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Session plan
Requirements of First time adoption
 Exemption from retrospective application
 Prohibition from retrospective application
 Disclosures

What are the requirements on first time adoption

The Financial Statements must be prepared in
compliance of IFRS (Framework/ IFRS/IAS/SICs/
IFRICs)

Financial statements to carry an explicit &
unreserved statement that it is in complete
compliance of IFRS

Financial statements to carry figures as if IFRS had
been adopted right from the day they were in force
(retrospective application)

However IFRS 1 provides certain exemptions from
retrospective application in the case of many items ,
on first time adoption.
What are the statements to be prepared on first time adoption

Opening IFRS statement of financial position is prepared on the
date of transition ( 1-4-2010 in the Indian situation)
Therefore at Minimum , following are presented
 3 Statements of financial position,
 2 Income statements,
 2 Statement of changes in equity
 2 Cash flow statements and
 Notes ( with comparatives)

IFRS to be applied shall be the ones in force as on the end of
the first IFRS reporting period ( ie IFRS effective for periods
ending on 31-3-2012 in the Indian situation)
Non IFRS comparative information

Auditors of X ltd are of the view that the entity shall present
(a) the financials for FY 09-10, and 10-11, under old GAAP
(b) the opening IFRS financial statement on 1-4-10 and
© IFRS compliant financials statement for FY 10-11 and 1112 on its first time adoption from FY 2011-12
(a) is not in the scope of IFRS .However there is no
prohibition in making such comparatives as additional
information .
 Any such additional comparisons need to be prominently
labeled as not being prepared under IFRS and disclosure
for the nature of adjustments (without quantification) that
would make it IFRS compliant
 ( This means
the gap between the previous GAAP
information and the information if it was presented under
IFRS needs to be explained) .

Explanation of transition to IFRS

Auditors of Y Ltd wants that the entity on its firstime adoption
of IFRS shall explain how the transition from previous GAAP
to IFRS has affected it. The company finds it impracticable

Such an explanation is mandatory .The explanation to cover
impact on reported financial position , financial performance,
and cash flows.
The explanation requires to be included with reconciliation of
position between the previous GAAP and IFRS both on
account of statement of financial position and comprehensive
income
 The reconciliation to include material adjustments, if any to
statement of cash flow.

Reconciliation of equity


Auditors are of the view
that the reconciliation
presented by first time
adoption is too simplistic
The requirement is to
present a reconciliation of
equity under previous
GAAP to equity under
IFRS as on date of
transition and as on the
end of latest period under
previous GAAP, giving
sufficient details. Auditors
are right
1-4-10
31-3-11
Equity under
Indian GAAP
1200
1500
Effect of first
time adoption
250
200
Equity under
IFRS
1450
1700
Exemption from retrospective application

Fair value as deemed cost (for PPE, investment
property, intangible assets)

Business combinations

Employee benefits – Corridor approach

IAS 21 principles related to foreign operations

Separation of Compound financial instruments

Fair value designation
financial instruments

Principles of FV measurement of financial assets and
financial liabilities
of
previously
recognized
Exemption from retrospective application
 Share based payment transactions

Assets/Liabilities in subsidiary, associates & JCE

Insurance contracts

Leases

Decommissioning liabilities included in the cost of PPE
– only balance liability to be provided for,

Financial assets or intangible assets accounted for as
per IFRIC 12

Borrowing costs
Retrospective application prohibited




De-recognition of financial assets and liabilities
Hedge accounting
Change of estimates (inconsistent with previous
GAAP)
Non controlling interests
Variation in profits of past periods

X Ltd found that it had not accounted for fair value changes in
derivatives ( that were not effective hedging instruments) for the
years FY ’08, ’09 , ’10 and ’11 the effect of which were under
reporting of profits 1000 and 1500 for ’08 and ’09 respectively.
Effect of ’10 and ’11 were over reporting of profit by 400 and 250
respectively. Derivatives get settled not later than three months

By virtue of Para 25 A of IFRS 1 , designating the eligible items at
FV thro P/L prospectively is allowed ( ie from 1-4-2010 in Indian
case)
Therefore non accounting in ‘08 and ’09 is not non
compliance.
Assign fair value on 1-4-10 and the effect goes to retained
earnings. Effect of fair value change in 2010-11 will affect the profit
of that year and is an item of reconciliation

