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GUIDE TO FIRST TIME ADOPTION OF IFRS- IFRS 1

PREFACE

With effect from April 1, 2011 Indian Accounting Standards are to converge with IFRS. Consequently, the companies listed outside but carrying their operations in India will need to convert their accounts from Indian GAAP to IFRS while some of the companies would like to see how their how their present financial statements would look if these were prepared as per IFRS. A number of practical issues need to be addressed while carrying out such assignments of conversion and IFRS 1, ‘First time adoption’ is one of the most critical standards in this regard. This handbook is an attempt to understand the requirements of IFRS 1
I hope this handbook will be helpful to all our readers. The readers are welcome to provide any suggestions, comments or bring to my notice any errors in the publication at rajkumarfca@gmail.com or call me at 98200 61049.



CONTENTS
Chapter No Title Page No
1 BACKGROUND TO IFRS 2
2 INTRODUCTION TO IFRS 1 3
3 RECOGNITION & MEASUREMENT PRINCIPLES OF IFRS 1 8
4 PRESENTATION AND DISCLOSURE 38
5 FIRST TIME ADOPTION OF IFRS: CHECKLIST- IFRS -1 40
6 CASE STUDY 49



Chapter 1
BACKGROUND TO IFRS
On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards.
Due to the global drive for convergence, many countries have already adopted IFRS. With the opening of Indian economy in near past, the convergence to IFRS has become unavoidable. Keeping this in view, ASB decided to form an IFRS task force in August 2006. Based on the recommendation of this task force, the Council of ICAI, in its 269th meeting decided to fully converge with IFRS from the accounting periods commencing on or after 1st April 2011. At initial stage, this convergence will be mandatory for listed and other public interest entities like banks, insurance companies, NBFCs, and large sized organizations with high turnover or annual income.
Why this convergence?
Converging with IFRS will have multiple benefits for Indian entities especially those who aspire to go global. Some of the benefits of convergence with IFRS are explained below:
a) Accessibility to foreign capital markets
b) Reduced Cost
c) Enhance Comparability
d) Boon for multinational group entities
e) New Opportunities for the professionals

