The Handbook to IFRS Transition and to IFRS U.S. GAAP Dual Reporting: Interpretation, Implementation and Application to Grey Areas

By Francesco Bellandi

An indispensable guide to making the transition to dual IFRS/GAAP financial reporting

U.S. financial reporting will undergo an unprecedented level of change within the next several years. U.S. companies face a convergence between U.S. GAAP and IFRS, affecting several major accounting standards—most notably in the areas of leasing, revenue recognition, and financial instruments. It is imperative that U.S. companies understand these major changes and their business and operational implications. The IFRS U.S. GAAP Dual Reporting Handbook to First-Time Adoption offers a comprehensive treatment of both the principles and techniques of dual reporting under IFRS/U.S. GAAP, while exploring the practical implications for accounting professionals of reporting under both sets of standards.

• Takes an operating approach to the implementation and application of the dual standards
• Draws upon the author's extensive firsthand experience to dispel uncertainty and offer decision makers expert technical assistance
• Defines systemic changes businesses will need to make to accommodate IFRS standards
• Compares the two bodies of standards item-by-item and identifies solutions under one set of standards to issues arising under the other
• Explores the strategic impact of structuring a company for IFRS transition

In addition to covering the full range of critical issues surrounding adopting IFRS, this indispensable handbook is a rich resource of dual reporting tools, including financial statement formats, charts of accounts, accounting check-lists, reconciliation schedules, and operating manuals.

• Language: English
• Publisher: Wiley
• Release date: May 3, 2012
• ISBN: 9781119960348

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Contents

Cover

Title Page

Copyright

Dedication

Preface

About the Author

Chapter 1: Introduction and Scope of Book

1.1 NATURE OF ACCOUNTING LITERATURE AND PERTINENT PRONOUNCEMENTS

1.2 SIGNIFICANCE OF THE IFRS TRANSITION

1.3 IFRS TRANSITION SCENARIO

1.4 SCOPE OF THE BOOK

Chapter 2: IFRS First-Time Adoption Requirements and Interaction with U.S. GAAP and SEC Rules and Regulations