Necessity of impairment provision on transition
On 1-4-2010, Y ltd identified impairment losses on certain
financial assets which was to be recognized in year 09-10,
but not done. Y ltd designated the items under AFS on
transition to IFRS on 1-4-10. How would the impairment
losses be reckoned on first time adoption in compliance of
IFRS
 If the impairment loss was to be carried to the opening IFRS
statement, then the corresponding asset would be lower by
so much erosion in value and the impact would have been in
equity ( Retained earnings)
 However here the asset will be valued at fair value as per IAS
39 , which need not be done retrospectively on first time
adoption that does away the impairment loss accounting.
Further an AFS need not be subject to impairment

Impairment provision omitted in past

AB had suffered capacity shortfall in 2005 and had not
provided for impairment losses , since 2005.On first time
adoption it was found that the recoverable value of a CGU
was less than carrying value by “1000” if impairment was
done in 2005.

Retrospective application was needed. The effect is that
depreciation should have been provided after considering
impairment losses since 2005. Cumulative effect needs to be
ascertained while measuring PPE.

In compliance of IAS 36, disclosure of impairment losses
recognized or reversed for the first time, in the opening IFRS
statement , if any is necessary . This is not that case
Fair value measurement of Financial assets or financial
liabilities
Shares held for trading used to be valued at lower of cost or
realizable price as per AS 13. Fair value of these assets on
date of transition is much more than the carrying values and
the fair value change could be dated back to 5 years ever
since the company had a trading portfolio, although the
portfolio underwent changes.
 Paragraph 25G of IFRS 1 exempts from retrospective
application of IAS 39 that requires measurement of financial
assets or financial liabilities at fair value on initial recognition (
or on subsequent measurement , wherever it is required as
per IAS 39 )
 Effectively that allows prospective presentation of financial
assets and financial liabilities as per IAS 39 , from the date of
transition

Redeemable shares

X had issued 10% redeemable preference shares in 2005,
redemption after 7 years at face value. Company had been
showing, the outstanding share preference capital, as part of share
capital and hence equity.

By substance it is a liability, rather than equity. Therefore on date of
transition it shall appear as liability in the financial statement books .
Measurement has to be at amortized cost as per IAS 39.
Dividend that was not charged to P/L would have overstated the
profit in the past. But its effect was offset when dividend was
charged to equity on payment . Unless there are different line items
to reflect the two under the head equity , no adjustment on this
count is necessary

Accumulated preference share dividend



If the terms of issue ( in the previous case) provided for
payment of dividend Rs 50 for all the years together
with principal on maturity, would it have made any
difference
Effective rate of dividend would have been 8.45%
instead of contractual rate 10%. Amortised cost of
liability that would be reflected on 1-4-10 would have
been different
Dividend payable classification – current -non current
needs re-assessment
Exemption on Compound instruments




Separation of equity and liability from a compound
instrument at inception is the requirement of IAS 32
Retrospective application , apart from bifurcating the
two components ,
also requires identifying
accumulated
interest
accreted
on
liability
component, considered in retained earnings. This is
practically difficult.
IFRS 1 exempts from such separation if the liability
element is not outstanding, on the date of transition.
( IFRS 1.23)
Where liability and equity components are
outstanding, retrospective application required
Instrument with put options



Debenture holders are given option to convert 60% of
the debenture in to equity shares after three years at the
average market price of the equity for preceding three
months. 30% will be converted to two equity shares for
every 5 debenture . Balance (inclusive of fraction value)
is payable in cash after 5 years. Those who do not
exercise option of conversion also get cash
60% conversion option gives variable number of shares
as means of settlement which is a liability as per IAS
32.Cash payable also is a liability. Fixed number of
shares for settling the liability is “equity”
Breaking up the equity and debt element at the
inception is needed under IFRS.
Implication of that instrument on transition





There is no exemption from retrospective application (
ie breaking into debt and equity since inception) if
debt element is outstanding as at transition date
Out of the debenture proceeds on issue, liability part
should have been recognized at fair value as per IAS
39. Balance should have been the equity element as
per IAS 32
Fair value of debt is the PV based up on comparable
instrument without conversion option
Interest attributable to the debt component only
should have been charged to P/L
Amortised cost to be determined on the basis of
effective rate of interest
Share warrants

Outstanding share warrants amounted to 1000, entitling
holders to opt for 100 equity shares were outstanding on
the date of transition . Option premium was considered
as revenue at the time of receipt .Company had treated
the share warrants as liabilities in previous GAAP.

As the number of shares to be issued is fixed , the
share warrants are not liabilities but equity . Option
premium is the part of equity that should have been
shown as a line item under equity .
Retrospective application changes the past profits and
creates a new line item under equity on account of
option premium. It can be added with “warrant” account
also.