Chapter 2
INTRODUCTION TO IFRS 1
ORIGIN OF IFRS 1
Companies listed on the European Stock Exchange were required to present their separate and consolidated accounts in accordance with IFRS 1 from 2005.Therefore The International Accounting Standards Board initiated a project for providing guidance and assistance to the first time adopters and published its first IFRS 1 First-time Adoption of International Financial Reporting Standards on 19th June 2003. The new standard provides guidance in difficult areas such as the use of hindsight and the application of successive versions of the same standards.
Prior to the adoption of IFRS 1 as stated above , the guidance related to first time adoption of accounting standards was detailed in SIC-8 First-Time Application of IASs However there were inherent difficulties faced by the first time adopting entities in complying with the provisions in SIC -8
Under SIC 8, in the period of first-time application of IASs as the primary accounting basis, the financial statements of an enterprise, including comparative information, should be prepared and presented as if the financial statements had always been prepared in accordance with the IASs effective for the period of first-time application. Therefore, the Standards and Interpretations should be applied retrospectively except when Standards or Interpretations require or permit a different transitional treatment or when the amount of the adjustment relating to prior periods cannot be reasonably determined. Adjustment amounts should be treated as an adjustment to the opening balance of retained earnings of the earliest period presented in accordance with IASs. If adjustments relating to prior periods or comparative information cannot be determined, the fact should be disclosed
These difficulties faced by the enterprises led to the replacement of SIC-8 by IFRS-1 as the standard for first time transition by the IASB. IFRS 1 has significant improvements over SIC-8 which is detailed out below:
1. IFRS- 1 requires an entity to follow all the accounting standards in the preparation and presentation of its financial statements which are effective at the reporting date thus ignoring previous superseded versions of standards which were effective some time earlier, but have become redundant on the date of transition.
For eg an entity which carries out the transition in 2009 has to comply with the standards effective 31st December 2009.
IFRS 1 also permits an entity to apply a new IFRS that is not yet mandatory if that standard allows early application.
2. In its basis for conclusions, the Board mentioned that IFRS 1 is drafted to give priority to achieving comparability over time within a first-time adopter's first IFRS financial statements and between different entities adopting IFRS for the first time at a given date and that achieving comparability between first-time adopters and entities that already apply IFRS is a secondary objective. On the other hand SIC-8 gave priority to ensuring comparability between a first-time adopter and entities already adopting IFRS.
On 27 November 2008, the International Accounting Standards Board (IASB) issued a revised version of IFRS 1 First-time Adoption of International Financial Reporting Standards. The objective of the revision was to restructure the Standard to improve its readability and clarity – no new or revised technical material was introduced. The November 2008 revisions (exposed as part of the 2007 improvements project) are designed to make the Standard clearer and easier to follow by reorganizing and moving to appendices most of the Standard’s numerous exceptions and exemptions. The improved structure was also intended to accommodate future changes to the Standard.
The Material has been reorganized within appendices as follows:
• exceptions to the retrospective application of other IFRSs (new Appendix B);
• exemptions for business combinations (new Appendix C);
• Exemptions from other IFRSs (new Appendix D).
• Interestingly, the Board has created another appendix (Appendix E) which could be used for future possible short-term exemptions from IFRSs on first-time adoption.
The revised version is effective for entities applying IFRSs for the first time for annual periods beginning on or after 1 January 2009. Earlier application is permitted.
2.2 STRUCTURE OF IFRS 1
IFRS 1 is set out in Paras 1-47 and Appendices A-C
 Appendix A- Defined Terms
 Appendix B- Business combinations
 Appendix C- Amendments to other IFRS (now incorporated in the relevant IFRS)
 Appendix D- Exemptions from other IFRSs
 Appendix E - Short-term exemptions from IFRSs
KEY DEFINTIONS as set out in Appendix A
1. First time Adopter: An entity that presents its first IFRS financial statements
2. First IFRS financial Statements: The First annual financial statements in which an entity adopts IFRS by an explicit and unreserved statement of compliance with IFRS
3. First IFRS reporting period: The latest reporting period covered by an entity’s first IFRS financial statements
4. Opening IFRS statement of financial position: An entity’s statement of financial position at the date of transition to IFRSs
5. Date of transition to IFRSs: The beginning of the earliest period for which an entity presents full comparative information under IFRSs in its first IFRS financial statements
OBJECTIVE OF IFRS 1
The objective of IFRS 1 is to ensure that an entity's first IFRS financial statements and its first IFRS interim financial statements contain high quality financial information that:
(a) Is transparent for users and comparable over all periods presented;
(b) Provides a suitable starting point for accounting under IFRS; and
© Can be generated at a cost that does not exceed the benefits to users.
SCOPE OF IFRS 1
An entity shall apply this IFRS 1 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.
The first IFRS statements are the first annual financial statement in which the entity makes an explicit and unreserved statement of compliance with IFRS. . This means IFRS-1 does not apply to entities that already apply IAS /IFRS.
Most companies will apply IFRS 1 when they move from local GAAP to IFRS. In India, all public interest entities will be required to adopt IFRS for all accounting periods beginning on or after 1st April 2011. IFRS 1 must also be applied when a company’s previous financial statements:
i. Was prepared under national GAAP not consistent with IFRS in all respect. included a reconciliation of some items from a previous GAAP to IFRS;
ii. complied with some, but not all, IFRS in addition to a previous GAAP – for example, in areas where there is no previous GAAP guidance; or
iii. complied with IFRS in all respects in addition to a previous GAAP, but did not include an explicit and unreserved statement of compliance.
An entity can also be a first-time adopter if, in the preceding year, its published financial statements asserted:
I. Compliance with some but not all IFRSs.
II. Included only a reconciliation of selected figures from previous GAAP to IFRSs. (Previous GAAP means the GAAP that an entity followed immediately before adopting to IFRSs.)
An entity may be a first-time adopter if, in the preceding year, it prepared IFRS financial statements for internal management use, as long as those IFRS financial statements were not and given to owners or external parties such as investors or creditors. If a set of IFRS financial statements was, for any reason, given to an external party in the preceding year, then the entity will already be considered to be on IFRSs, and IFRS 1 does not apply.
However, an entity is not a first-time adopter if, in the preceding year, its published 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.
Some situations to explain when IFRS 1 can be applied
1. Can an offering document contain the first IFRS financial statements?
Yes, if the financial statements included in the offering document contains an explicit and unreserved statement of compliance with IFRS it will be the first IFRS financial statements provided complete set is presented with comparative previous year information as required by IAS 1. The context in which the financial statements are prepared is not relevant to deciding whether or not they are the first IFRS financial statements. IFRS 1 should not be applied to the financial statements issued after the offering.
2. Can management of an existing IFRS reporter apply the exemptions of IFRS 1 to an entity’s financial statements by dropping an explicit and unreserved statement of compliance with IFRS from its financial statements?
Yes. Deleting the statement of compliance with IFRS means that the financial statements will not be IFRS financial statements, even though entity has been preparing IFRS financial statements for several years. Entity’s subsequent financial statements will therefore be entity’s first IFRS financial statements.
3. Can an entity use a new holding company to create the first IFRS financial statements?
No. The creation of a new parent entity just to hold the group is a transaction that has no substance. The transaction should be ignored, and the first financial statements of the new parent entity should be prepared on the basis that the original parent continues as the preparer of the group financial statements.
4. Can management apply IFRS 1 when an entity’s previous financial statements were qualified?
No. IFRS 1 is not applied when an entity previously prepared financial statements that contained an explicit statement of compliance with IFRS, but for which the auditors' report was qualified.
5. Can IFRS 1 be applied when an entity previously complied with some, but not all, IFRSs?
Yes. IFRS 1 is applied when an entity's previous financial statements did not contain an explicit and unreserved statement of compliance with IFRS. The statement that the financial statements complied with some, but not all, IFRSs is not an explicit and unreserved statement of compliance.
TRANSITION DATE FOR IFRS AND PREPARING OPENING STATEMENT OF FINANCIAL POSITION AT DATE OF TRANSITION
For Indian companies transiting to IFRS from 2011 and required to make comparative statements for one preceding year and having financial year from April to March, the date of transition would be 1st April 2010 and for companies having financial year from January to December date of transition would be 1st January 2010.
An entity's first IFRS financial statements must include at least one comparative period, but an entity may elect or be required to provide more than one comparative period. The beginning of the earliest comparative period for which the entity presents full comparative information under IFRS will be treated as its date of transition to IFRS.
The opening IFRS statement of financial position is the starting point for all subsequent accounting under IFRS. Companies should prepare an opening IFRS statement of financial position at ‘the date of transition to IFRS’. This statement of financial position forms the basis for preparation of financial statements for eg opening statement of financial position is required for, and integral to an equity reconciliation that has to be presented in an entity's first IFRS financial statements.
The opening statement of financial statement has to be prepared as on this date however, the same need not be published in the first IFRS financial statements.
In preparing opening statement of financial position entity must: follow the Recognition & Measurement principles of IFRS 1
Chapter 3
RECOGNITION & MEASUREMENT PRINCIPLES OF IFRS 1
IFRS 1 requires a first-time adopter to use the same accounting policies including general principle of retrospective application, optional exemptions and mandatory exceptions in its opening IFRS statement of financial position and all periods presented in its first IFRS financial statements The selection of accounting policy among diverse existing alternatives as per IFRS standards should be done carefully , fully understanding its implication on both the opening IFRS statement of financial position and the financial statements of future periods.
A number of standards allow companies to choose between alternative policies. Companies should select the accounting policies to be applied to the opening IFRS statement of financial position carefully, with a full understanding of the implications on both the opening IFRS statement of financial position and the financial statements of future periods.
A company may apply a standard that has been issued at the reporting date, even if that standard is not mandatory, as long as the standard permits early adoption.
As a first time adopter is required to comply with all IFRS standards effective at the reporting date, it is evident that the transitional provisions of individual IFRS do not apply to first .time adopter. Instead the opening statement of financial position is prepared by a first time adopter only in accordance with IFRS-1. The IASB has stated that it will provide specific guidance for first-time adopters in all new standards.
Therefore for a first-time adopter, the requirements in IFRS 1 override the transitional provisions in other IFRS. There are limited exceptions [IFRS 1.9] to this general rule relating to
(1) Insurance contracts and
(2) Assets classified as held for sale and discontinued operations
(3) IFRIC relating to determining whether an Arrangement contains a Lease.
(4) Financial assets or intangible assets accounted for in accordance with IFRIC12
(5) Provisions relating to Borrowing costs (IAS 23).
In these cases IFRS 1 specifically requires application of the transitional rules in the relevant IFRS. It is important to note that the transition rules for first-time adopters and entities that already report under IFRS may differ significantly.
OPENING STATEMENT OF FINANCIAL POSITION
Generally a first time adopter shall comply with the following requirements of IFRS-1 in its opening statement of financial position:
(a) recognise all assets and liabilities whose recognition is required by IFRSs;
i. IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded derivatives. These were not recognised under many local GAAPs.
ii. IAS 19 requires an employer to recognise its liabilities under defined benefit plans. These are not just pension liabilities but also obligations for medical and life insurance, vacations, termination benefits, and deferred compensation. In the case of "over-funded" plans, this would be a defined benefit asset.
iii. IAS 37 requires recognition of provisions as liabilities. Examples could include an entity's obligations for restructurings, onerous contracts, decommissioning, remediation, site restoration, warranties, guarantees, and litigation.
iv. Deferred tax assets and liabilities would be recognised in conformity with IAS 12.
A Case Study
Entity X occupies its factory shed on a 30-year lease. The useful life of the shed is estimated to be 35 years and the net present value of the minimum lease payments at the inception of the lease amounted to 90% of the fair value of the shed. Entity X has accounted for the lease arrangements as an operating lease under Indian GAAP. If Entity x has to transit to IFRS what adjustments should be made on the opening IFRS statement of financial position?
Solution
The management of entity X should recognise the building as property, plant and equipment and should recognise a finance lease liability instead of operating lease in accordance with IAS 17as the lease is for over 85% of the useful life of the building and the net present value of the minimum lease payments is equivalent to substantially all of the fair value of the property at the inception of the lease. Therefore Entity X should record the building as an asset at the net present value of the minimum lease payments at the inception of the lease, less appropriate depreciation. Entity X should also record a finance lease liability at the net present value of the minimum lease payments at the inception of the lease; less capital repayments calculated using the rate of interest implicit in the lease.
The difference between the amounts recorded as property, plant and equipment and the amount recorded as finance lease liability should be included in retained earnings

