IFRS 1 First-time Adoption of IFRSs Transitional Issues

Date recorded:

The Canadian Accounting Standards Board (AcSB) provided follow-up analysis of the issues discussed at the March 2008 meeting. At the March 2008 meeting the Board decided to proceed with the following proposed exemptions to IFRS 1 but asked the AcSB staff to draft amendments taking into account the Board's decisions and comments made at that meeting.

  • Reassessment of accounting under previous GAAP
  • Retrospective restatement of fair values
  • Oil and gas industry issue: Full cost accounting

Regarding a fourth issue dealing with derecognition of financial assets and financial liabilities, the Board was less supportive of providing an exemption and asked the AcSB staff to investigate whether the exemption regarding the retrospective restatement of fair values would resolve the issue.

In addition, at this meeting the AcSB staff presented a proposed amendment to IFRS 1 relating to non-IFRS-compliant amounts in property, plant and equipment. This issue was raised by the Canadian rate-regulated industry.

Reassessment of accounting under previous GAAP

The AcSB staff amended the March proposal by clarifying that the amendment should only apply when the previous GAAP required the same accounting treatment and that an entity would be permitted not to reassess the accounting for a past transaction.

The AcSB staff recommended that the following principle be added to IFRS 1:

This IFRS permits a first-time adopter not to reassess the accounting for a past transaction at the date of transition to IFRSs, based on facts and circumstances at that date, when previous GAAP had introduced the same accounting as IFRSs based on an assessment of facts and circumstances at an earlier date. A first-time adopter electing not to reassess its previous accounting in such circumstances shall continue to use the assessment made in accordance with the previous GAAP.

The Board agreed to the proposed amendment subject to drafting suggestions. In particular, the Board decided that 'same accounting' should be replaced by 'identical accounting and assessment'.


Retrospective restatement of fair values

The AcSB staff was of the view that a broad linkage of IFRS 1 to the impracticality guidance in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors would risk that the exception not only captures retrospective restatement of fair values but also other, probably inappropriate items.

Consequently, the AcSB staff recommended proceeding with the (slightly redrafted) proposal presented at the March meeting:

This IFRS prohibits a first-time adopter from retrospectively determining fair values as of dates prior to the date of transition to IFRSs when those fair values were not available when IFRSs required them to be determined. When a fair value was not available, an entity shall use in its place the carrying amount at that date under its previous GAAP.

The Board agreed.


Oil and gas industry issue: Full cost accounting

The AcSB staff provided an analysis regarding the need for accompanying disclosure requirements if an entity elects to measure oil and gas assets in the development and production phase at the amount determined under previous GAAP. According to this analysis the election to use the proposed exemption would normally result in the oil and gas assets as a whole being measured at a higher amount than if they were reported using the IFRSs effective at the reporting date for its first IFRS financial statements. In addition, the existing IFRS 1 would not require disclosures since the exemption would not result in using fair values as deemed cost and, accordingly, would not be covered by paragraph 44 of IFRS 1.

The AcSB staff suggested adding the following paragraphs to IFRS 1:

The exemption:

19A An entity may elect to measure oil and gas assets at the date of transition to IFRSs on the following basis: (a) exploration and evaluation assets at cost, less any impairment, determined in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources; and

(b) other assets (i.e. those in the development or production phases) at the amount determined under the entity's previous GAAP, first adjusted by the difference between the decommissioning, restoration or similar liability as measured in accordance with IAS 37 and that recognised under the entity's previous GAAP. The adjusted amount is then allocated on a pro rata basis using reserve volumes or related values as of that date. An entity making this election does not apply paragraph 25E for these assets.

The deemed cost for each oil and gas asset determined as above shall be tested for impairment at the date of transition to IFRSs. For purposes of this paragraph, oil and gas assets comprise only those used in the exploration, evaluation, development or production of oil and gas.

Disclosure requirements:

44A. Paragraph 19A provides an exemption for oil and gas assets. If an entity uses that exemption, it shall disclose that fact and the basis on which carrying amounts under previous GAAP were allocated."

The Board agreed.


Derecognition of financial assets and financial liabilities

The AcSB staff concluded that its proposal to introduce a principle prohibiting retrospective fair value measurement would resolve the derecognition issue and withdrew the proposed amendment.


Canadian rate-regulated industry: Non-IFRS-compliant amounts in property, plant and equipment of first-time adopters

The ACSB staff highlighted the following:

  • Some Canadian rate-regulated entities have capitalised, as part of the historical cost of property, plant and equipment (PP&E), amounts not permitted to be capitalised in accordance with IFRSs, for example, imputed cost of equity and not directly attributable costs (indirect overheads etc).
  • In many cases these costs were capitalised as part of the total cost of an item of PP&E and not tracked separately after inclusion.
  • Due to the capital intensive nature of the industry, the age of many items and the difficulty in obtaining fair value information, neither retrospective restatement nor use of fair values as deemed cost is practicable in many cases.

Consequently, the AcSB staff proposed to amend IFRS 1 to include an exemption permitting all first-time adopters facing this issue to elect to use the IFRS transition date carrying amount of an item of PP&E (containing previously capitalised amounts not in compliance with IFRSs) as deemed cost at that date. Under this proposal entities applying the exemption would be required to undertake impairment testing at the transition date.

Most of the discussion was spent on understanding the accounting for these items of PP&E. Some Board members questioned how the impairment test would be undertaken when fair value information can not be obtained. The staff responded that a rough estimate for purposes of an impairment test could be made but that a precise fair value calculation would not be possible in many cases.

Eventually, by majority vote the Board decided to proceed with the proposal but that the exemption should be restricted to rate-regulated entities only.

Way forward

The AcSB staff was asked to prepare an exposure draft on behalf of the Board. The Board decided that the comment period should be 120 days. No Board members indicated that they would dissent.

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