation shall be total comprehensive income in
accordance with previous GAAP for that period or, if an entity did not report
such a total, profit or loss in accordance with previous GAAP.
(b) In addition to the reconciliations required by (a), an entity's first interim financial
report in accordance with IAS 34 for part of the period covered by its first IFRS
financial statements shall include the reconciliations described in paragraph 24(a)
and (b) (supplemented by the details required by paragraphs 25 and 26) or a cross
reference to another published document that includes these reconciliations.
33.
IAS 34 requires minimum disclosures, which are based on the assumption that users of
the interim financial report also have access to the most recent annual financial
statements. However, IAS 34 also requires an entity to disclose 'any events or
transactions that are material to an understanding of the current interim period'.
Therefore, if a first-time adopter did not, in its most recent annual financial statements
in accordance with previous GAAP, disclose information material to an understanding
of the current interim period, its interim financial report shall disclose that information
or include a cross-reference to another published document that includes it.
If a first-time adopter presents an interim financial report under IAS 34 for part of the period
covered by its first IFRS financial statements, IFRS 1 has the following specific requirements
in addition to the requirements of IAS 34:
(a) Each interim financial report, if the entity presented an interim financial report for the
comparable interim period of the immediately preceding financial year, includes
reconciliations of:
(i) its equity under previous GAAP at the end of that comparable interim period to its
equity under IFRS at that date; and
(ii) its profit or loss under previous GAAP for that comparable interim period (current and
year-to-date) to its profit or loss under IFRS for that period.
120
(b) In addition to the reconciliations required by (a), an entitys first interim financial report
under IAS 34 for part of the period covered by its first IFRS financial statements includes
the reconciliations required for annual financial statements or a cross-reference to
another published document that includes these reconciliations.
IAS 34 states that the interim financial report is intended to provide an update on the latest
complete set of annual financial statements. IAS 34 requires an entity to disclose any events
or transactions that are material to an understanding of the current interim period and
Additional line items or notes should be included if their omission would make the condensed
interim financial statements misleading. Therefore, even if a first-time adopter disclosed
information material to an understanding of the financial statements in the most recent annual
financial statements, it will still be required to disclose this information in its interim financial
report. Thus, IAS 34 requires less disclosure in interim financial statements than IFRS require
in annual financial statements. The assumption is that users of the interim financial report also
have access to the most recent annual financial statements. However, an entitys interim
financial report under IAS 34 is less helpful to users if the entitys latest annual financial
statements were prepared using US GAAP than if they were prepared under IFRS. Therefore,
IFRS 1 requires that a first-time adopters first interim financial report under IAS 34 should
include sufficient information about events or transactions that are material to an
understanding of the current interim period to enable users to understand how the transition
to IFRS affected previously reported annual, as well as interim, figures. Hence it may be
necessary for a first-time adopter to include in its first IFRS interim report significantly more
information that it would normally include in an interim report; alternatively it could include a
cross-reference to another published document that includes such information.
5.1

The proposed SEC Roadmap for the potential use of IFRS by US issuers contemplates firsttime issuance of IFRS financial statements in an issuers annual report on Form 10-K. As a
result, if adopted as discussed in the proposed Roadmap US issuers may not present any
interim statements in accordance with IFRS during the first annual period. (Interim
statements during the first annual period will be presented in accordance with US GAAP.)
Therefore, the requirements of IFRS 1 applicable to disclosures in interim reports may not
apply to US issuers. However, the SEC in deliberation of the final rules for early use option of
IFRS may recognize that many issuers may find it desirable to issue IFRS financial statements
in the interim reports of the fiscal year that they anticipate issuing IFRS annual financial
statements. Accordingly, US issuers should monitor the SEC deliberations to anticipate the
appropriate manner of presentation and disclosures that may be required in their interim
reports in the year of adoption.
121
6 Appendix
6 Appendix
6.1
Proposed amendments to IFRS 1
In September 2008, the IASB issued an exposure draft of certain amendments to IFRS 1.
The amendments will provide relief to first-time adopters that used the full cost method of
accounting for oil & gas assets under previous GAAP and relief for regulatory assets of
certain rate regulated enterprises.
6.1.1
Oil and gas exploration and production assets
To comply with IFRS 1, first-time adopters currently would be required to apply IFRS
retrospectively to determine the carrying amount of oil and gas assets at the date of
transition or use the fair value or revaluation amount as deemed cost exemption. See
section 3.5 of this publication.
6.1.1.2