2.1 CHAPTER PREVIEW

2.2 IFRS 1 AMENDMENTS AND EFFECTIVE DATES

2.3 RATIONALE OF IFRS 1

2.4 ACCOUNTING STEPS IN MIGRATING TO IFRSS

2.5 FIRST IFRS FINANCIAL STATEMENTS

2.6 ENTITIES AFFECTED BY IFRS 1

2.7 COMPLIANCE WITH IFRSS

2.8 TRANSITION DATE

2.9 ACCOUNTING POLICIES

2.10 THE IMPACT OF ALTERNATIVE BASES OF REPORTING

2.11 ACCOUNTING ESTIMATES

2.12 THE OPENING IFRS STATEMENT OF FINANCIAL POSITION

2.13 COMPARATIVE INFORMATION

2.14 EXCEPTIONS AND EXEMPTIONS IN THE CONTEXT OF COMPARABILITY

2.15 INTERIM REPORTING

2.16 RECONCILIATIONS AND DISCLOSURES

2.17 EXCEPTIONS TO THE RETROSPECTIVE APPLICATION OF OTHER IFRSS

2.18 EXEMPTION FOR PAST BUSINESS COMBINATIONS

2.19 EXEMPTIONS FROM OTHER IFRSS

2.20 SHORT-TERM EXEMPTIONS FROM OTHER IFRSS

2.21 IMPLICATIONS FOR FINANCIAL STATEMENT PREPARERS

KEY ELEMENTS AND DECISIONS

OTHER CONTROL POINTS

Chapter 3: Dual Reporting for The Statement of Financial Position

3.1 CHAPTER PREVIEW

3.2 CONTEXT OF THE STATEMENT OF FINANCIAL POSITION

3.3 STRUCTURE OF THE STATEMENT OF FINANCIAL POSITION

3.4 CERTAIN OTHER STRUCTURAL ELEMENTS OF THE STATEMENT OF FINANCIAL POSITION

3.5 CAPTIONS AND LINE ITEMS

3.6 IMPLICATIONS FOR FINANCIAL STATEMENT PREPARERS

KEY ELEMENTS AND DECISIONS

3.8 OTHER CONTROL POINTS

Chapter 4: Dual Reporting for the Statements of Income

4.1 CHAPTER PREVIEW

4.2 DIFFERENT FORMS OF STATEMENTS OF INCOME

4.3 CONTEXT OF STATEMENTS

4.4 STRUCTURE OF THE STATEMENT OF INCOME

4.5 AGGREGATIONS AND SUBTOTALS

4.6 ANALYSIS OF EXPENSES

4.7 CAPTIONS AND LINE ITEMS

4.8 IMPLICATIONS FOR FINANCIAL STATEMENT PREPARERS

KEY ELEMENTS AND DECISIONS

OTHER CONTROL POINTS

Chapter 5: Dual Reporting for the Statement of Cash Flows

5.1 CHAPTER PREVIEW

5.2 CONTEXT OF THE STATEMENT OF CASH FLOWS

5.3 CASH AND CASH EQUIVALENTS

5.4 DIRECT VERSUS INDIRECT METHOD

5.5 OTHER STRUCTURAL ELEMENTS OF THE STATEMENT OF CASH FLOWS

5.6 SPECIAL ISSUES

5.7 CAPTIONS AND LINE ITEMS

5.8 IMPLICATIONS FOR FINANCIAL STATEMENT PREPARERS

KEY ELEMENTS AND DECISIONS

OTHER CONTROL POINTS

Chapter 6: Dual Reporting for The Statement of Changes in Equity

6.1 CHAPTER PREVIEW

6.2 CONTEXT OF THE STATEMENT OF CHANGES IN EQUITY

6.3 DIFFERENT CONCEPTS OF THE STATEMENT OF CHANGES IN EQUITY

6.4 THE STRUCTURE OF THE STATEMENT OF CHANGES IN EQUITY

6.5 SPECIFIC ELEMENTS

6.6 CAPTIONS AND LINE ITEMS

6.7 IMPLICATIONS FOR FINANCIAL STATEMENT PREPARERS

KEY ELEMENTS AND DECISIONS

OTHER CONTROL POINTS

Chapter 7: Dual Reporting for Interim Financial Statement

7.1 CHAPTER PREVIEW

7.2 ACCOUNTING PRINCIPLES FOR INTERIM FINANCIAL STATEMENTS

7.3 TYPES OF INTERIM FINANCIAL INFORMATION

7.4 REPORTING ENTITIES

7.5 APPROACHES TO INTERIM REPORTING

7.6 BASES OF ACCOUNTING IN INTERIM FINANCIAL STATEMENTS

7.7 PERIODS TO BE COVERED

7.8 FREQUENCY OF REPORTING

7.9 REPORTING DEADLINES

7.10 AUDITED VERSUS UNAUDITED

7.11 SET OF INTERIM FINANCIAL STATEMENTS

7.12 CONDENSED FORMAT OF INTERIM FINANCIAL STATEMENTS

7.13 IMPLICATIONS FOR FINANCIAL STATEMENT PREPARERS

KEY ELEMENTS AND DECISIONS

OTHER CONTROL POINTS

Table of Exhibits

Bibliography

OFFICIAL

UNOFFICIAL

Index

Title Page

This edition first published 2012

© 2012 Francesco Bellandi

Registered office

John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com.

The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this Book may be translated, reprinted or reproduced or utilized in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing of the Publisher.

This book contains criticism, contrast and commentary that may have origin in material copyrighted by the IASCF International Accounting Standards Committee Foundation, Copyright © by the International Accounting Standards Committee Foundation, material copyrighted by the FAF/FASB the Financial Accounting Foundation and the Financial Accounting Standards Board, Copyright © by the Financial Accounting Standards Board, or material copyrighted by the AICPA, Copyright © by the American Institute of Certified Public Accountants, Inc.

Some portions of the Book and some Exhibits are reused or adapted, with permission, from Bellandi, F., 2009. Accounting for Equity and Other Comprehensive Income, Dual Reporting under U.S. GAAP and IFRSs. [e-book] Rome, Casa Editrice Università La Sapienza.

This Book is not a substitution for reading the full text of all IFRSs and U.S. GAAP pronouncements. Complete copies can be obtained directly from the IASB IASCF Publications Department, 1st Floor, 30 Cannon Street, London EC4M 6XH, United Kingdom, e-mail: [e-mail] Web: www.iasb.org and from the FASB, 401 Merritt 7, P.O. Box 5116 Norwalk, CT 06856-5116, e-mail: www.fasb.org.

While the Publisher and the Author have used their best effort in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book, and assume no liability or responsibility for any errors or omissions in the content. The reader should not construe the content of this book as accounting, legal, or other professional advice. It is not intended to address the circumstances of any particular individual or entity. If specific professional advice or assistance is required, the services of a competent professional should be sought. Neither the Publisher nor the Author shall be liable for any loss of profit or any commercial damages, including but not limited to special, incidental, consequential, or other damages to any person acting or refraining from action as a result of this book. This material is provided AS IS AND WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT.

This Book considers accounting literature issued or published up to August 25, 2011.

Wiley also publishes its books in a variety of electronic formats and by print-on-demand. Some content that appears in standard print versions of this book may not be available in other formats. For more information about Wiley products, visit us at www.wiley.com.

Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought.

Library of Congress Cataloging-in-Publication Data

ISBN 978-0-470-97712-5

978-1-11996034-8 (ebook)

978-1-11996035-5 (ebook)

A catalogue record for this book is available from the British Library.

To the memory of

Maestro Nazario Carlo Bellandi, my father,

whose works represent a milestone in classical music composition

PREFACE

The Handbook to IFRS Transition and to IFRS U.S. GAAP Dual Reporting explains the accounting for the first-time adoption of IFRSs and the structuring of IFRS financial statements, from the perspective of companies that want to reuse, or must continue to use their U.S. GAAP (Generally Accepted Accounting Principles in the United States of America) and SEC practices. The handbook capitalizes on the experience gained during the EU migration wave, goes into the implications for U.S. GAAP companies, as well as the Implementation Guidance that U.S. GAAP and the SEC have been developing over time for foreign entities reporting under IFRSs in the U.S.

This Book first addresses the requirements for adopting IFRSs for the first time. The treatment of these requirements is accompanied by corporate examples, illustrations, and enforcement decisions by regulators, as well as considerations arising from U.S. GAAP and SEC guidance that have been developing in the context of the use of IFRSs by foreign private issuers.

An explanation of how to structure the statement of financial position, the statements of income, the statement of cash flows, the statement of changes in equity, and interim reporting under IFRSs then follows. A detailed comparison is made of each item with U.S. GAAP and SEC rules and regulations, including examples, comments, and planning points. Ready-made dual reporting tools are provided to assist financial statement preparers in designing the structures of the financial statements under IFRSs, U.S. GAAP, and SEC rules and regulations, as well as to reconcile respective captions and line items.

The requirements for SEC domestic issuers and for foreign private issuers are then explained. Readers are warned of the subtleties and interpretations relating to the IASB-IFRSs, certain jurisdictional versions of IFRSs, and implications in SEC filings. It expands on any topic with comments and directions arising from several committees within the AICPA, SEC, and other regulators and accounting bodies.

In each chapter, there are commentary sections that highlight the similarities, differences, and grey areas of the subject matter between IFRSs, U.S. GAAP, SEC rules and regulations, as well as other accounting jurisdictions. These sections also provide criticism of the related literature. The planning point sections within each chapter provide recommendations and propose several resolutions to issues that practitioners, including corporate staff, may face. The Book follows a meticulous and rigorous methodical approach. It gives full references to accounting pronouncements for further analysis by interested readers.

This Book does not limit itself to industrial, commercial, and service companies. It also covers certain specialized industries, such as banks and financial institutions, investment companies, brokers and dealers, insurance enterprises, pension and post-retirement plans, real estate, and other sectors.

It addresses the informational needs of practitioners, CPAs, Chief Financial Officers, Financial Directors, controllers, financial analysts, policymakers, students, and academics by examining how to adopt IFRSs. It also draws practical implications for IFRSs/U.S. GAAP dual reporting. The Book uses an operating approach, which is useful to companies especially for implementation and application guidance. It also explains how to design, restate, and reconcile financial statements, especially for entities reporting under U.S. GAAP.