(b) Not recognise items as assets or liabilities if IFRSs do not permit such recognition;
For example:
IAS 38 does not permit recognition of expenditure on any of the following as an intangible asset:
• research
• start-up, pre-operating, and pre-opening costs
• training
• advertising and promotion
• moving and relocation
If the entity's previous GAAP had allowed accrual of liabilities for "general reserves", restructurings, future operating losses, or major overhauls that do not meet the conditions for recognition as a provision under IAS 37, these are eliminated in the opening IFRS statement of financial position.
If the entity's previous GAAP had allowed recognition of reimbursements and contingent assets that are not virtually certain, these are eliminated in the opening IFRS statement of financial position.
Treasury shares are not recognized as assets in the IFRS.
Deferred tax assets, when recovery is not probable are derecognized as per IFRS.
A Case Study
An Entity manufactures textile weaving machines. The machines require installation, which is done by entity’s own employees and takes nearly four weeks. An additional charge is added to the sales invoice to cover the costs of installation. Entity recognizes revenue from the sale of the machines when they are delivered to the customer’s premises. There are always a number of installations in progress at the end of each financial year. In entity has to converge to IFRS what adjustments should be made for the opening IFRS statement of financial position?
Solution
The entity should exclude from the opening IFRS statement of financial position any receivables recorded previously in connection with machines that have not been installed as IAS 18 requires that revenue is recognised when the buyer accepts delivery and installation and inspection are complete. Revenue cannot be recognised in connection with machines that have not been installed, so any receivable recorded should be excluded from the opening IFRS statement of financial position. The revenue should be recognised in subsequent year when installation is complete and customer has accepted the product. The machines delivered but not yet installed and accepted should be recognised as inventory at cost. The corresponding adjustment is made to reduce retained earnings.

(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;
i. IAS 10 does not permit classifying dividends declared or proposed after the balance sheet date as a liability at the balance sheet date. In the opening IFRS statement of financial position these would be reclassified as a component of retained earnings.
ii. If the entity's previous GAAP had allowed treasury stock (an entity's own shares that it had purchased) to be reported as an asset, it would be reclassified as a component of equity under IFRS.
iii. Items classified as identifiable intangible assets in a business combination accounted for under the previous GAAP may be required to be classified as goodwill under IAS 22 because they do not meet the definition of an intangible asset under IAS 38. The converse may also be true in some cases. These items must be reclassified.
iv. Some offsetting (netting) of assets and liabilities or of income and expense items that had been acceptable under previous GAAP may no longer be acceptable under IFRS