under US GAAP
To apply IFRS 1 retrospectively could be an onerous task for companies that use the full-cost
method of accounting for oil and gas activities, a method that is allowable under US GAAP as
well as certain other local GAAPs. Information about oil and gas assets recorded using full
cost accounting will almost always be for a larger unit of account than is acceptable under
IFRS. To apply IFRS retrospectively, amortization at the IFRS unit of account level would have
to be calculated (on a unit of production basis) for each year, using a reserves base that has
likely changed over time. In many cases, particularly for older assets, this information may
not be available. Even if the information is available, the effort and associated cost to apply
IFRS retrospectively at the date of transition could be very high.
Determining the fair value of oil and gas assets requires estimating the volume of reserves
and resources and may require the use of qualified external experts. For first-time adopters
with many oil and gas assets, the effort and associated cost of using the fair value as deemed
cost exemption could also be very high.
6.1.1.3
Future Developments
As a result of these challenges and in order to provide oil and gas companies currently using
the full cost method of accounting with a practical and cost effective method of transition to
IFRS, in September 2008 the IASB issued a proposed amendment to IFRS 1. Under the
proposed amendment, a first-time adopter using full cost accounting under previous GAAP
(that is, US GAAP) would be able to elect to measure oil and gas assets at the date of
transition to IFRS on the following basis:
122
(a)
exploration and evaluation (E&E) assets at the amount determined under previous
GAAP; and
(b)
assets in the development or production phases at the amount determined under

previous GAAP, allocated to the underlying assets pro rata using reserve volumes or
reserve values as of that date.
6 Appendix
After measuring oil and gas assets on this basis, E&E assets and assets in the development
and production phases would be required to be tested for impairment at the date of transition
to IFRS in accordance with IFRS 6 and IAS 36, respectively. Any impairment would reduce the
amounts determined as discussed above.
Such an impairment test would require a first-time adopter to measure the value in use or fair
value less cost to sell of the assets which could negate the benefit of the proposed exemption
of allowing the first-time adopter to measure the assets at the amount determined under
previous GAAP.
The proposed amendment would also expand the exemptions discussed in section 3.14
of this publication to allow an entity that uses the full cost exemption to (a) measure
decommissioning, restoration and similar liabilities at the date of transition to IFRS in
accordance with IAS 37, and (b) recognize directly in retained earnings any difference
between that amount and the carrying amount of those liabilities determined under previous
GAAP at the date of transition to IFRS. That is, any necessary adjustment for differences
(plus or minus) arising from the application of IAS 37 and the decommissioning liabilities
determined under previous GAAP is charged directly to retained earnings.
If the exemption for oil and gas assets in the development or production phases accounted
for using the full cost method under previous GAAP is elected, a first-time adopter would be
required to disclose that fact and the basis in which carrying amounts determined under
previous GAAP were allocated.
The successful efforts method of accounting for oil and gas activities requires a unit of
account that is generally consistent with IFRS and does not cause transition issues like those
seen for companies that account for oil and gas activities under the full cost method of
accounting. Therefore, the proposed amendment would apply only to entities that use the full
cost method of accounting.
6.1.2
Rate regulated entities
Some entities provide services or products to customers that are subject to rate regulation.
Under certain previous GAAPs, entities were often permitted to include in the costs of
property, plant and equipment amounts that do not qualify for capitalization under IFRS. For
example, entities may have been permitted to capitalize, as part of the cost of property,
plant and equipment, an imputed cost of equity within the cost of financing the assets
acquisition, construction or production. This practice is not permitted by IAS 23 or IAS 16.
To comply with IFRS 1, an entity whose carrying amounts include amounts that do not
qualify for capitalization under IFRS must either restate those items retrospectively to
remove the non-qualifying amounts, or use the fair value as deemed cost exemption. See
section 3.5 of this publication. Both of those alternatives are often impracticable. Typically,
once amounts are included in the total cost of an item of property, plant and equipment,
they are no longer tracked separately. The restatement of property, plant and equipment to
123
6 Appendix
remove amounts not in compliance with IFRS would require historical information that, given
the typical age of some of the assets involved, may no longer be available and could be
difficult to estimate. Obtaining the fair value information necessary to use the exemption
may also be impracticable, given the lack of readily available fair value information for those
assets and the difficulty in valuing the required number of assets in such capital-intensive
operations all at one time.
6.1.2.1