This Book treats the experience gathered first hand in an international context and becomes an indispensable tool for management decision-making as well as for academic study.

ABOUT THE AUTHOR

Francesco Bellandi, U.S. CPA (Certified Public Accountant); Dottore Commercialista (Italian Chartered Accountant); Diploma in International Financial Reporting from the ACCA (The Association Of Chartered Certified Accountants, UK); Degree in Economics (summa cum laude), LUISS University; MBA, SDA Bocconi School of Business, Bocconi University; Diploma in Private Equity from the A.I.F.I. (Italy's private equity association).

Francesco Bellandi is a practitioner in U.S. GAAP/IFRSs dual reporting. He is a member of the AICPA, the NYSSCPA (New York State Society of Certified Public Accountants), the NYSSCPA's International Accounting & Auditing Committee.

He has served as a Board Director and Chief Financial Officer in Cobalt Waterline Group; Director Finance & Administration in Alitalia Maintenance Systems (Alitalia – Lufthansa Technik); Chief Financial Officer in Alitalia North America & Mexico, New York; Director Business Planning & Finance Performance SEMEA Southern Europe, Middle East, and Africa in Société Internationale de Télécommunications Aéronautiques; Manager Finance & Administration/Shared Services, Reengineering & Restructuring in Ernst & Young; Financial Controller and Logistics Manager in Ericsson; Financial Analyst in IRI (Istituto per la Ricostruzione Industriale).

Francesco Bellandi also holds executive seminars for CFOs on U.S. GAAP/IFRSs dual reporting. He can be reached at [e-mail] or www.dualgaap.com, a website dedicated to U.S. GAAP/IFRSs dual reporting.

1

INTRODUCTION AND SCOPE OF BOOK

1.1 NATURE OF ACCOUNTING LITERATURE AND PERTINENT PRONOUNCEMENTS

International Financial Reporting Standards (IFRSs) contain an all-inclusive general standard, i.e., IFRS 1, First-Time Adoption of International Financial Reporting Standards, concerning a company's migration to IFRSs as a comprehensive basis of accounting. Although regulated by a single standard, transition to IFRSs is a pervasive event that involves all accounting pronouncements, with implications in virtually all strategic, managerial, and operating areas of an organization.

This Book refers to the principal IFRSs, U.S. GAAP, and SEC pronouncements that are applicable to the structuring of the IFRS financial statements, including U.S. GAAP and SEC rules and regulations that have been developing over time for foreign entities reporting in the U.S.

The International Financial Reporting Interpretations Committee (IFRIC) recently changed its name to IFRS Interpretations Committee. Starting from July 1, 2010, the International Accounting Standards Committee Foundation (IASCF) became the IFRS Foundation. The IASB recently renamed its website as IFRS.org. The Accounting Standards Executive Committee (AcSEC) recently became the Financial Reporting Executive Committee (FinREC). This Book maintains the above original names, including for all reference dating before these changes.

1.2 SIGNIFICANCE OF THE IFRS TRANSITION

The significance of transition to IFRSs is a function of the type of previous GAAP that an entity adopted before such a move. The impact depends on the degree of prudence of the sets of standards previously used, the differences with IFRSs, and the specific facts and circumstances applicable to each reporting entity. To mention some, the following surveys illustrate the impacts of first-time adoption of IFRSs in certain countries and sectors.

According to a 2007 survey of European publicly listed and unlisted companies, 40% of preparers reported no change in profits, 23% stated that profits slightly increased, and 8% registered a high boost. 16% indicated a slight decrease in profits and 4% a much lower level. The remaining companies did not provide an analytic answer.¹

A 2005 survey of 45 IFRS first-time adopters illustrated that on average, profit or loss increased by approximately 43% and equity by 13%. The most significant areas that impacted profit or loss were goodwill for 63% of companies, financial instruments for 35%, employee benefits for 33%, share-based payment for 28%, tax for 26%, and intangible assets for 26%. The most significant areas that impacted equity were employee benefits for approximately 65% of companies, goodwill for 43%, tax for 43%, dividends for 35%, financial instruments for 33%.²

According to another survey concerning 2005 financial statements, approximately 70% of French survey companies improved profit or loss by adopting IFRSs (34% with an effect lower than 10% in comparison to the previous year, 19% with an impact higher than 30%, and 17% placed somewhere in between). The remaining 30% of surveyed companies registered a decrease in results (by less than 10% for 23% of the cases, a negative effect in excess of 30% for 2% of the occurrences, whereas the remaining 5% ranked somewhere in between). 69% of the survey companies increased shareholders’ equity (42% with an effect lower than 10%, 6% with an impact higher than 30%, and 21% in between). The remaining 31% registered a decrease (less than 10% for 22% of the cases, a negative effect greater than 30% for 3% of the occurrences, and the remaining 6% located in between).³

A survey on the adoption of IFRSs in 2005 by Italian listed companies showed that the change in stockholders’ equity relative to previous GAAP exceeded a +/−10% range for 29% of consolidated financial statements as of the beginning of 2004 (32% as of the end of 2004). These figures become 35% (25% as of the end of 2004) for entity's financial statements. 2004 consolidated net income improved in 73% of occurrences (52% in case of parent's separate financial statements), turning loss to profit in 5% of the cases (2% for parent's separate financial statements).⁴

The percentage change in stockholders’ equity due to the 2005 first-time adoption of IFRSs for the 24 largest European banks was positive in France up to over 20% in one case, and in Belgium from over 5% up to 15%. It was generally decreasing in the United Kingdom down to less than −10% in one occurrence, and with mixed results in other countries with a range from +10% to less than −15%.⁵

An analysis of the impact of the adoption of IFRSs in 2005 by six European companies in the building materials sector showed a prevailing downward change, ranging from −4% to −10%, in total equity (only one player presenting a positive increase). Income before taxes increased from approximately 2% to 16%.⁶

