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BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS

BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS

BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS

Basic concepts In developing recognition and measurement requirements for an entity’s opening IFRS balance sheet, the Board referred to the objective of financial statements, as set out in the Framework for the Preparation and Presentation of Financial Statements. The Framework3 states that the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

 

BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS

The Framework identifies four qualitative characteristics that make information in financial statements useful to users. In summary, the information should be:
(a) readily understandable by users.
(b) relevant to the decision-making needs of users.
(c) reliable, in other words financial statements should:

  •  represent faithfully the transactions and other events they either purport to represent or could reasonably be expected to represent;
  • represent transactions and other events in accordance with their substance and economic reality and not merely their legal form;
  •  be neutral, that is to say, free from bias;
  • contend with the uncertainties that inevitably surround many events and circumstances by the exercise of prudence; and
  • be complete within the bounds of materiality and cost.

(d)comparable with information provided by the entity in its financial statements through time and with information provided in the financial statements of other entities.

BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS

Comparability
The previous paragraph notes the need for comparability. Ideally, a regime for first-time adoption of IFRSs would achieve comparability:
(a) within an entity over time;
(b) between different first-time adopters; and
(c) between first-time adopters and entities that already apply IFRSs.

SIC-8 gave priority to ensuring comparability between a first-time adopter and entities that already applied IASs. It was based on the principle that a first-time adopter should comply with the same standards as an entity that already applied IASs. However, the Board decided that it is more important to achieve comparability over time within a first-time adopter’s first IFRS financial statements and between different entities adopting IFRSs for the first time at a given date; achieving comparability between first-time adopters and entities that already apply IFRSs is a secondary objective.

BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS

Current version of IFRSs
This:
(a) enhances comparability, because the information in a first-time adopter’s first IFRS financial statements is prepared on a consistent basis over time;

(b) gives users comparative information prepared using later versions of
IFRSs that the Board regards as superior to superseded versions; and

(c) avoids unnecessary costs.

BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS
In general, the transitional provisions in other IFRSs do not apply to a first-time adopter. Some of these transitional provisions require or permit an entity already reporting in accordance with IFRSs to apply a new requirement prospectively. These provisions generally reflect a conclusion that one or both of the following factors are present in a particular case:
(a) Retrospective application may be difficult or involve costs exceeding the likely benefits. The IFRS permits prospective application in specific cases where this could occur
(b) There is a danger of abuse if retrospective application would require judgements by management about past conditions after the outcome of a particular transaction is already known. The IFRS prohibits retrospective application in some areas where this could occur
Some have suggested three further reasons for permitting or requiring prospective application in some cases:
(a) to alleviate unforeseen consequences of a new IFRS if another party uses financial statements to monitor compliance with a contract or agreement. However, in the Board’s view, it is up to the parties to an agreement to determine whether to insulate the agreement from the effects of a future IFRS and, if not, how they might renegotiate it so that it reflects changes in the underlying financial condition rather than changes in reporting (paragraph 215 of the Preface to International Financial Reporting Standards).
(b) to give a first-time adopter the same accounting options as an entity that already applies IFRSs. However, permitting prospective application by a first-time adopter would conflict with the Board’s primary objective of comparability within an entity’s first IFRS financial statements. Therefore, the Board did not adopt a general policy of giving first-time adopters the same accounting options of prospective application that existing IFRSs give to entities that already apply IFRSs.
(c) to avoid difficult distinctions between changes in estimates and changes in the basis for making estimates. However, a first-time adopter need not make this distinction in preparing its opening IFRS balance sheet, so the IFRS does not include exemptions on these grounds. If an entity becomes aware of errors made under previous GAAP, the IFRS requires it to disclose the correction of the errors.

BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS

The Board will consider case by case when it issues a new IFRS whether a first-time adopter should apply that IFRS retrospectively or prospectively. The Board expects that retrospective application will be appropriate in most cases, given its primary objective of comparability over time within a first-time adopter’s first IFRS financial statements. However, if the Board concludes in a particular case that prospective application by a first-time adopter is justified, it will amend the IFRS on first-time adoption of IFRSs. As a result, IFRS 1 will contain all material on first-time adoption of IFRSs and other IFRSs will not refer to first-time adopters (except, when needed, in the Basis for Conclusions and
consequential amendments). BC15 Under the proposals in ED 1, a first-time adopter could have elected to apply IFRSs as if it had always applied IFRSs. This alternative approach was intended mainly to help an entity that did not wish to use any of the exemptions proposed in ED 1 because it had already been accumulating information in accordance with IFRSs without presenting IFRS financial statements. To enable an entity using this approach to use the information it had already accumulated, ED 1 would have required it to consider superseded versions of IFRSs if more recent versions required prospective application. However, as explained in paragraphs BC28 and BC29, the Board abandoned ED 1’s all-or-nothing approach to exemptions. Because this eliminated the reason for the alternative approach, the Board deleted it in finalising the IFRS.

BASIS FOR CONCLUSIONS ON IFRS 1 BASIC CONCEPTS

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