under US GAAP
Under US GAAP, Statement 71 establishes the criteria that must be met to recognize regulatory
assets and liabilities. Currently, IFRS does not recognize regulatory assets and liabilities.
However, some of the items currently accounted for as regulatory assets and liabilities under
US GAAP may be recognized in accordance with the criteria set forth in IAS 37 or IAS 38.
6.1.2.2
Future Developments
As a result of the challenges listed above and in order to provide companies with rate
regulated assets a practical and cost effective method of transition to IFRS, in September
2008 the IASB issued a proposed amendment to IFRS 1. A first-time adopter with operations
subject to rate regulation17 may elect to use the carrying amount of the asset at the date of
transition to IFRS if it is otherwise impracticable (as defined in IAS 8) to meet the
requirements of IFRS 1. This exemption is applied individually to each rate regulated asset
(that is, it is not a blanket exception). The proposed exemption relates only to the total
value carried over from previous GAAP as deemed cost for rate regulated assets and does
not extend to other IAS 16 requirements. Currently, the proposed exemption does not
provide relief if a first-time adopters previous GAAP did not require depreciation of each
significant part of the asset as required by IAS 16. Therefore, a first-time adopter still may
incur significant costs to allocate the carrying value to those significant parts in order to
prospectively depreciate each significant part. Also, similar to the oil and gas exemption
discuss above the proposed exemption requires a full impairment test for regulated assets at
the date of transition to IFRS. However, this requirement would seem to negate the benefit of
the exemption as the first-time adopter would be required to measure the value in use or fair
value less cost to sell of the assets.
Also, the proposed exemption seems to provide limited relief, due to the inclusion of the
IAS 8 impracticable threshold. That threshold only looks to whether the necessary
historical information can be obtained after making every reasonable effort. Unlike the
overall objective of IFRS 1, it does not consider providing relief based on the cost exceeding
the potential benefit to investors and other users of the financial statements.
17
124
The proposed amendment defines operations subject to rate regulation as those that provide services or
products to customers at prices (e.g, rates) established by legislation, an independent regulator or other
authorized body that are designed to recover the cost of providing the services or products and allow the entity
to earn a determined return on investment.
6 Appendix
At the date of transition to IFRS, each item for which the exemption is used must be tested
for impairment in accordance with IAS 36 and, if necessary, the carrying amount of the asset
must be reduced. The resulting carrying value is the depreciable amount to be used in
applying the exemption discussed in section 3.14 of this publication.
In addition, the IASB has a project on its active agenda for rate regulated entities. The Board
has decided to place the amendments to IFRS 1 on hold until the project on rate regulated
entities is complete. The Board plans to issue an Exposure Draft in the second half of 2009
with a final IFRS expect in 2010.
6.2
Abbreviations used in this publication
Abbreviation
Standard
APB 25
APB Opinion No. 25, Accounting for Stock Issued to Employees
ARB 51
Accounting Research Bulletin No. 51, Consolidated Financial

Statements
ASR 268
SEC Accounting Series Release No. 268, Presentation in Financial

Statements of Redeemable Preferred Stocks
EITF 95-3
EITF Issue No. 95-3, Recognition of Liabilities in Connection with a

Purchase Business Combination
EITF 96-18
EITF Issue No. 96-18, Accounting for Equity Instruments That are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services
EITF 00-19
EITF Issue No. 00-19, Accounting for Derivative Financial

Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock
EITF 00-27
EITF Issue No. 00-27, Vendor Income Statement Characterization of