According to the analysis of 35 listed companies that were part of the S&P/MIB index in Italy, the first-time adoption of IFRSs in 2005 increased stockholders’ equity by +2.7% on average. The breakdown by sector was +15.8% for insurance, +5.5% for industrial companies, +4.5% for media and telecom, −4.9% for energy and utilities, −3.5% for banking, and +51.9% for other trades and services. The impact on net income was +10.3% on average, and +12.2% for insurance, −0.9% for industrial companies, +62.4% for media and telecom, +8.5% for energy and utilities, +1.4% for banking, and +68.6% for other trades and services.⁷

1.3 IFRS TRANSITION SCENARIO

Massive first-time adoption of IFRSs occurred in 2005 and 2006 in the European Union in connection with EC Regulation 1606/2002.⁸ In 2007 the CESR reported that from 2005 the IFRS adopters in the countries of the CESR Members numbered 7365, of which approximately 23% from the UK, 13% in Germany, 12% in France, 6% in Bulgaria, 5% in Greece, 5% in Italy, 5% in Sweden, 4% in Spain, and the remainder from other countries.⁹ EC Regulation 1606/2002 permitted EU Member States to defer the first-time adoption of IFRSs to a financial year starting on or after January 2007 for companies, inter alia, that are listed in a non-member State and report under U.S. GAAP.¹⁰

As is well known, the IASB and the FASB are committed to a joint work program as described in their Memorandum of Understanding. The Memorandum of Understanding establishes a roadmap of convergence between IFRSs and U.S. GAAP 2006–2008. The MoU called for issuance of one or more due process documents by 2008. In 2008, the FASB and the IASB updated the Memorandum of Understanding. On September 24–25, 2009 in Pittsburgh, the G20 Leaders endorsed a timeline for convergence of IFRSs and U.S. GAAP by 2011 outlined in the update of the Memorandum of Understanding. In November 2009, the FASB and the IASB reaffirmed their commitment to their Memorandum of Understanding. They issued a joint statement indicating a pathway for completion of the major projects by 2011. In June 2010, they revised their convergence work plan to prioritize the major projects.

To give preparers a relatively stable period to implement the IFRS platform, the IASB announced that it would not require the application of new standards before January 1, 2009,¹¹ although in the meantime it has developed new standards. In October 2010, the IASB and the FASB published a Discussion Paper soliciting feedback on the best effective times and transition methods of standards that they are jointly developing.¹² In general, the effective date of major projects planned for completion by 2011 is the beginning of 2013.¹³

In the United States, the Securities and Exchange Commission permitted foreign registrants to file IFRS financial statements with reconciliation to U.S. GAAP, with some accommodations for first-time adoption of IFRSs. In 2006, the SEC staff reviewed the annual reports of more than 100 foreign private issuers.¹⁴ Approximately 110 foreign private issuers filed IASB-compliant IFRS financial statements with the SEC, and approximately 70 companies with a jurisdictional variation of IFRSs. IFRS filings with the Commission have been principally from European and Australian issuers.¹⁵

Effective for financial years ending after November 15, 2007 and interim periods within those years contained in filings made after March 4, 2008, the SEC amended Form 20-F and Regulation S-X, and other regulations, forms, and rules under the Securities Act of 1933 and the Exchange Act of 1934, to accept IFRS financial statements without reconciliation to U.S. GAAP from foreign private issuers. This is limited to English language financial statements prepared under the IASB (International Accounting Standards Board) version of IFRSs. Regulation S-X continues to apply to filings from such foreign private issuers with the exception of their financial statement form and content.¹⁶

The SEC also published a Concept Release on allowing U.S. issuers, including investment companies subject to the Investment Company Act of 1940, to prepare financial statements in accordance with IFRSs as published by the IASB for purposes of complying with the rules and regulations of the Commission.¹⁷

On August 27, 2008, the SEC proposed a roadmap to IFRS that would require all U.S. public companies to file their financial statements in IFRSs by 2016 and allow some U.S. companies, based on certain criteria, to use IFRSs for their filings for fiscal years ending on or after December 15, 2009. In 2011, the SEC is to evaluate the steps made in the roadmap and decide whether to require large accelerated filers (issuers with common equity of at least $700 million) to report under IFRSs starting from fiscal years ending on or after December 15, 2014. Accelerated filers would report under IFRSs starting for fiscal years ending on or after December 15, 2015, and all other public companies for fiscal years ending on or after December 15, 2016.

However, on February 24, 2010, the SEC issued a statement calling for more study of IFRSs and setting 2015 as the earliest possible date for the required use of IFRSs by U.S. public companies. It confirmed the year 2011 as the threshold for a decision on whether to move ahead. The SEC withdrew the proposed rules for limited early use of IFRSs by certain U.S. issuers, although it did not exclude the possibility of early use or adoption. The statement does not rule out the possibility in the future that issuers may be permitted to choose between the use of IFRSs or U.S. GAAP. The work plan addresses six specific areas of concern: 1) whether IFRS is sufficiently developed and consistent in application for use in the U.S. reporting system; 2) the independence of standard setting; 3) investor understanding and education regarding the new standards and comparison with U.S. GAAP; 4) impact on U.S. laws or regulations; 5) impact on both large and small companies; and 6) preparation of auditors. The successful completion of the FASB-IASB convergence project is perceived as a critical milestone.

On May 26, 2011, the SEC published an update concerning the work plan to IFRSs.¹⁸ After analyzing the difference between enforcement and convergence, the SEC's paper addresses the so-called condorsement approach. This approach intends to lead to IFRS compliance by U.S. issuers that are compliant with U.S. GAAP. At the end of a transitional period, U.S. GAAP would incorporate IFRSs. In this respect, this is similar to an enforcement approach. During a transitional period of five to seven years, differences between IFRS and U.S. GAAP would be addressed. In this respect, this is similar to a convergence approach. The transition period could permit a staged or phased implementation. Finally, the FASB would also have a role to issue supplementary or interpretative guidance, adding disclosure requirements, or setting requirements on issues not addressed by IFRSs.