Redeemable preference shares

Preference shares redeemable are debts

Preference shares with put option with holder are
debts
Preference shares with call option with issuer are
not debts

Foreign currency translation difference adjustment



X had opted for the AS 11 modification pronounced by
MCA , in March 2009, under which FCTDA account
showed a debit balance as reduction from reserves 350
on 31-3-09, and 325 on 31-3-10. P/L account of the
company was credited with 500 in 07-08 on exchange
difference and amortized with 175, 325 and 425 during
08-09, 09-10 and 10-11 respectively.
On date of transition, the FCTDA account shall not
appear in the opening IFRS statement and the effect
goes to equity account.
As IFRS comparatives for 10-11 will not recognise the
carried over effect of FCTDA 325 unlike in IGAAP, the
profits between the two would differ by as much amount
and reconciliation to capture the gap
Bank limits

X has a bank limit of 200 with variable interest rate . On
date of transition to IFRS, fair value of the liability was
sought to be assessed for presentation. Is it correct

Bank limit , is a liability that can not come under trade
liability. Therefore no fair valuation is required as per
IAS 39.
The liability will be measured at amortized cost in this
case.
Since effective rate of interest and contractual rate are
same, carrying value and amortized cost are same.
Therefore transition invites no accounting adjustment to
equity.


Written options

X used to amortize written option premiums over the
period of contract as income .

On the date of first time adoption, this has to be
measured at fair value through P/L account, being a
derivative liability.
IFRS 1 exempts from retrospective classification of
financial instruments “at FV thro P/L” ( IFRS 1.25A)
Therefore on the date of transition, the fair value shall
be captured as liability . Incorrect recognition of option
premium as income will not be adjusted as application is
prospective, thereby the effect goes to Retained
earnings.


Staff advances

Staff advances at concession rate of interest , has been
outstanding on the date of transition 1000. Company
had the practice of recognizing interest on accrual at
contractual rates . The advances were as old as 10
years and of the subsequent periods.

The item comes under financial asset – Loans and
receivables – requiring amortized cost presentation.
There is no exemption from retrospective application .
Therefore effects of (a) presentation at amortized cost
(b) effect of charging of excess over fair value in P/L on
initial recognition © effect of interest recognition under
effective rate etc.. Would go to respective equity heads
PPE - Fair value or revaluation as deemed cost

On the date of transition ( 1-4-2010) fair value or
revaluation price( approximating fair value) can be
used as deemed cost for PPE (fixed assets),
Intangible assets and investment property.
(IFRS1.16-19)

Based on such deemed costs, entity can follow cost
basis accounting.

If they choose an accounting policy of revaluation as
permitted by IAS 16, the value to represent the fair
value consistently
Change In accounting policy

Does first time adoption of IFRS require disclosure as per
IAS 8 on change in Accounting Policy.

IAS 8 requires disclosure regarding change in Accounting
Policy, as a matter of general rule .However on first time
adoption , change in policies in compliance of IFRS are not
required to be disclosed as per IAS 8
Early application of an IFRS

An IFRS is introduced , but not yet mandatory as on 31-32012 (for the first IFRS statements of a company) . What are
the prescriptions for its applicability

The company is not required to follow non mandatory IFRS
on first time adoption .If chooses to adopt early , there is no
restriction

Transitory provision in the said new IFRS can be used even
in a case of early application.

IAS 8 requires disclosure on all IFRS that are not effective
and not adopted by the entity along with
the likely
implication upon adoption
Employee Benefits

IFRS 1 exempts entities from applying “corridor
approach” retrospectively for complying with IAS 19. All
other aspects in IAS 19 require retrospective application

This means Corridor approach can be used prospectively
and past accumulated actuarial losses can be recognized
on the date of transition , by charging to appropriate
equity account.

Availing this exemption means availing for all the plans

Disclosure as per IAS 19 on unrecognized actuarial
losses , would carry the facts on prospective application ,
by virtue of availing this exemption
Leases

How would ‘lease’ of past periods be considered on first time
adoption..

IFRIC 4 gives guidance as how to test whether an arrangement
constitutes a lease or not. The principle is to understand the
substance of the contract.