(d) Apply IFRSs in measuring all recognised assets and liabilities.
The general measurement principle is to apply IFRS in measuring all recognised assets and liabilities. Therefore, if an entity adopts IFRS for the first time in its annual financial statements for the year ended 31 December 2011, in general it would use the measurement principles in IFRSs in force at 31 December 2011.
Financial instruments are valued at fair value or amortised cost under IAS 39.
Pension liabilities are valued as per IAS 19 and involves detailed and complex calculations
Provisions are calculated using the best estimate as per IAS 37
Impairment of assets is checked as per the detailed complex calculation as per IAS 36.
All items like receivables (IAS 18), employee benefit obligations (IAS 19), deferred taxation (IAS 12), financial instruments (IAS 39), provisions (IAS 37), impairments of property, plant and equipment and intangible assets (IAS 36), assets held for disposal (IFRS 5), share-based payments, etc. are measured in accordance with IFRS
Resulting Adjustments required on account f moving from previous GAAP to IFRS at the time of first-time adoption.
The transition to IFRS could result in an entity having to change its accounting policies on recognition and measurement. The effect of this is recognized
 Directly in retained earnings or other appropriate category of equity in the opening IFRS balance sheet prepared at the date of transition to IFRSs,
For example, an entity that applies the IAS 16 – Property, Plant and Equipment – revaluation model in its first IFRS financial statements would recognize the difference between cost and the revalued amount of property, plant and equipment in a revaluation reserve. Conversely, an entity that had applied a revaluation model under its previous GAAP, but decided to apply the cost model under IAS 16 would reallocate the revaluation reserves to retained earnings.
There are significant disclosure requirements relating to changes in accounting policies on transition to IFRS. The information gathering and reporting systems of the entities should be suitably modified to deliver correct presentation and disclosure requirements as per IFRS in the opening and subsequent period statement of financial positions of the first time adopters.
EXCEPTIONS TO THE PRINCIPLE THAT AN ENTITY’S OPENING STATEMENT SHALL COMPLY WITH EACH IFRS
1. Exceptions from other IFRS
2. Exceptions to retrospective application of other IFRSs
Optional Exemption to retrospective application
Fourteen exemptions are designed to allow companies some relief from full retrospective application so as to simplify the task of convergence. However, the application of the exemptions is also not very straightforward. Some exemptions allow for alternative ways of applying the relief and others have conditions attached an entity may elect to use one or more of the following 14 exemptions:
a) business combinations
b) fair value or revaluation as deemed cost
c) employee benefits
d) cumulative translation differences
e) compound financial instruments
f) assets and liabilities of subsidiaries, associates and joint ventures
g) designation of previously recognised financial instruments
h) share-based payment transactions
i) insurance contracts
j) decommissioning liabilities included in the cost of property, plant and equipment
k) leases
l) fair value measurement of financial assets or financial liabilities at initial recognition;
m) a financial asset or an intangible asset accounted for in accordance with IFRIC 12 Service Concession Arrangements and
n) borrowing costs
An entity shall not apply these exemptions by analogy to other items.
Now we shall look into each of this optional exemption one by one:
a) BUSINESS COMBINATION- APPENDIX C
Exemptions for business combinations
The IASB issued the latest revised version of IFRS 3 – Business Combinations in January 2008. which comes into effect for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1st July 2009. The standard permits earlier application, provided that IAS 27 as amended in 2008 is applied at the same time.
For all transactions qualifying as business combinations under IFRS 3, an entity being a first time adopter has three choices viz.
i. Not restate business combinations before the date of transition.
ii. Restate all business combinations before the date of transition.
iii. Restate a particular business combination, in which case all subsequent business combinations must also be restated and the IAS 36 impairment guidance must be applied.

The entity applying IFRS 3 as stated above has to comply with the following provisions of the standard:
Applying the acquisition method i.e. retrospective application
• A business combination must be accounted for by applying the acquisition method.
• An acquirer shall be identified for all business combinations.
• The cost of the business combination must be calculated.
• The IFRS establishes principles for recognising and measuring the identifiable assets acquired, including any additional intangible assets under IAS 38 Intangible Assets and the liabilities assumed, including any contingent liabilities and any non-controlling interest in the acquiree.
• Each identifiable asset and liability is measured at its acquisition-date fair value. Any non-controlling interest in an acquiree is measured at fair value or as the non-controlling interest’s proportionate share of the acquirer’s net identifiable assets.
• The IFRS requires the acquirer, having recognised the identifiable assets, the liabilities and any non-controlling interests, to identify any difference between:
 the aggregate of the consideration transferred, any non-controlling interest in the acquiree and, in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; and
 the net identifiable assets acquired.
The difference will, generally, be recognised as goodwill. If the acquirer has made a gain from a bargain purchase that gain is recognised in profit or loss.
• Not amortise goodwill thus determined as per previous clause.
• Carry out an impairment test of assets as per IAS 36 Impairment of Assets during each annual period subsequent to the date of acquisition.
The retrospective application of IFRS 3 by a first time adopter could be onerous and in many cases impracticable because it requires an entity to review all the business combinations since its incorporation and to recreate every information that was not collected at the time of business combination but is required for retrospective application at the date of transition to IFRS. Moreover, from the date that a company applies IFRS 3 to its business combinations, it must also comply with IAS 27 and IAS 36.
To ease the burden of restating following retrospective application of IFRS3, IFRS1 includes an optional exemption. The exemption provides that an entity that chooses to apply exemption provided in IFRS 1 is not required to restate business combinations to comply with IFRS 3, Business Combinations, where control was obtained before the transition date. The exemption is available to all transactions that meet the definition of a business combination under IFRS 3. The classification under Indian GAAP is not relevant for determining whether the exemption can be applied. The exemption also applies to acquisitions of investments in associates and joint ventures.
However, application of the exemption is complex and certain adjustments must be made.
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 as per IFRS 3 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. The optional exemption will however be available for all the business combinations before 30 June 20X6. as per IFRS1.
The adjustments to recognized goodwill, other assets and liabilities under previous GAAP and reversal of goodwill amortization under previous GAAP related to business combination are treated retrospectively in accordance with IFRS 3 and effect is directly recognized in retained earnings.
Reversal of previously amortised goodwill and testing of the goodwill for impairment is done from the date the IFRS 3 is followed retrospectively by a first time adopter. If from the date of transition, such restatement as per IFRS 3 is made, the reversal and impairment testing is done in the retained earnings as on date of transition or if from an earlier date such restatement is done, then the reversal and impairment is carried out for all the intervening periods i.e. from the date of retrospective restatement to the date of transition.
Application of optional exemption
Under the previous GAAP, an entity may have followed some other method for accounting for business combination
For eg :
• Acquisition method as prescribed by IFRS 3
• Uniting of interests method
• Reverse Acquisition method