As of May 18, 2008, the Council of the AICPA designated the IASB as the body to establish international financial reporting standards for both private and public entities pursuant to Rule 202 and Rule 203 of the AICPA Code of Professional Conduct. In three to five years, the Council will reassess this decision.¹⁹ In particular, the AICPA's recognition of the IASB as a designated standard setter has opened the route for the use of IFRSs by nonpublic entities in the U.S., especially IFRS for small and medium-sized entities. An analysis on IFRSs in 175 jurisdictions found out that for domestic listed companies 30 countries do not permit IFRSs, 24 permit them, six require IFRSs for some companies, 94 require IFRSs or full IFRS equivalent or substantially converged standards for all companies, and 21 have no stock exchange. Of 136 jurisdictions for which information concerning unlisted companies is available, 37 jurisdictions do not permit IFRSs, 44 permit IFRSs for all or some companies, 30 require them for some companies, and 25 for general purpose financial statements of all companies.²⁰

All over the world, several patterns of adoptions, or combinations of approaches, have arisen depending on the country involved. Some countries have required the use of IFRSs for consolidated financial statements of listed companies. Others have required or permitted this for listed companies, or extended to unlisted companies with an option to use local accounting principles. Certain jurisdictions, for example Ukraine, have permitted IFRSs for all companies with no reconciliation to local GAAP; others (e.g., Bangladesh) have required them for all companies, still others have prohibited IFRSs completely (for example, Iran). The U.S. traditional approach was a limited permission with reconciliation to local GAAP. The EU has chosen a clearance process resulting in a jurisdictional version of IFRSs. Amendment of local GAAP to conform partly or entirely to IFRSs is another pattern (for example, in Australia). Other countries, such as the U.S., Canada, Japan, India, have plans in progress to adopt IFRSs.

Most importantly, some major economies, e.g., Canada, which has announced IFRS convergence by 2011, are migrating to IFRSs by 2010–2012 and beyond. In 2006, China promulgated a new set of accounting standards substantially in line with IFRSs.

On July 24, 2007, the Council of the Institute of Chartered Accountants of India announced its IFRS convergence plan for listed entities, other public interest entities such as banks, insurance companies, and large-sized entities from the accounting periods commencing on or after April 1, 2011.

On January 28, 2010, the Brazilian Federal Council of Accounting and the Brazilian Accounting Pronouncements Committee signed an MoU with the IASB to converge fully to IFRS by end 2010.

On August 1, 2008, the Financial Reporting Foundation (FRF) and Malaysian Accounting Standards Board (MASB) announced their plan to bring Malaysia to full convergence with IFRSs by January 1, 2012. For the time being, private entities will continue to apply Private Entity Reporting Standards (PERS).

In November 2008, the National Banking and Securities Commission of Mexico together with the Mexican Board for Research and Development of Financial Reporting Standards communicated a plan to adopt IFRS for listed entities starting for periods ending on 31 December 31, 2012.

Public companies in Argentina will be required to adopt IFRSs starting in 2012, with an option to file financial statements in accordance with IFRS starting in January 2011.

The South Korean government has approved mandatory adoption of IFRSs by 2011 for all listed companies and unlisted financial institutions in certain sectors. All companies except financial institutions could voluntarily adopt IFRSs from January 1, 2009.

On December 11, 2009, the Japan Financial Services Agency (FSA) announced regulatory changes to allow certain qualifying domestic listed companies to apply IFRSs in consolidated financial statements, starting from the fiscal year ending on or after March 31, 2010. A final decision on mandatory requirement of IFRSs from 2015 or 2016 will be taken around 2012.

1.4 SCOPE OF THE BOOK

1.4.1 The Dual Reporting Perspective

This Book uses the expression dual reporting to mean the use of systems, processes, and procedures to report under at least two comprehensive bases of accounting in a complete set of general purpose primary financial statements. This Book follows a multi-standard comparison approach, and includes implications for managers. It also includes some practical tools to help face changing accounting systems to reporting in (at least) two comprehensive bases of accounting, as opposed to just a one-off exercise for reconciliation to U.S. GAAP.

The circumstances discussed in Paragraph 1.3 previously show that companies migrating to IFRSs may have the need to embed the capabilities mentioned above in their systems. The Concept Release also acknowledges this phenomenon for certain U.S. issuers, due to competition for capital globally, a broad subsidiaries base in IFRS jurisdictions, or the requirement to file under IFRSs for regulatory or statutory purposes.²¹ The pathway foreseen in the SEC statement might be read in the sense that dual reporting would be the most likely route. For example, if the SEC requires IFRSs for the years ending on or after December 31, 2015, the transition date for a calendar-year company would be January 1, 2013. This means that from 2013 to 2015 and very likely beyond, some dual reporting systems will be necessary. If the condorsement approach is followed, there will be a transitional period of at least five to seven years plus the transition year and probably two comparative years, during which IFRSs/U.S. GAAP dual reporting will be a typical situation. U.S. multinationals that are present in IFRS jurisdictions may share some of the reasons for adopting IFRSs with other non-U.S. enterprises. These standards may provide them some of the general benefits that are normally associated with the concept of a single set of high quality globally accepted accounting standards. Benefits comprise raising foreign finance, including non-U.S. based finance, reducing costs of global investment and of restating financial statements,²² improving corporate image, competitiveness, financial transparency, and international visibility with customers, investors, and financial markets, enhancing the decision usefulness for users of financial statements, and providing a common accounting language to enhance internal management. IFRS for small and medium-sized entities has opened to a much more extended audience.

Dual reporting tools are what, in the initial transition phase, really matter to U.S. companies that operate both in the United States and in foreign jurisdictions or multinational companies that are present in countries where IFRSs are effective. Transition processes may result in expensive professional charges to clients, unless better time and result for money are achieved through a multi-chartered accounting environment that capitalizes on a dual reporting practice, as opposed to the traditional and costly approach of mobilizing staff from the U.S. and European practices of a professional firm. Solutions proposed would not need the involvement of foreign branches and affiliates and therefore would be cost competitive. It is a tremendous opportunity to shift the business processes from report production to streamlined and cost-effective data capture and generation. This is an opportunity for business process re-engineering, to build a comprehensive data warehousing which comprises data for financial reporting as well, and to extend internal controls to the issues of the new standards. Exhibit 1-1 illustrates the types of companies that may need dual reporting under IFRSs and U.S. GAAP.