Consideration Paid to a Reseller of the Vendors Product
EITF 01-8
EITF Issue No. 01-8, Determining whether an Arrangement contains

a Lease
EITF 07-5
EITF Issue No. 07-5, Determining Whether an Instrument (or

Embedded Feature) Is Indexed to an Entity's Own Stock
EITF D-47
EITF Issue D-47, Accounting for the Refund of Bank Insurance Fund
and Savings Association Insurance Fund Premiums
FIN 46(R)
FASB Interpretation No. 46(R), Consolidation of Variable Interest

Entities and Interpretation of ARB No. 51
FSP APB 14-1
FASB Staff Position APB 14-1 Accounting for Convertible Debt

Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement
125
6 Appendix
126
Abbreviation
Standard
IAS 1
International Accounting Standard No. 1, Presentation of Financial

Statements (Revised)
IAS 2
International Accounting Standard No. 2, Inventories
IAS 8
International Accounting Standard No. 8, Accounting Policies,

Changes in Accounting Estimates and Errors
IAS 10
International Accounting Standard No. 10, Events After the Balance

Sheet Date
IAS 12
International Accounting Standard No. 12, Income Taxes
IAS 16
International Accounting Standard No. 16, Property, Plant

and Equipment
IAS 17
International Accounting Standard No. 17, Leases
IAS 19
International Accounting Standard No. 19, Employee Benefits
IAS 21
International Accounting Standard No. 21, The Effects of Changes in

Foreign Exchange Rates
IAS 23
International Accounting Standard No. 23, Borrowing Costs (revised

2007)
IAS 27
International Accounting Standard No. 27, Consolidated and Separate

Financial Statements
IAS 27R
International Accounting Standard No. 27, Consolidated and Separate

Financial Statements (as amended in 2008)
IAS 28
International Accounting Standard No. 28, Investments in Associates
IAS 29
International Accounting Standard No. 29, Financial Reporting in

Hyperinflationary Economies
IAS 31
International Accounting Standard No. 31, Interests in Joint Ventures
IAS 32
International Accounting Standard No. 32, Financial Instruments:

Presentation
IAS 34
International Accounting Standard No. 34, Interim Financial Reporting
IAS 36
International Accounting Standard No. 36, Impairment of Assets
IAS 37
International Accounting Standard No. 37, Provisions, Contingent

Liabilities and Contingent Assets
IAS 38
International Accounting Standard No. 38, Intangible Assets
IAS 39
International Accounting Standard No. 39, Financial Instrument:

Recognition and Measurement
6 Appendix
Abbreviation
Standard
IAS 40
International Accounting Standard No. 40, Investment Property
IFRIC 1
IFRIC Interpretation 1 Changes in Existing Decommissioning,

Restoration and Similar Liabilities
IFRIC 4
IFRIC Interpretation 4 Determining whether an Arrangement contains

a Lease
IFRIC 12
IFRIC Interpretation 12 Service Concession Arrangements
IFRS 1
International Financial Reporting Standard No. 1, First Time Adoption

of International Financial Reporting Standards
IFRS 2
International Financial Reporting Standard No. 2, Share-based

Payment
IFRS 3R
International Financial Reporting Standard No. 3, Business

Combinations (as revised in 2008)
IFRS 4
International Financial Reporting Standard No. 4, Insurance Contracts
IFRS 5
International Financial Reporting Standard No. 4, Non-Current Assets

Held for Sale and Discontinued Operations
IFRS 6
International Financial Reporting Standard No. 6, Exploration for and

Evaluation of Mineral Resources
IFRS 8
International Financial Reporting Standard No. 8, Operating Segments
SAB 74 (Topic 11M) SEC Staff Accounting Bulletin No. 74 (Topic 11M), Miscellaneous
Disclosure
SIC 12
SIC 12 Interpretation ConsolidationSpecial Purpose Entities
SOP 78-9
AICPA Statement of Position 78-9 Accounting for Investments in Real

Estate Ventures
Statement 5
FASB Statement No. 5, Accounting for Contingencies
Statement 71
FASB Statement No. 71, Accounting for the Effects of Certain Types
of Regulation
Statement 94
FASB Statement No. 94, Consolidation of All Majority-Owned

Subsidiaries
Statement 97
FASB Statement No. 97, Accounting and Reporting by Insurance

Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments
Statement 113
FASB Statement No. 113, Accounting and Reporting for Reinsurance

of Short-Duration and Long-Duration Contracts
127
6 Appendix
Abbreviation
Standard
Statement 115
FASB Statement No. 115, Accounting for Certain Investments in Debt

and Equity Securities
Statement 115 Q&A FASB Staff Implementation Guidance A Guide to Implementation of

Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities: Questions and Answers
128
Statement 123(R)
FASB Statement No. 123(R), Share-Based Payments
Statement 133
FASB Statement No. 133, Accounting for Derivative Instruments and

Hedging Activities
Statement 140
FASB Statement No. 140, Accounting for Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities
Statement 141
FASB Statement No. 141, Business Combinations
Statement 141R
FASB Statement No. 141(R), Business Combinations
Statement 142
FASB Statement No. 142, Goodwill and Other Intangible Assets
Statement 146
FASB Statement No. 146, Accounting for Costs Associated with Exit
or Disposal Activities
Statement 157
FASB Statement No. 157, Fair Value Measurements
Statement 159
FASB Statement No. 159, The Fair Value Option for Financial Assets
and Liabilities
Statement 160
FASB Statement No. 160, Noncontrolling Interests in Consolidated

Financial Statements, an amendment of ARB No. 51
Statement 166
FASB Statement No. 166, Accounting for Transfers of Financial

Assets, an amendment of FASB Statement No. 140
Statement 167
FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)
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To our clients and other friends

IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1) was

International financial reporting developments IFRS1

Mandatory prohibitions on retrospective application............................................... 16

International financial reporting developments IFRS1

Voluntary Exemptions From the Requirements of Certain IFRS ..............................29

International financial reporting developments IFRS1

3.5.4 Potential issues applicable to first-time adopters that previously

International financial reporting developments IFRS1

3.10.7 Potential issues applicable to first-time adopters that previously

International financial reporting developments IFRS1

Presentation and Disclosures................................................................................ 113

Interim Financial Statements................................................................................ 120

Comparative information ............................................................................. 113

Potential issues applicable to first-time adopters that previously reported

Proposed amendments to IFRS 1.................................................................. 122

International financial reporting developments IFRS1

Excerpt from IFRS 11

is transparent for users and comparable over all periods presented;

provides a suitable starting point for accounting in accordance with International

can be generated at a cost that does not exceed the benefits.

International financial reporting developments IFRS1

Excerpt from IFRS 1

An entity shall apply this IFRS in:

its first IFRS financial statements; and

presented its most recent previous financial statements:

International financial reporting developments IFRS1

prepared a reporting package in accordance with IFRSs for consolidation purposes

did not present financial statements for previous periods.

stops presenting financial statements in accordance with national requirements,

presented financial statements in the previous year in accordance with national

requirements on changes in accounting policies in IAS 8 Accounting Policies,

specific transitional requirements in other IFRSs.

International financial reporting developments IFRS1

International financial reporting developments IFRS1

Opening IFRS Balance Sheet Selection of Accounting Policies

First IFRS Reporting Period

Date of Transition to IFRS and Opening IFRS Balance Sheet

Excerpt from IFRS 1

International financial reporting developments IFRS1

Retrospective Application of IFRS

Excerpt from IFRS 1

International financial reporting developments IFRS1

Example 1.3.3 Consistent application of latest version of IFRS

International financial reporting developments IFRS1

Transitional provisions in other standards

Excerpt from IFRS 1

Adjustments to the Opening IFRS Balance Sheet

Excerpt from IFRS 1

recognise all assets and liabilities whose recognition is required by IFRSs;

apply IFRSs in measuring all recognised assets and liabilities.

Application of the general provisions in paragraph 10 of IFRS 1 regarding the preparation of

International financial reporting developments IFRS1

Recognize all assets and liabilities whose recognition is required by IFRS

International financial reporting developments IFRS1

Derecognize items as assets and liabilities if such recognition is not

Classify items recognized in accordance with IFRS

International financial reporting developments IFRS1

Measure all recognized assets and liabilities in accordance with IFRS

International financial reporting developments IFRS1

Example 1.3.5.4 Subsequent Measurement of Acquired Finished Goods Inventory

International financial reporting developments IFRS1