If optional exemption is elected by a first time adopter, then it shall retain the same classification as was under previous GAAP, On the other hand, if an entity elects to apply IFRS 3 retrospectively, it shall comply with the provisions of IFRS 3 which permits only acquisition method for accounting business combinations.
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 (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
Most assets or liabilities will be adjusted through retained earnings except for the following two cases where adjustment is made in goodwill:
Goodwill is increased/decreased for an intangible asset recognized/ not recognised under Indian GAAP that does not qualify/qualify for recognition as an asset under IAS 38, or
Goodwill is impaired at the transition date after applying IAS 36.
Goodwill
The goodwill shall be adjusted at the date of transition for the following items only in case optional exemption for business combination is used:
(a) Intangible assets
Previous GAAP IFRS Treatment to Goodwill
Recognised Not Recognised Carrying amount at the date of transition of intangible assets (less deferred tax and non controlling interests) is added to goodwill
Not Recognised i.e. intangible assets subsumed within goodwill Recognised The amount at which the intangible assets would have been recognized in the separate IFRS financial statements of the subsidiary at the date of transition less (deferred tax and non controlling interests) is deducted from goodwill.

Goodwill shall also be adjusted on account of the following:
(b) Contingency affecting the amount of purchase consideration:
If the contingency has been settled and resolved before the date of transition although the effect has not been shown in the goodwill under previous GAAP then , goodwill as at the date of transition is adjusted for the amount of contingency.
Goodwill adjustment is also done when payment of the contingent amount is considered probable based on the reliable estimate calculated by the entity.
Impairment of Goodwill
Any resulting impairment of goodwill carried out at the date of transition is reflected as adjustment to goodwill. This requirement for testing impairment is compulsory as per IAS 36 without regard to any indication about impairment and based on the conditions existing at the transition date and in any resulting impairment loss is recognized in retained earnings (or, if so required by IAS 36, in revaluation surplus).
No other adjustments shall be made to the carrying amount of goodwill at the date of transition to IFRS. IFRS 1 highlights the following examples for which goodwill is not adjusted
• 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);
• to adjust previous amortisation of goodwill;
• 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 transition to IFRSs.
Goodwill deducted directly from equity
If the first-time adopter recognised goodwill in accordance with previous GAAP as a deduction from equity then that goodwill is neither shown as an asset under the opening statement of financial position nor is it shown as a separate component of equity. Instead it is deducted directly from retained earnings.
Furthermore, on disposal of the subsidiary or if the investment in the subsidiary becomes impaired. which gave rise to goodwill previously deducted from equity, the amount recognized in the retained earnings at the date of transition is not transferred to profit or loss as part of net gain or loss on disposal.
Subsequent adjustments to goodwill previously deducted from equity resulting from the subsequent resolution of a contingency affecting the purchase consideration shall be recognised in retained earnings
Negative goodwill
Any negative goodwill recognised under previous GAAP is derecognized with corresponding adjustment to retained earnings at the date of transition.
To summarise the provisions relating to exemption with respect to business combination, it is evident that application of the exemption is complex, and certain adjustments to transactions may still be required. The following points should be kept in mind when exemption is availed of:
• Classification of the combination as an acquisition or a pooling of interests does not change.
• Assets and liabilities acquired or assumed in the business combination are recognized in the acquirer’s opening IFRS statement of financial position, unless IFRS does not permit recognition.
• Deemed cost of assets and liabilities acquired or assumed is equal to the carrying value under Indian GAAP immediately after the business combination.
• Assets and liabilities that are measured at fair value under IFRS are restated to fair value in the opening IFRS statement of financial position, with the offset being recorded in equity
• Assets and liabilities that were not recognized under Indian GAAP immediately after the business combination are recognized on the opening IFRS statement of financial position only if they would be recognized in the acquired entity’s separate IFRS statement of financial position.
• Goodwill must be tested for impairment at the date of transition to IFRS, using the impairment testing method required by IAS 36
b) FAIR VALUE OR REVALUATION AS DEEMED COST
Normally under IFRS property, plant and equipment are measured using either cost model or revaluation model. Under cost model they are carried at cost less accumulated depreciation and accumulated impairment. Under revaluation model they are valued at each reporting date. As per IFRS 1, for property, plant and equipment, an entity can choose to measure the value using:
• Cost in accordance with IFRS.
• Fair value at the date of transition as deemed cost.
A revaluation carried out at a previous date (such as an IPO) as deemed cost, subject to certain conditions
This exemption is very beneficial to entities as they need not dig in the records of previous year to remeasure depreciation and amortization amounts in previous years. It should be noted that an entity that applies the fair value as deemed cost exemption at the IFRS transition date is not required to revalue these assets in subsequent periods. When the exemption is applied, deemed cost is the basis for subsequent depreciation and impairment tests. The “fair value as deemed cost” exemption may be applied on an asset-by-asset basis. Moreover, this exemption can also be applied to investment property if an entity elects to use the cost model in IAS 40, Investment Property, or to intangible assets that meet both the recognition and revaluation criteria in IAS 38, Intangible Assets. However, it cannot be applied to any other assets or liabilities.
c) EMPLOYEE BENEFITS
The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits (that is, all forms of consideration i.e. wages and salaries profit sharing plans ,bonuses etc given by an enterprise in exchange for service rendered by employees
Types of Post-employment Benefit Plans
The accounting treatment for a post-employment benefit plan will be determined according to whether the plan is a
• defined contribution or
• a defined benefit plan
Under a defined contribution plan, the enterprise pays fixed contributions into a fund but has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees' entitlements to post-employment benefits. In these plans, the cost to be recognised in the period is the contribution payable in exchange for service rendered by employees during the period.
A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. These would include both formal plans and those informal practices that create a constructive obligation to the enterprise's employees.
Under these plans, the present value of the defined benefit obligation should be determined using the Projected Unit Credit Method.
The employee benefits will be treated in accordance with the general principle of retrospective application i.e. any changes in the accounting policies are made retrospectively and the effect is shown in the retained earnings. There is no exemption in this area.
The relevant provisions of IAS 19 are summarized below in table format:
Relevant category Treatment in the financial statements
Calculation under IAS 19
For defined benefit plans, Projected Unit Credit Method
The amount recognised in the statement of financial position should be the present value of the defined benefit obligation (that is, the present value of expected future payments required to settle the obligation resulting from employee service in the current and prior periods), as adjusted for unrecognised actuarial gains and losses and less unrecognised past service cost, and reduced by the fair value of plan assets at the balance sheet date.
Actuarial valuations , actuarial gains and losses Possibility to roll forward or back
Measurements of employee benefit obligations at three dates: the end of the first IFRS reporting period, the date of the comparative statement of financial position and the date of transition to IFRSs is cumbersome. So an actuary can be engaged to carry out a detailed actuarial valuation at one or two of these dates and roll the valuation(s) forward or back to the other date(s). Any such roll forward or roll back reflects any material transactions and other material events (including changes in market prices and interest rates) between those dates (IAS 19 paragraph 57).
Estimates Apply guidance on estimates as per IFRS -1
After adjustments to reflect any difference in accounting policies, the first time adopter shall make actuarial assumptions at the date of transition to IFRSs that are consistent with actuarial assumptions made for the same date in accordance with previous GAAP, unless there is objective evidence that those assumptions were in error .If certain assumptions were not made under previous GAAP then IFRS 1 requires that the estimates reflect market conditions at the date of transition (eg of discount rates and fair value of plan assets at the date of transition to IFRSs).The impact of any later revisions to those assumptions is an actuarial gain or loss of the period in which the entity makes the revisions and are not reflected in the calculation of pension liabilities at the date of transition.
Past service cost Is the term used to describe the change in the obligation for employee service in prior periods, arising as a result of changes to plan arrangements in the current period. Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced). Past service cost should be recognised immediately to the extent that it relates to former employees or to active employees already vested. Otherwise, it should be amortised on a straight-line basis over the average period until the amended benefits become vested