Exhibit 1-1 Companies that May Need Dual Reporting under IFRSs and U.S. GAAP

Table 1-1

Although the Book occasionally refers to not-for-profit organizations, the accounting for these entities, as well as for governmental organizations, is outside of the scope of the Book.

1.4.2 IFRS Migration, Transition, or First-Time Adoption

This Book is relevant irrespective of the IFRS approach that a jurisdiction might adopt. Firstly, the analysis of differences between IFRSs and U.S. GAAP is the core of the Book. This is of current interest irrespective of any model of convergence or incorporation of IFRSs in the U.S. systems. Whether the SEC goes for an endorsement, a convergence, or a condorsement approach, the real topic that companies want to understand is how IFRSs compare to U.S. GAAP. They want this at operational level. Secondly, even under a condorsement approach, companies would implement IFRSs, although formally as part of U.S. GAAP. Irrespective of whether the terms migration, transition, or adoption are used, or whether a convergence, enforcement, or condorsement approach is followed, a company would have to study IFRSs as issued by the IASB, understand and manage any differences with U.S. GAAP.

Chapter 2 focuses on IFRS 1. Of course, this is relevant for any jurisdiction that adopts IFRSs. However, knowing IFRS 1 is also critical in the U.S. This is obvious in the case the SEC goes for a model of first-time adoption. However, this is also important under other scenarios. While a pure convergence approach does not claim compliance with IFRSs, condorsement would do so. After the transitional period, an entity would be required to state explicit and unreserved compliance with IFRSs, which calls for the procedures in IFRS 1. Furthermore, even if some form of waiver of IFRS 1 is developed, the basic accommodations in IFRS 1 would likely be available to U.S. companies, because they are already thought of as facilitations as opposed to retrospective application of IFRSs. In addition, the financial community must know the ramifications of IFRS 1 and its effects. Even on the unrealistic assumption that a U.S. blend of IFRS 1 is developed, financial analysts will have to compare foreign private issuers and foreign companies that have applied native IFRS 1 to domestic companies. In addition, financial analysts would quantify the gap resulting from any waiver of IFRS 1. Finally, many U.S. companies must apply IFRSs and IFRS 1 abroad. New foreign private issuer must apply IFRS 1.

1.4.3 Why this Book Includes Guidance to Foreign Private Issuers

This Book does not limit itself to guidance arising in an IFRS context. It extends to the Implementation Guidance that U.S. GAAP and the SEC have been developing over time for foreign entities reporting under IFRSs in the U.S. This is relevant to foreign private issuers reporting under IFRSs in the U.S. However, this is also critical for companies that move from U.S. GAAP to IFRSs, because they cannot ignore the SEC guidance on IFRSs, even if provided in a context of foreign businesses. The Book warns readers of the subtleties and interpretations relating to the IASB-IFRSs, certain jurisdictional versions of IFRSs, and the implications in SEC filings. It expands on any topic with comments and directions arising from several committees within the AICPA, SEC, and other regulators and accounting bodies. The SEC guidance to foreign private issuers provides incredible value for companies reporting under IFRSs. Actually, the use of guidance to foreign private issuers is one of the elements that differentiate this Book from others. Authors of books on IFRSs do not generally analyze U.S. GAAP and SEC guidance on IFRSs. Authors of U.S. GAAP and SEC guidance do not analyze native IFRSs. Consequently, as these are two disconnected worlds, CFOs have to employ Big 4 and external consultants. These consultants involve their foreign branches and so the cost of the IFRS project becomes unaffordable. This is another reason why this type of Book should appeal CFOs, corporate staff, and practitioners.

1.4.4 Other Unique Features of this Book

This book has certain innovative features.

It goes into IFRS implementation and application issues well beyond simply commenting on the accounting requirements. This arises out of the analysis of real-world post-transition topics based on relevant sources, such as enforcement decisions.

It compares IFRSs to U.S. GAAP at peer-to-peer, item-by-item levels, in order to identify solutions under one set of standards to issues arising under the other set of standards and vice versa. This helps find possible answers to grey areas. This is rarely found, because the main difficulty that comparative studies usually encounter is making an inventory of whether authoritative literature treats the same, similar, partially overlapping, or very different issues. The reason for this is mostly because different bodies of standards often move from different angles, scope, or starting points.

Its level is deeply technical: companies, practitioners, academics, and students want analysis, discussion, and possible solutions to real technical matters that can help them solve their pressing accounting problems. In each chapter, there are commentary sections that highlight the similarities, differences, and grey areas on the subject matter in IFRSs, US GAAP, SEC rules and regulations, as well as other accounting jurisdictions. These sections also provide a review of the related literature. The planning point sections within each chapter provide recommendations and propose several resolutions to issues that may be faced by practitioners and other corporate staff. Unlike other books, it gives full references to accounting pronouncements for further reading and analysis by interested readers.

The EU has gained experience from the first-time adoption of IFRSs in so many countries that companies have faced virtually every kind of different technical question. The SEC also acknowledges that the U.S. public capital market has never experienced the magnitude of an event that requires either a massive change in the comprehensive basis of accounting, or the use of a different basis of accounting for purposes of preparing primary financial statements.²³ The Book capitalizes on this experience, in addition to the study of Basis for Conclusions, proposed Exposure Drafts, and convergence projects, in order to analyze the rationales, the practical implications of different accounting requirements and prospective developments.

This Book is not limited to industrial, commercial, and service companies. It also covers certain specialized industries, such as banks and financial institutions, investment companies, brokers and dealers, insurance enterprises, pension and post-retirement plans, real estate, as well as other sectors.

1.4.5 Use of this Book in Jurisdictions Other than the U.S.

The focus of this Book is an operating comparison between IFRSs and U.S. GAAP. However, the Book also addresses IFRSs and IFRS migration irrespective of specific jurisdictions. This Book is more detailed and operating in IFRSs than most books on IFRSs. Therefore, it constitutes a valid guide to IFRS interpretation, application, and implementation in any jurisdiction, especially in relation to grey areas.

1.4.6 The Benefits of Reading this Book

Readers may consult this Book on specific topics or issues. Firstly, the Book analyzes a topic from numerous angles, interspersing comments and planning points on ramifications and implications. In this way, readers may have a deep understanding of a subject at a glance, saving months and months of accounting research.