On first time adoption , the guidance in IFRIC 4 can be used to
determine whether an arrangement is a lease or not. If it is a lease
prospectively since date of transition, IAS 17 needs application

In the Indian situation there is no significant difference between AS
19 and IAS 17 and therefore , there is less scope for gaps on first
time adoption.
Business combinations took place prior to transition
IFRS 3 requires assets and liabilities to be accounted at fair
value on the day of acquisition and goodwill arises
consequently for the difference in purchase consideration for
the unidentified assets. Minority interest also requires
recognition ( in consolidated accounts). Employee liability,
Contingent liabilities, Income taxes etc require recognition as
specified in IFRS3
 However
for Business combinations happened before
transition date to IFRS, retrospective effective is not
mandatory.
 However the entity can opt for retrospective application of
IFRS 3 if it chooses provided IAS 27 also is complied with.
 Suppose there are a few business combinations prior to date
of transition, if it chooses to account for the first under IFRS
3, then the others also must comply.

Application of IAS 21 in a past business combination

In a past business combination , if IAS 21 was applied it
would have resulted in certain fair value adjustments to
assets and liabilities and to the value of goodwill. But it was
not done. What is the effect on first time adoption

IFRS I exempts application of IAS 21 retrospectively in a past
business combination.

If an entity chooses it can apply it retrospectively too.
In the Indian context if AS11 was complied for past business
combination, this exemption made no material difference as
AS11, is not inconsistent with IAS 21
 Prospective application means on date of transition,
translation is done as per IAS 21 and exchange difference
accounted for

Consequences of a past business combination on first time adoption
If IFRS 3 was not retrospectively followed
 First time adopter to recognize all assets and liabilities taken over.
 But , shall not recognize those that are not IFRS compliant
 There could be items that were not recognized under previous
GAAP, if they can be recognized under IFRS, recognize them

There could also be items that were recognized under previous
GAAP, but can not be recognized under IFRS, derecognize them

Resulting changes of the above would be adjusted in equity
account
However effect of derecognizing of any intangible assets has to be
to the goodwill account ( unless goodwill was offset against equity
under previous GAAP – which is not followed in India)

‘Measurement’ on first time adoption in the wake of past business
combination

Assets /liabilities from past business combination, if are to be
valued at fair value on subsequent measurements under the
Accounting policies under IFRS, first time adopter to measure
them accordingly and the resultant effect goes to equity
(rather than goodwill).

If assets are to be measured at cost for depreciation or
amortization under IFRS , then the carrying value of those
items under previous GAAP becomes deemed cost.

Para 16 – fair value being deemed cost for PPE, Intangible
assets etc.. Not applicable therefore.
Changes to Goodwill from acquisition on first time adoption

A past business combination , accounted under previous GAAP,
reflected goodwill . If IFRS 3 is not applied retrospectively , how would
the goodwill be carried on first time adoption.
Goodwill will be carried with the same amount (as in previous GAAP )
to the IFRS books, subject to following adjustments
 If any intangible asset was recognized under previous GAAP, which is
not to be recognized under IFRS 3 (read with IAS 38), derecognizing
that intangible asset would be adjusted to goodwill account
 If any asset that was subsumed in goodwill account and was not
recognized under previous GAAP, has been recognized on date of
transition, the goodwill gets affected by the adjustment. ( adjustment to
deferred taxes and non controlling interest is consequential, depending
on cases)
 IAS 36 requires testing goodwill for impairment regardless of indication
of impairment. Therefore consequential adjustments necessary.

A sample IFRS disclosure on business combination
“ Since the date of transition to IFRS meant for EU is
1.4.2006 and the practice of preparation of consolidated
financial statement (CFS) under pooling method has been in
vogue since much longer period under the old GAAP, the
stipulation of IFRS-3 laying down purchase method of
incorporating consolidated accounts had to be done away
with for business combination lasting since before transition
date.
 However purchase method has been applied for
consolidation / merger of any new entity or change in
business combination of existing entities forming the group”.


Comment- exemption under IFRS 1.15 is availed, for past
business combinations. Language could have been refined.
Restatement of Goodwill for adjustments in past

Goodwill created at the time of a past business combination
was amortized partly . Can the Goodwill be restated with the
pre-amortized amount on first time adoption

No. carrying amount under previous GAAP becomes the
carrying amount on first time adoption
Goodwill not accounted from past business combination

A the parent on acquiring B as a subsidiary had not
prepared consolidated financial statements under previous
GAAP. On first time adoption , how is the compliance
ensured.