Actuarial gains and losses – The corridor approach
The provisions for Valuations in respect of defined benefit plans are calculated on the basis of a large number of actuarial assumptions such as employee turnover, discount rates, inflation, future salary increase, expected long term return on plan assets and are carried out with sufficient regularity such that the amounts recognised in the financial statements do not differ materially from those that would be determined at the balance sheet date. The assumptions used for the purposes of such valuations should be unbiased and mutually compatible. The rate used to discount estimated cash flows should be determined by reference to market yields at the balance sheet date on high quality corporate bonds.
On an ongoing basis, actuarial gains and losses arise that comprise
• Experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred)
• Effects of changes in actuarial assumptions.
• The difference between the expected return and actual return on plan assets.
Over a long time period, actuarial gains and losses may offset one another and therefore the enterprise is not required to recognise all such gains and losses immediately. The Standard specifies that if the accumulated unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognised immediately as income or expense. The portion recognised is the excess divided by the expected average remaining working lives of the participating employees. Actuarial gains and losses that do not breach the 10% limits described above (the 'corridor') need not be recognised - although the enterprise may choose to do so. Over the life of the plan, changes in benefits under the plan will result in increases or decreases in the enterprise's obligation.
The retrospective application of the corridor approach would require cumulative actuarial gains and losses from the inception of each pension plan to be split into recognized and unrecognized gains and losses at each balance sheet date. This would be impracticable for a first time adopter unless the entity has data readily available under previous GAAP by following similar accounting practice as in IAS 19 for employee benefits. Thus IFRS 1 applies optional exemption to retrospective application of the corridor approach.
Thus through this optional exemption a first-time adopter is allowed to recognise all cumulative actuarial gains and losses at the date of transition to IFRSs in retained earning without requiring them to be recycled through profit or loss account subsequently. This election, however does not preclude it from using the corridor approach for later actuarial gains and losses.
This exemption may result in a significant charge to equity at the date of transition, however this is compensated by avoiding the amortizing the accumulated losses in profit and loss account over a period. Thus those actuarial gains and losses which arise subsequent to the date of transition will be recognized in the profit and loss account.
d) CUMULATIVE TRANSLATION DIFFERENCES
Retrospective application of IAS 21, The Effects of Changes in Foreign Exchange Rates, would require a company to determine the foreign currency translation differences in accordance with IFRS from the date on which a foreign operation was formed or acquired. This would mean restating the currency translation reserve to what it would have been had IFRS always been applied. Restatement requires an entity to recreate the IFRS financial statements of every subsidiary since each one was acquired or created and to calculate currency adjustments for each year through to transition date. The cost of restating is likely to outweigh the benefit for most entities. However, the exemption allows a company to apply IAS 21 prospectively. All cumulative translation gains and losses as of the transition date are reset to zero through an adjustment to opening retained earnings and gains or losses on subsequent disposals of foreign operations will exclude translation differences that arose before the transition date. Translation differences arising after the transition date are recorded in other comprehensive income.
e) COMPOUND FINANCIAL INSTRUMENTS
IAS 32 requires a company to split a compound financial instrument at inception into separate liability and equity components according to substance of the contract. Two entries remain in equity when the liability component of a compound financial instrument has been repaid - the original equity component and the interest on the liability component that is part of retained earnings. However, IFRS 1 exemption provides that if the liability component is no longer outstanding at the transition date, a first-time adopter does not have to separate it from the equity component in the equity. If the liability component is outstanding at the transition date, companies will need to bifurcate the two elements of equity and measure the components in accordance with IAS 32.
f) ASSETS AND LIABILITIES OF SUBSIDIARIES, ASSOCIATES, AND JOINT VENTURES
A parent and its subsidiaries 9or associate or joint venture) might adopt IFRS at different dates. For instance, an Indian parent company might prepare its first IFRS financial statements at December 31, 2014, while its subsidiary in U.S might not adopt IFRS for statutory reporting till 2014. In such cases, the exemption under IFRS 1 allows a subsidiary to measure its assets and liabilities either at the carrying amounts included in its parent’s consolidated IFRS financial statements or on the basis of IFRS 1 as applied to its statutory financial statements at its own date of transition. However, when a subsidiary (joint venture or associates) elects to use the carrying amounts in its parent’s consolidated financial statements, those carrying amounts are adjusted to exclude consolidation and acquisition adjustments.
Moreover, when a parent adopts IFRS after a subsidiary, the parent must measure the subsidiary’s assets and liabilities in the consolidated financial statements using the subsidiary’s existing IFRS carrying values. Most of the IFRS 1 voluntary exemptions cannot be used on an existing IFRS-reporting subsidiary. However, the subsidiary’s carrying values are adjusted to include consolidation and acquisition adjustments.