Secondly, it refers to most of the documents that exist in accounting literature on the specific issues treated. Therefore, readers can know where to find additional materials as appropriate, without initiating a time-consuming research.

Finally, the Book gives a wide, cross cutting and comprehensive picture of the subjects treated. Not all readers have gained years of study and experience in IFRSs to make them adept in all standards and interpretations and their interactions to the level that is necessary to treat a topic more in detail than the high-level analysis that is usually available. Therefore, this feature makes readers aware of aspects that they may otherwise ignore or consider unrelated to the topic studied, without spending years in studying IFRSs.

Alternatively, each chapter or the entire Book may be read sequentially. The subject matter is discussed within a consistent framework. This facilitates reading for studying, whether as part of University curricula, executive courses, or personal learning.

¹. The Institute of Chartered Accountants in England and Wales (ICAEW), 2007. EU Implementation of IFRS and the Fair Value Directive, a Report for the European Commission, ¶ Figure 4.15. [Online] London: ICAEW. Available at: http://www.icaew.com/ecifrsstudy [last accessed: July 31, 2010] (hereinafter ICAEW 2007 Survey).

². KPMG, December 2005. International Financial Reporting Standards (IFRS) Survey of First-time Adoption. [Online] KPMG. Available at: www.kpmgifrg.com [last accessed: February 5, 2007] (hereinafter KPMG 2005 Survey).

³. Mouvement des Entreprises de France (MEDEF), October 2006. Survey, Chief Financial Officers of Listed Groups and the IFRS: What Lessons, What Objectives for after 2005?, ¶¶ Chapter 2, Appendix 1 (hereinafter MEDEF 2006 Survey).

⁴. Osservatorio Bilanci Sezione di Ragioneria – Dipartimento di Economia Aziendale Università degli Studi di Torino, October 16, 2006. Summit 2005, Rapporto sui bilanci 2005 delle società quotate. [Online] Summa. Available at: www.m2a.unito.it [last accessed August 5, 2007].

⁵. Ernst & Young, October 2006. The Impact or IFRS on European Banks – 2005 Reporting. [Online] Ernst & Young. Available at: www.ey.com/ifrs [last accessed October 2006] (hereinafter EY, 2005 Banking).

⁶. Ernst & Young, December 2005. IFRS, The Implications for the Building Materials Sector. [Online] Ernst & Young, Available at: www.ey.com/ifrs [last accessed December 2005].

⁷. Protiviti, December 2005. Insight No. 6 2005. Available at: www.protiviti.it [last accessed January 2006].

⁸. Regulation (EC) No. 1606/2002 of The European Parliament and of The Council of 19 July 2002 on the application of international accounting standards (hereinafter EC Regulation 1606/2002).

⁹. Committee of European Securities Regulators, CESR, Press Statement, CESR/07-121b, April 2007; Committee of European Securities Regulators, CESR, November 2007. 07-352, CESR's Review of the Implementation and Enforcement of IFRS in the EU, ¶ Appendix 1. [Online] CESR, France. Available at: www.cesr.eu [last accessed May 25, 2009]; Commission of The European Communities, Report from the Commission to The Council and The European Parliament on The Operation of Regulation (EC) No 1606/2002 of 19 July 2002 on The Application of International Accounting Standards (April 24, 2008), ¶ 2.3.

¹⁰. EC Regulation 1606/2002, article 9(b).

¹¹. IASB Press Release, December 2006. No new major standards to be effective before 2009. [Online] IASB. Available at: www.iasb.org [last accessed February 2007].

¹². FASB, October 2010. Discussion Paper, Effective Dates and Transition Methods; IASB, October 2010. Request for Views on Effective Dates and Transition Methods.

¹³. IASB Update, December 2009.

¹⁴. SEC, July 2, 2007. Observations in the Review of IFRS Financial Statements. [Online] SEC. Available at: http://www.sec.gov/divisions/corpfin/ifrs_staffobservations.htm [last accessed September 2007].

¹⁵. Security and Exchange Commission, July 2, 2007, Proposed Rule (Release No. 33-8818), Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP, page 29 (hereinafter Release No. 33-8818).

¹⁶. Release No. 33-8818.

¹⁷. Securities and Exchange Commission, August 2007. Release No. 33-8831, Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance With International Financial Reporting Standards (hereinafter Release No. 33-8831).

¹⁸. SEC, 2011. Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers. [Online] Available at www.sec.gov [last accessed May 29, 2011].

¹⁹. AICPA. Amendment to Code of Professional Conduct, Appendix A – Council Resolution Designating Bodies to Promulgate Professional Standards.

²⁰. Adapted from: Deloitte, Use of IFRSs for Reporting by Jurisdiction. [Online] Deloitte. Available at: www.iasplus.com/country/useias.htm [last accessed August 25, 2011].

²¹. Release No. 33-8831, page 7.

²². Similarly, the Concept Release, page 13 regarding the lowering of costs in preparing consolidated financial statements as a possible driving force in a situation where a U.S. issuer has a large number of subsidiaries reporting under IFRSs, as long as an increase in cost of capital does not offset such benefit.

²³. Release No. 33-8831, page 40.

2

IFRS FIRST-TIME ADOPTION REQUIREMENTS AND INTERACTION WITH U.S. GAAP AND SEC RULES AND REGULATIONS

2.1 CHAPTER PREVIEW

This chapter provides an invaluable guide on how U.S. companies, foreign private issuers, and multinational companies that need to keep updated on U.S. requirements must apply IFRS 1, First-time Adoption of International Financial Reporting Standards. It includes an analysis of peculiar aspects of reporting standards that are not easily investigated in accounting literature.

IFRS 1 is a complex standard. This chapter first provides graphic illustrations of its requirements for easier visualization and understanding. It then focuses on grey areas, researching topics that have arisen in different jurisdictions and how the SEC and other regulators have tackled the issues. It goes on to research how a careful reading of all IFRSs can lead to resolutions of problems that are still open. It contrasts those results with solutions to similar issues offered by U.S. GAAP. It explains in depth the SEC guidance on the subject.

