BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

Opening IFRS balance sheet 

An entity’s opening IFRS balance sheet is the starting point for its accounting in accordance with IFRSs. The following paragraphs explain how the Board used the Framework in developing recognition and measurement requirements for the opening IFRS balance sheet.

BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

Recognition

The Board considered a suggestion that the IFRS should not require a first-time adopter to investigate transactions that occurred before the beginning of a ‘look back’ period of, say, three to five years before the date of transition to IFRSs. Some argued that this would be a practical way for a first-time adopter to give a high level of transparency and comparability, without incurring the cost of investigating very old transactions. They noted two particular precedents fortransitional provisions that have permitted an entity to omit some assets and liabilities from its balance sheet:

BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

(a) A previous version of IAS 39 Financial Instruments: Recognition and Measurement6 prohibited restatement of securitisation, transfer or other derecognition transactions entered into before the beginning of the financial year in which it was initially applied
(b) Some national accounting standards and IAS 17 Accounting for Leases(superseded in 1997 by IAS 17 Leases) permitted prospective application of a requirement for lessees to capitalise finance leases. Under this approach, a lessee would not be required to recognise finance lease obligations and the related leased assets for leases that began before a specified date.

BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

However, limiting the look back period could lead to the omission of material assets or liabilities from an entity’s opening IFRS balance sheet. Material omissions would undermine the understandability, relevance, reliability and comparability of an entity’s first IFRS financial statements. Therefore, the Board concluded that an entity’s opening IFRS balance sheet should:
(a) include all assets and liabilities whose recognition is required by IFRSs, except:

• some financial assets or financial liabilities derecognised in accordance with previous GAAP before the date of transition to IFRSs (paragraphs BC20–BC23); and
• goodwill and other assets acquired, and liabilities assumed, in a past business combination that were not recognised in the acquirer’s consolidated balance sheet in accordance with previous GAAP and also would not qualify for recognition in accordance with IFRSs in the balance sheet of the acquiree

(b) not report items as assets or liabilities if they do not qualify forecognition in accordance with IFRSs.

Some financial instruments may be classified as equity in accordance with previous GAAP but as financial liabilities in accordance with IAS 32 Financial Instruments: Presentation. Some respondents to ED 1 requested an extended transitional period to enable the issuer of such instruments to renegotiate contracts that refer to debt-equity ratios. However, although a new IFRS may have unforeseen consequences if another party uses financial statements to monitor compliance with a contract or agreement, that possibility does not, in the Board’s view, justify prospective application.

BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

Derecognition in accordance with previous GAAP
An entity may have derecognised financial assets or financial liabilities in accordance with its previous GAAP that do not qualify for derecognition in accordance with IAS 39.7 ED 1 proposed that a first-time adopter should recognise those assets and liabilities in its opening IFRS balance sheet. Some respondents to ED 1 requested the Board to permit or require a first-time adopter not to restate past derecognition transactions, on the following grounds:
(a) Restating past derecognition transactions would be costly, especially if restatement involves determining the fair value of retained servicing assets and liabilities and other components retained in a complex securitisation. Furthermore, it may be difficult to obtain information on financial assets held by transferees that are not under the transferor’s control.
(b) Restatement undermines the legal certainty expected by parties who entered into transactions on the basis of the accounting rules in effect at the time.
(c) IAS 39 did not, before the improvements proposed in June 2002, require (or even permit) entities to restate past derecognition transactions. Without a similar exemption, first-time adopters would be unfairly disadvantaged.
(d) Retrospective application would not result in consistent measurement, as entities would need to recreate information about past transactions with the benefit of hindsight.

The Board had considered these arguments in developing ED 1. The Board’s reasons for the proposal in ED 1 were as follows:
(a) The omission of material assets or liabilities would undermine the understandability, relevance, reliability and comparability of an entity’s financial statements. Many of the transactions under discussion are large and will have effects for many years.
(b) Such an exemption would be inconsistent with the June 2002 exposure draft of improvements to IAS 39.
(c) The Board’s primary objective is to achieve comparability over time within an entity’s first IFRS financial statements. Prospective application by a first-time adopter would conflict with that primary objective, even if prospective application were available to entities already applying IFRSs.
(d) Although a new IFRS may have unforeseen consequences if another party uses financial statements to monitor compliance with a contract or agreement, that possibility does not justify prospective application.

Nevertheless, in finalising the IFRS, the Board concluded that it would be premature to require a treatment different from the current version of IAS 39 before completing the proposed improvements to IAS 39. Accordingly, the IFRS originally required the same treatment as the then current version of IAS 39 for derecognition transactions before the effective date of the then current version of IAS 39, namely that any financial assets or financial liabilities derecognised in accordance with previous GAAP before financial years beginning on 1 January 2001 remain derecognised. The Board agreed that when it completed the improvements to IAS 39, it might amend or delete this exemption.

BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

The Board reconsidered this issue in completing the revision of IAS 39 in 2003. The Board decided to retain the transition requirements as set out in IFRS 1, for the reasons given in paragraph BC20. However, the Board amended the date from which prospective application was required to transactions that occur on or after 1 January 2004 in order to overcome the practical difficulties of restating transactions that had been derecognised before that date. In 2010 the Board was asked to reconsider whether 1 January 2004 is the appropriate date from which a first-time adopter should be required to restate past derecognition transactions. Constituents were concerned that, as time passes, the fixed transition date of 1 January 2004 becomes more remote and increasingly less relevant to the financial reports as additional jurisdictions adopt IFRSs. The Board accepted that the cost of reconstructing transactions back in time to 1 January 2004 was likely to outweigh the benefit to be achieved in doing so. It therefore amended the fixed date of 1 January 2004 in paragraph B2 to ‘the date of transition to IFRSs’. The Board also amended the wording of the illustration in paragraph B2, in order to clarify that it is providing an example. BC22B The Board also noted that financial statements that include financial assets and financial liabilities that would otherwise be omitted under the provisions of the IFRS would be more complete and therefore more useful to users of financial statements. The Board therefore decided to permit retrospective application of the derecognition requirements. It also decided that retrospective application should be limited to cases when the information needed to apply the IFRS to past transactions was obtained at the time of initially accounting for those transactions. This limitation prevents the unacceptable use of hindsight.

BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

The Board removed from IAS 39 the following consequential amendments to IAS 39 made when IFRS 1 was issued, because, for first-time adopters, these clarifications are clear in paragraphs IG26–IG31 and IG53 of the guidance on implementing IFRS 1. These were:
(a) the clarification that an entity is required to apply IAS 39 to all derivatives or other interests retained after a derecognition transaction, even if the transaction occurred before the effective date of IAS 39; and
(b) the confirmation that there are no exemptions for special purpose entities8 that existed before the date of transition to IFRSs.

BASIS FOR CONCLUSIONS ON IFRS 1 OPENING IFRS BALANCE SHEET

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