A Case Study
Entity X, an Indian company, has a subsidiary in China that has already adopted IFRS and filed its IFRS financial statements. The subsidiary opted to use fair value as deemed cost for certain property, plant and equipment as allowed by the IFRS 1 optional exemptions while adopting IFRS for the first time. Can entity X again avail of the exemption to fair value Chinese subsidiary’s property, plant and equipment when transiting to IFRS?
Solution
When Entity X converts to IFRS, it must carry over the value of the Chinese subsidiary’s property, plant and equipment at the deemed cost less depreciation currently on the subsidiary’s books. Therefore, Entity X cannot use the fair value as deemed cost exemption again for the Chinese subsidiary at the time of its own transition date.

g) DESIGNATION OF PREVIOUSLY RECOGNIZED FINANCIAL INSTRUMENTS
Entities will have to classify their financial assets and liabilities as if they had always applied IFRS. IAS 39 permits a financial instrument to be designated on initial recognition as a financial asset or financial liability at fair value through profit or loss (provided it meets certain criteria) or as available for sale. As per IAS 32 the choice is irrevocable i.e. a financial asset cannot be reclassified in and out of fair value through profit or loss account category. However, IFRS 1 allows an exemption from retrospective application by permitting such designations to be made at the date of transition.
This exception of designation at the date of transition instead of the designation at the initial recognition as required by IAS 39 is allowed because the first time adopter might have applied the provisions of previous GAAP at the date of initial recognition and has not been able to take the advantage of election available to the entities that already report under IFRS. .
Accordingly, an entity may choose to designate a financial instrument as a financial asset or financial liability “at fair value through profit or loss” or may designate a financial asset as available-for-sale at its transition date.
If the entity shall uses this exception it 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.
An entity shall treat an adjustment to the carrying amount of a financial asset or financial liability as a transition adjustment to be recognised in the opening balance of retained earnings at the date of transition to IFRSs only to the extent that it results from adopting IAS 39.
h) SHARE-BASED PAYMENT TRANSACTIONS
The share-based payment transaction are accounted for in accordance with IFRS 2.The standard requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity including expenses associated with transactions in which share options are granted to employees.
For equity-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity is required to measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. This amount is recognized at the grant date or allocated over the vesting period if any attached to the scheme.
An entity need only apply IFRS 2, Share-based payments, to equity instruments granted before 7 November 2002 (i.e. the date when IFRS 2 was issued) and to those granted after 7 November 2002 which were not vested by the later of transition date. However, share based payment granted after 7 November 2002 which has not vested till the date of transition entities would be required to apply IFRS 2. Similarly only liabilities arising from cash-settled share-based payments arising after 7 November 2002 and not settled by the later of transition date are captured. A first-time adopter may choose to apply IFRS 2 to other instruments but only if the entity has previously disclosed publicly the fair value of the instruments, determined at the measurement date.
The relevant provisions of IFRS 2 relating to first time adopter are summarized below in table format:
Grant date Application of IFRS 2 Conditions to be complied with
Granted on or before 7 November 2002.** A first-time adopter is encouraged, but not required, to apply IFRS 2
Share-based Payment to these equity instruments

A first-time adopter shall
nevertheless disclose the information required by paragraphs 44 and 45
of IFRS 2.in all these cases without regard to grant and vesting dates
Granted after
7 November 2002 and vested before the later of (a) the date of transition
to IFRSs and (b) 1 January 2005.** A first-time adopter is encouraged, but not required, to apply IFRS 2 to these equity instruments.
Granted after
7 November 2002 and vested after1 January 2005. IFRS 2 must be applied retrospectively with changes to comparative information.