IFRS requires mandatory consolidation of subsidiary
Difference between parents investments in its books and
Parent’s interest in Subsidiary’s net assets (after presenting
all the assets and liabilities according to IFRS requirement
as on the date of transition, including deferred tax accounting
) will be the goodwill in the consolidated records.
 Non controlling interest also would be reflected in the
consolidation

Intangible assets

Can intangible assets also be valued at fair value on date of
transition just as fixed assets

Yes , if the assets can be recognized under IAS 38, their
value can be the deemed cost on the date of transition, just
as in the case of PPE

Similar option is available to Investment property also
Exchange rate translation reserve
 Exchange rate differences on foreign operations are
accumulated in a special equity account until investments
are disposed as per IAS 21.

A retrospective application of this principle would mean
identifying accumulated exchange difference on this
account as on date of transition and showing separately

IFRS 1 gives option to do away with this on retrospective
basis , which means as on date of transition the
exchange rate difference accumulated can be Zero.

Consequently gain or loss on disposal of foreign
operation shall exclude the
cumulative exchange
difference before the date of transition to IFRS.
Hedge Accounting

Under the previous GAAP, net of the foreign exchange payables
and receivables was identified as a hedge against a highly probable
forecast transaction. How would it get affected on first time adoption

IAS 39 prescribes norms of hedge accounting and conditions .
IFRS 1 prohibits retrospective application of Hedge accounting
norms. That means on date of transition , all derivatives shall be
valued at fair value and there shall not be any deferred
unrecognized losses / gains
The opening IFRS statement shall not carry any hedging relation
ship which is not in compliance of IAS 39. Therefore any hedges
that existed under previous GAAP , which is not in compliance of
IAS39 , to discontinue hedge accounting before transition.
Transactions happened before transition date shall not be
retrospectively designated as hedges



Estimates on First time adoption

Estimates under IFRS at the date of transition has to be
consistent with estimates made under previous GAAP

If there are objective evidences that those estimates were in
error , appropriate modification in estimates is possible.

If the adoption results in change of accounting policy , say,
an employee termination liability is accounted under
constructive obligation as per IAS19, the estimates to reflect
necessary adjustment for such policy changes.

Variables such as interest rates, foreign exchange rate,
market prices etc to reflect conditions existed on the date of
transition
Events after balance sheet date

Transition date is 1-4-2010. Information received on June 1
requires revision of an estimate made under previous GAAP,
as per IAS 10 . Should the opening IFRS have been
amended with changed estimate . What is the implication on
first time adoption.
Changes in estimates is a prospective adjustment item.
Under IFRS 1 also, there is prohibition in changing opening
IFRS statement consequent to adjusting events (requiring
change of estimates )
 However if the change was a change of policy or due to error,
the effect of it would affect the financials (P/L) of 2010-11

Non current assets held for sale

Non current assets held sale ( disposal group) is valued at
lower of cost or net realizable price as per IFRS 5.

Entities having transition date after 1-1-05 shall apply IFRS 5
retrospectively . Accordingly all the items under this
classification to appear as per IFRS 5 in the opening IFRS
statement

To give effect to retrospective application, transition
provisions on 1-1-05 in IFRS 5 can be used as on that date.
Practically that means retrospective application since 1-1-05
Non controlling interest

On consolidation , IAS 27 is required to be complied with, which
requires presentation on non controlling interest separately . Total
comprehensive income also requires separation as to parent
interest and non controlling interest

In case parents ownership interest undergoes change , without
resulting in loss of control, that also would reflect in non controlling
interest .

When there is loss of control over subsidiary , derecognition of
assets, liabilities, non controlling interest and recognition of
consideration received and gain or loss of disposal etc.. as per IAS
27 required .

First time adopter shall apply above requirement of IAS 27
prospectively from the date of transition
Reconciliations in the interim reports in First IFRS
statement

Are the requirements for reconciliation on first time
adoption , same for interim periods also ?

Yes , In case of Interim period reports comparative
reconciliation as in the case of full reporting period is
required
IFRS Adoption date at variance in the case of a parent

If an entity adopts IFRS later than its subsidiary , in the
consolidation it shall carry the figures as per the subsidiary’s
separate financials , subject to consolidation adjustments

If a parent company becomes a first time adopter for its
separate financial statements earlier or later than for its
consolidated financials, it shall measure its assets and
liabilities at the same amounts in both the financial
statements.
Disclosure

In addition to disclosure in the form of explanations
(reconciliations) and unreserved statement on compliance
with IFRS the following disclosures also needed

Fair value of financial assets /financial liabilities designated in
each category ( At FV thro P/L or AFS ) as on date of
designation and their classification and value in the previous
financial statements

In the case PPE, Investment Property and Intangible assets,
used the fair value as deemed cost , the aggregate of fair
value of those items, aggregate adjustment to the carrying
amount reported under previous GAAP.
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