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BASIS FOR CONCLUSIONS ON IFRS 1 SHORT-TERM EXEMPTIONS FROM IFRSs

BASIS FOR CONCLUSIONS ON IFRS 1 SHORT-TERM EXEMPTIONS FROM IFRSs

BASIS FOR CONCLUSIONS ON IFRS 1 SHORT-TERM EXEMPTIONS FROM IFRSs

Short-term exemptions from IFRSs-Disclosures about financial instruments
E4A of IFRS 1 was added as a consequence of Annual Improvements to IFRSs 2012–2014 Cycle issued in September 2014. To avoid the potential use of hindsight when this amendment first took effect, the Board decided that first-time adopters should be permitted to use the same transition provisions permitted for existing preparers of financial statements prepared in accordance with IFRSs that are included in Annual Improvements to IFRSs 2012–2014 Cycle.

BASIS FOR CONCLUSIONS ON IFRS 1 SHORT-TERM EXEMPTIONS FROM IFRSs

Explanation of transition to IFRSs

The IFRS requires disclosures about the effect of the transition from previous GAAP to IFRSs. The Board concluded that such disclosures are essential, in the first (annual) IFRS financial statements as well as in interim financial reports (if any), because they help users understand the effect and implications of the transition to IFRSs and how they need to change their analytical models to make the best use of information presented using IFRSs. The required disclosures relate to both:
(a) the most recent information published in accordance with previous GAAP, so that users have the most up-to-date information; and
(b) the date of transition to IFRSs. This is an important focus of attention for users, preparers and auditors because the opening IFRS balance sheet is the starting point for accounting in accordance with IFRSs.

IFRS requires reconciliations of equity and total comprehensive income. The Board concluded that users would also find it helpful to have information about the other adjustments that affect the opening IFRS balance sheet but do not appear in these reconciliations. Because a reconciliation could be voluminous, the IFRS requires disclosure of narrative information about these adjustments, as well as about adjustments to the cash flow statement.

The Board decided to require a first-time adopter to include in its first IFRS financial statements a reconciliation of total comprehensive income (or, if an entity did not report such a total, profit or loss) in accordance with previous GAAP to total comprehensive income in accordance with IFRSs for the latest period reported in accordance with previous GAAP.

BASIS FOR CONCLUSIONS ON IFRS 1 SHORT-TERM EXEMPTIONS FROM IFRSs

The Board observed that the amendments to IAS 1 in 2007 regarding the presentation of income and expense might result in users having to change their analytical models to include both income and expense that are recognised in profit or loss and those recognised outside profit or loss. Accordingly, the Board concluded that it would be helpful to those users to provide information on the effect and implication of the transition to IFRSs on all items of income and expense, not only those recognised in profit or loss.

The Board acknowledged that GAAP in other jurisdictions might not have a notion of total comprehensive income. Accordingly, it decided that an entity should reconcile to total comprehensive income in accordance with IFRSs from the previous GAAP equivalent of total comprehensive income. The previous GAAP equivalent might be profit or loss.

BASIS FOR CONCLUSIONS ON IFRS 1 SHORT-TERM EXEMPTIONS FROM IFRSs

IFRS states that the reconciliations should distinguish changes in accounting policies from the correction of errors. Some respondents to ED 1 argued that complying with this requirement could be difficult or costly. However, the Board concluded that both components are important and their disclosure should be required because:
(a) information about changes in accounting policies helps explain the
transition to IFRSs.

(b) information about errors helps users assess the reliability of financial information. Furthermore, a failure to disclose the effect of material errors would obscure the ‘results of the stewardship of management, or the accountability of management for the resources entrusted to it’

For impairment losses (and reversals) recognised in preparing the opening IFRS balance sheet, of the IFRS requires the disclosures that IAS 36 would require if those impairment losses (and reversals) were recognised during the period beginning with the date of transition to IFRSs. The rationale for this requirement is that there is inevitably subjectivity about impairment losses. This disclosure provides transparency about impairment losses recognised on transition to IFRSs. These losses might otherwise receive less attention than impairment losses recognised in earlier or later periods.

Paragraph 30 of the IFRS requires disclosures about the use of fair value as deemed cost. Although the adjustment arising from the use of this exemption appears in the reconciliations discussed above, this more specific disclosure highlights it. Furthermore, this exemption differs from the other exemptions that might apply for property, plant and equipment (previous GAAP revaluation or event-driven fair value measurement). The latter two exemptions do not lead to a restatement on transition to IFRSs because they apply only if the measurement was already used in previous GAAP financial statements.

BASIS FOR CONCLUSIONS ON IFRS 1 SHORT-TERM EXEMPTIONS FROM IFRSs

Interim financial reports
IAS 34 Interim Financial Reporting states that the interim financial report is ‘intended to provide an update on the latest complete set of annual financial statements’ (paragraph 6). Thus, IAS 34 requires less disclosure in interim financial statements than IFRSs require in annual financial statements. However, an entity’s interim financial report in accordance with IAS 34 is less helpful to users if the entity’s latest annual financial statements were prepared using previous GAAP than if they were prepared in accordance with IFRSs. Therefore, the Board concluded that a first-time adopter’s first interim financial report in accordance with IAS 34 should include sufficient information to enable users to understand how the transition to IFRSs affected previously reported annual, as well as interim, figures.

BASIS FOR CONCLUSIONS ON IFRS 1 SHORT-TERM EXEMPTIONS FROM IFRSs

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