* * 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 IFRS2.
The relevant provisions of IFRS 2 relating to liabilities arising from share-based payment are summarized below in table format:
Date of settlement of liabilities Application of IFRS 2
Liabilities arising from share-based payment transactions that were settled before the date of transition to IFRSs.
AND
Liabilities that were settled before 1 January 2005. 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 and to those liabilities that were
settled before 1 January 2005..
Other liabilities IFRS 2 must be applied retrospectively with changes to comparative information. However comparative information need not be restated to the extent that the information relates to a period or date that is earlier than 7 November 2002

(i) INSURANCE CONTRACTS
The objective of this IFRS 4 on Insurance Contracts is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts. In particular, this IFRS requires:
(a) Limited improvements to accounting by insurers for insurance contracts.
(b) Disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.
An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
In contrast to the general principle of retrospectively application in IFRS 1, the provisions in IFRS 4 (para 40 of IFRS 4) as well as the Para D4 of Appendix D to IFRS 1 states that a first-time adopter issuing Insurance Contracts (Issuer) may apply the transitional provisions in IFRS 4 Insurance Contracts prospectively for reporting periods on or after 1st January 2005 with optional application earlier.
IFRS 4 restricts changes in accounting policies for insurance contracts, including changes made by a first-time adopter.
j) CHANGES IN EXISTING DECOMMISSIONING, RESTORATION, AND SIMILAR LIABILITIES INCLUDED IN THE COST OF PROPERTY, PLANT AND EQUIPMENT
IFRIC 1 requires that changes made to a decommissioning liability, for which an asset is recognised, are recognised against the cost of the asset. This treatment assumes that changes relate to the discount rate or changes in the estimated cash flows to settle the liability and the IAS 16 cost model are used. The adjusted asset value is depreciated over the remaining useful life of the asset in accordance with IAS 16. Retrospective application of IFRIC 1 would require identification of all the revisions to the discount rate and estimated cash flows that would have been recognised since the inception of the decommissioning obligation. IFRS 1 provides an exemption from full retrospective application. IFRS 1 allows first time adopters to apply a shortcut method for measuring the decommissioning liability and related depreciated asset cost at the transition date. Entities can elect to measure the decommissioning liability at the transition date in accordance with IAS 37 and then “back into” the amount of the decommissioning liability that would have been included in the cost of the related asset at the time the liability first arose by discounting the liability to that date using historic risk-adjusted rates. The entity would then calculate the accumulated depreciation on that discounted amount as of the transition date using the current estimate of the useful life and the depreciation policy adopted under IFRS.
k) LEASES
IFRIC 4, Determining Whether an Arrangement Contains a Lease, requires an assessment of whether a contract or arrangement contains a lease at the inception of the contract or arrangement. However, as per IFRS 1 first-time adopters must apply IFRIC 4, but can elect to make this assessment as of the date of transition based on the facts at that date instead of inception date of the arrangement.
l) FAIR VALUE MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT INITIAL RECOGNITION
IAS 39 contains guidance to determine fair value of financial instruments. Normally, the transaction price of a financial instrument is the best evidence of fair value, unless fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. At initial recognition, a company may recognize day one gain or loss I.e. a gain or loss on the difference between this fair value measurement and the transaction price only if the measurement of fair value is based entirely on observable market inputs without modification. Otherwise recognition of a day one gain or loss is prohibited and requires transaction price to be taken as fair value. Subsequent measurement and recognition follows the guidance as provided in IAS 39. A first time adopter may measure these financial instruments at initial recognition either:
• Prospectively for transactions entered into after October 25, 2002; or
• Prospectively for transactions entered into after January 1, 2004.
m) SERVICE CONCESSION ARRANGEMENTS
IFRIC 12, Service Concession Arrangements, applies to contractual arrangements between grantor and operator in which a private sector operator participates in the development, financing, operation, and maintenance of infrastructure for public sector services. First-time adopters may elect to use the transitional provisions of IFRIC 12 rather than full retrospective application. Paragraph 30 of IFRIC 12 provides that when it is impractical for an operator to apply IFRIC 12 retrospectively the operator may:
• Recognize financial and intangible assets that existed at the start of the earliest period presented.
• Use the previous carrying amounts as the carrying amount at that date (however previously classified).
• Test the financial and intangible assets recognized at that date for impairment
n) Borrowing Cost
IFRS 1 allows first time adopter to apply transitional provision provided in paragraphs 27 and 28 of IAS 23 Borrowing Costs. If the accounting treatment for capitalized interest required by IAS 23 is different than a company’s previous accounting policy, the company should apply IAS 23 to borrowing costs related to qualifying assets capitalized on or after January 1, 2009, or the date of transition to IFRS, if later. Alternatively, companies can designate any date before January 1, 2009 and apply the standard to borrowing costs relating to all qualifying assets capitalized on or after that date.
APPLYING MANDATORY EXCEPTIONS TO RETROSPECTIVE APPLICATIONS
There are five mandatory exceptions to full retrospective application. They apply in areas where retrospective application would be inappropriate. These exemptions are:
a) derecognition of financial assets and financial liabilities
b) hedge accounting
c) estimate
d) assets classified as held for sale and discontinued operations; and
e) some aspects of accounting for non-controlling interests

1. Derecognition of financial assets and financial liabilities
IAS 39 is applied retrospectively to the derecognition of non-derivative financial assets and non-derivative financial liabilities. Such financial assets and liabilities derecognised before 1 January 2004 under previous GAAP are not recognised on the opening IFRS statement of financial position. In other words, 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.
Notwithstanding the provisions mentioned above, an entity may choose to apply the IAS 39 derecognition requirements from an earlier date. However, it must have obtained the necessary information at the time of initially accounting for the transactions concerned.
Hedge Accounting
Accounting for derivative financial instruments under International Accounting Standards is covered by IAS39 (Financial Instrument: Recognition and Measurement).IAS39 requires that all derivatives are marked-to-market with changes in the mark-to-market being taken to the profit and loss account. For many entities this would result in a significant amount of profit and loss volatility arising from the use of derivatives.

An entity can mitigate the profit and loss effect arising from derivatives used for hedging, through an optional part of IAS39 relating to hedge accounting.
Hedging is the endeavour by an entity to lessen the effect of economic risks on its financial performance. Many financial institutions and corporate businesses (entities)