IFRS 1 First time Adoption of International Financial Reporting Standards sets out the processes that a company must take when it adopts IFRSs for the first time as the foundation for compiling its general purpose financial statements. The IFRS offers certain exemptions from the general obligation to comply with each IFRS effective at the conclusion of its initial IFRS reporting period.
A revised version of IFRS 1 was released in November 2008 and applies if an entity’s first IFRS financial statements are for a period beginning on or after 1 July 2009.
Definition of first-time adoption
A first-time adopter is an organisation that declares explicitly and unequivocally for the first time that its general purpose financial statements comply with IFRSs.
A business may be a first-time adopter if it created IFRS financial statements for internal management use in the prior year and did not make such IFRS financial statements available to owners or external parties such as investors or creditors. If a business makes a set of IFRS financial statements available to owners or external parties in the prior year for whatever reason, the entity is already deemed to be using IFRSs, and IFRS 1 does not apply.
Additionally, a company may be a first-time adopter if its financial records for the prior year show the following:
claimed conformity with a subset of IFRSs but not all, or contained just a reconciliation of chosen numbers from prior GAAP to IFRSs. (The term “previous GAAP” refers to the GAAP that an entity used immediately before adopting IFRSs.)
An entity is not a first-time adopter if, in the preceding year, its financial statements asserted:
- Compliance with IFRSs even if the auditor’s report contained a qualification with respect to conformity with IFRSs.
- Compliance with both previous GAAP and IFRSs.
An organisation that implemented IFRSs in a prior reporting period but did not include an explicit and unqualified statement of compliance with IFRSs in its most recent preceding annual financial statements may opt to:
- implement the requirements of IFRS 1 retroactively (including the different authorised exclusions), or
- implement IFRSs retrospectively in line with IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors, as if they had never ceased to apply IFRSs.
Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption
- Derecognition of some previous GAAP assets and liabilities
- Recognition of some assets and liabilities not recognised under previous GAAP
- Reclassification of some balance sheet items
- Measurement principles
Disclosures in the financial statements of a first-time adopter
IFRS 1 requires disclosures that explain how the entity’s reported financial condition, financial performance, and cash flows were affected by the transition from prior GAAP to IFRS. This includes the following:
- Reconciliations of equity reported under prior GAAP to equity reported under IFRS are provided for both (a) the date of transition to IFRSs and (b) the end of the most recent annual period reported under previous GAAP. [IFRS 1.24(a) IFRS 1.24(a) IFRS 1.24(a) (For an entity that adopts IFRSs for the first time in its financial statements as of 31 December 2014, the reconciliations will be as of 1 January 2013 and 31 December 2013.)
- Total comprehensive income reconciliations for the most recent annual period reported under prior GAAP to total comprehensive income under IFRSs for the same period [IFRS 1.24(b)].
- Explanation of the significant adjustments made to the statement of financial position, the statement of comprehensive income, and the statement of cash flows as a result of the first adoption of IFRSs (the latter if presented under previous GAAP)
- If mistakes in previously prepared GAAP financial statements are detected during the transition to IFRSs, they must be declared separately [IFRS 1.26]
- If a business recognised or reversed any impairment losses during the preparation of its initial IFRS statement of financial position, they must be declared [IFRS 1.24(c)].
- Appropriate explanations if the entity decided to employ one of the IFRS 1 special recognition and measurement exemptions – for example if it used fair values as considered cost.