IFRS 1 First Time Adoption of International Financial Reporting Standards - P2

This article covers the basic principles in IFRS 1. It states that first-time adopter must prepare an opening statement of financial position (SOFP) in accordance with IFRS on the date of transition from generally accepted accounting principle/practice (GAAP) to IFRS. Also, entity must select accounting policies based on IFRS. For example, if the entity adopts IFRS for the first time in financial statements year ended 31 December 2009, it should select accounting policies based on IFRSs effective at 31 December 2009 and prepare opening SOFP (restate retrospectively) as at 1 January 2008 (because IAS 1 requires full comparative financial statements to be presented, which will be 2009 and 2008 financial statements).

In preparing opening SOFP, the following rules should be followed unless IFRS 1 grants exemptions or prohibits retrospective application:
1. Eliminate previous GAAP assets and liabilities if they don't qualify for recognition under IFRSs.
2. Recognise assets and liabilities required by IFRS but previously not recognised under GAAP.
3. Reclassify previous GAAP assets/liabilities/equity into appropriate IFRS classification.
4. All recognised assets and liabilities should be measured according to IFRS principles.

First-time adopter should apply accounting policies consistently throughout the periods presented in its first IFRS financial statements. Transitional provisions in other IFRSs do not apply to first-time adopter. However, first-time adopter is allowed to elect to use one or more exemptions from general measurement and restatement principles such as:
1. Can use fair value of assets (property, plant and equipment, intangible assets, investment property) previously fair valued or revalued under GAAP as deemed cost under IFRS cost model. Deemed cost is an amount used as surrogate (substitute) for cost or depreciated cost.
2. Keep the original GAAP accounting for business combination that occurred prior to date of opening SOFP. If entity decides to retrospectively apply IFRS 3 to business combination, it must apply consistently to all business combinations occurring between date it decides to adopt IFRS 3 and date of transition.
3. Can recognise all cumulative actuarial gains and losses for all defined employee benefit plans.
4. Recognise all cumulative translation reserve under GAAP to retained earnings.

There are also mandatory exceptions to general measurement and restatement principles:
1. Conditions in IAS 39 for hedging relationship that qualifies for hedge accounting are applied at opening SOFP date, not retrospectively.
2. Apply derecognition requirements in IAS 39 prospectively for transactions occurring on or after 1 January 2004, not retrospectively unless needed information was obtained at the time of initial recognition of those transactions.