Adopting International Financial Reporting Standards (IFRS) present challenges that many people underestimate. The International Accounting Standards Board (IASB) on November 24, 2008 has issued Reconstructed version of IFRS 1: First Time Adoption of International Financial Reporting Standards applicable to the entities on or after January 1, 2009 although earlier application is permitted. The Institute of Chartered Accountants of India (ICAI) has issued Ind- AS 41 talking about the transition requirements on the lines of IFRS 1 (Revised).
When a company prepares its first IFRS financial statements for the year ending 31st March 2012 with one year comparatives, the date of transition to IFRS will be 1st April 2010 and the opening IFRS balance sheet will be prepared at that date. A company required to present two full years of comparative information should prepare an opening balance sheet at 1st April 2009. The opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS.
An entity in its opening balance sheet shall:
• Recognize all assets and liabilities whose recognition is required by IFRSs (e.g. derivative financial instruments);
• Not recognize items as assets and liabilities if IFRS do not permit such recognition (e.g. general reserves);
• Reclassify items that it recognized 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 IFRS (e.g. netted-off assets where netting is not permitted);
• Apply IFRSs in measuring all recognized assets and liabilities (e.g. impairments of property, plant and equipment and intangible assets)
The exception to this is where one of the optional exemptions or mandatory exemptions does not require or permit recognition, classification and measurement in accordance with IFRS.
The adjustments as a result of applying IFRS for the first time are recorded in retained earnings or another equity category. For example, a company that is required to re-measure available-for-sale (AFS) investment to fair value should recognize the adjustment in the AFS reserve. Similarly if a company elects to adopt a revaluation model in IAS 16 should recognize the difference between the cost and fair value of property, plant and equipment in the revaluation reserve. Companies might also be required to consolidate entities that were earlier not consolidated under the local GAAP. Companies will be required to consolidate any entity over which it is able to exercise control. Subsidiaries that were previously excluded from the group financial statements are consolidated as if they were first time adopters on the same date as the parent. The difference between cost of the parent’s investment in the subsidiary and subsidiary’s net assets under IFRS is treated as goodwill.
The deferred tax and minority interest balance included in the opening IFRS balance sheet will be dependent on other adjustments made. These balances should therefore be calculated after all adjustments are made.
The preparation of opening IFRS balance sheet may require the calculation and /or collection of information which was not calculated earlier in our local GAAP. Converging to IFRS will be a bigger change for some companies than for others. With mandatory transition proposed to begin in 2011, it makes sense for management to start sizing up the volume and variety of financial, business, tax, and operational changes—the objective being to avoid a resource demanding effort at the eleventh hour. Perhaps just as important, sufficient lead time will allow companies to discover transition-related changes which have the potential to deliver future dividends, such as overhaul of an inflexible information technology system or rethinking of accounting choices and not just treating them as a compliance exercise. The earlier we begin, the greater the benefits are likely to be.
When a company prepares its first IFRS financial statements for the year ending 31st March 2012 with one year comparatives, the date of transition to IFRS will be 1st April 2010 and the opening IFRS balance sheet will be prepared at that date. A company required to present two full years of comparative information should prepare an opening balance sheet at 1st April 2009. The opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS.
An entity in its opening balance sheet shall:
• Recognize all assets and liabilities whose recognition is required by IFRSs (e.g. derivative financial instruments);
• Not recognize items as assets and liabilities if IFRS do not permit such recognition (e.g. general reserves);
• Reclassify items that it recognized 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 IFRS (e.g. netted-off assets where netting is not permitted);
• Apply IFRSs in measuring all recognized assets and liabilities (e.g. impairments of property, plant and equipment and intangible assets)
The exception to this is where one of the optional exemptions or mandatory exemptions does not require or permit recognition, classification and measurement in accordance with IFRS.
The adjustments as a result of applying IFRS for the first time are recorded in retained earnings or another equity category. For example, a company that is required to re-measure available-for-sale (AFS) investment to fair value should recognize the adjustment in the AFS reserve. Similarly if a company elects to adopt a revaluation model in IAS 16 should recognize the difference between the cost and fair value of property, plant and equipment in the revaluation reserve. Companies might also be required to consolidate entities that were earlier not consolidated under the local GAAP. Companies will be required to consolidate any entity over which it is able to exercise control. Subsidiaries that were previously excluded from the group financial statements are consolidated as if they were first time adopters on the same date as the parent. The difference between cost of the parent’s investment in the subsidiary and subsidiary’s net assets under IFRS is treated as goodwill.
The deferred tax and minority interest balance included in the opening IFRS balance sheet will be dependent on other adjustments made. These balances should therefore be calculated after all adjustments are made.
The preparation of opening IFRS balance sheet may require the calculation and /or collection of information which was not calculated earlier in our local GAAP. Converging to IFRS will be a bigger change for some companies than for others. With mandatory transition proposed to begin in 2011, it makes sense for management to start sizing up the volume and variety of financial, business, tax, and operational changes—the objective being to avoid a resource demanding effort at the eleventh hour. Perhaps just as important, sufficient lead time will allow companies to discover transition-related changes which have the potential to deliver future dividends, such as overhaul of an inflexible information technology system or rethinking of accounting choices and not just treating them as a compliance exercise. The earlier we begin, the greater the benefits are likely to be.
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