In parallel to the introduction of other IFRSs, with special reference to IFRS 9, the IASB amended IFRS 1 several times. Most textbooks take the view of the adoption of all the latest amendments to IFRS 1 available at the beginning of a specific year. However, this is not the perspective that companies face, as many alternative treatments are possible at a certain point in time. This chapter explains how the changes from the previous versions of IFRS 1 to the current release and the alternatives still available may affect the migration to IFRSs. This is important for both simulation of financial results and planning for transition.

This chapter uses an analysis working method of investigative granularity, especially in discussing each IFRS 1 accommodation. In particular, it spells out many tacit interactions among the individual exceptions and exemptions in IFRS 1, potentially resulting in unintentional or dangerous implications.

Finally, its Exhibits provide ready-made dual reporting tools, such as accounting entries, comparisons of implications of alternative treatments, recasting from or to U.S. GAAP, and many others.

2.2 IFRS 1 AMENDMENTS AND EFFECTIVE DATES

2.2.1 History of IFRS 1

Entities that want to migrate to IFRSs as a comprehensive basis of accounting must follow IFRS 1, First-time Adoption of International Financial Reporting Standards. Over time, IFRS 1 has had several amendments and interpretations. Exhibit 2-1 lists those together with the respective effective dates and the enforcement dates in the European Union.

Exhibit 2-1 History of IFRS 1, First-Time Adoption of International Financial Reporting Standards

Table 2-7Table 2-7Table 2-7Table 2-7Table 2-7

2.2.2 Restructured IFRS 1

The current revision of IFRS 1, effective for financial years beginning on or after July 1, 2009, with earlier application permitted, is the so-called restructured IFRS 1. In essence, this is a restyled version intended to make the standard more readable and comprehensible, in consideration of the fact that the standard is open to frequent amendments.¹

2.3 RATIONALE OF IFRS 1

2.3.1 First-Time Adoption of a Comprehensive Basis of Accounting

Essentially, IFRS 1 treats the first-time adoption of a comprehensive basis of accounting with reference to IFRSs. It is a change in accounting basis rather than an accounting change.²

Comment: U.S. GAAP has no similar guidance on its first-time adoption. Under FIN 40, an entity that describes its financial statements as prepared in conformity with U.S. generally accepted accounting principles must apply all relevant authoritative accounting pronouncements.³ This concept is similar to the explicit and unreserved statement of compliance to IFRSs (see Paragraph 2.7 following).

2.3.2 Derogation from the Basic Principle of Retrospective Application

Retrospective accounting for an involuntary change in accounting principles (i.e., mandated by authoritative pronouncements) is a general rule under both U.S. GAAP and IFRSs.

Comment: Under U.S. GAAP, this tenet is compelling except for certain FASB Staff Positions and, in general, for EITF Abstracts, unless the transitional provisions of a specific pronouncement state otherwise.⁴ For companies already applying IFRSs, IAS 8 requires retrospective application of involuntary changes in accounting policies for which a Standard or an Interpretation does not provide any transitional provision. This is subject to an impracticability exception that, contrary to the previous version of the standard, also holds when the retrospective application required in a transitional provision is not practicable (not only when that Standard or Interpretation has no transitional provision and the results of retrospective application would be impracticable).⁵

However, unlike U.S. GAAP, IFRS 1 provides new entrants with certain accommodations as opposed to a rigid application of a one-off full retrospective approach that would be called for with the transition to IFRSs, as Paragraph 2.3.3 below illustrates. Paragraph 2.9.9 following goes into detail about the IAS 8 impracticability exception.

2.3.3 IFRS 1 versus SIC-8

IFRS 1 replaced SIC-8, First-time Application of IASs as the Primary Basis of Accounting. SIC-8 was in force from 1998 to the date when IFRS 1 came into existence.⁶ This Interpretation required a strict full retrospective method, unless impracticable. Unlike IFRS 1, it did not allow for exemptions or exceptions. SIC-8 followed a substantially different basic approach in selecting accounting policies. At that time, comparability among IAS entities, not simply among first-time adopters, was its main objective. SIC-8 was considered too rigid in retrospectively applying all IASs in a context of first adoption, without conceding to practical reasons, avoidance of hindsight, and cost/benefit justifications whether in the form of exceptions or exemptions. At the same time it was not so clear in spelling out transition rules. Paragraph 2.14.5 following explains the rationales under each of the specific derogations contained in IFRS 1. Furthermore, SIC-8 opened some room for misinterpretation or diverse application with regard to its impracticability exception from retrospective application that, nevertheless, could be invoked in rare cases.⁷ Conversely, IFRS 1 includes a cost-benefit balance into its objectives.⁸

2.3.4 Main Rationales of IFRS 1

The objective of IFRS 1 clearly includes the creation of first IFRS annual statements, and if it is the case, also interim financial statements as the foundation for continuing reporting under IFRSs. In this ways, the Standard takes into consideration the balance between cost and benefits.⁹

Comment: IFRS 1 moved in the direction of making transition to IFRSs more appealing to the IFRSs’ large potential audience than was the case under SIC-8, by reducing possible undue costs of managing the change. SIC-8 did not stipulate so clearly which version of the standards should be used, whether use should be made of hindsight in estimates, or interaction with standard-specific transitional provisions. This had caused doubts and debate. IFRS 1, instead, reframed all this by seeking comparability among companies over time, initially among first-time adopters, and between those and companies that already applied IFRSs as a next step.¹⁰

2.4 ACCOUNTING STEPS IN MIGRATING TO IFRSS

Migration to IFRSs involves many considerations beyond accounting, ranging from strategy, to competitive considerations, investor relations, process and operations management, organization, communication, human resources management, training, legal and taxation, and so on. From a purely accounting perspective, an entity should consider certain main steps, as Exhibit 2-2 illustrates.

Exhibit 2-2 Accounting Steps in Migrating to IFRSs

2.5 FIRST IFRS FINANCIAL STATEMENTS

2.5.1 Terminology

First-time adoption of IFRSs, as opposed to first-time application, is the expression that the IASB elected to mean the presentation of the first set of IFRS financial statements.¹¹ First IFRS financial statements, whether annual or interim, are those that use IFRSs in their entirety and include a statement where the reporting entity unambiguously represents such an adoption without any reservation.¹² Paragraph 2.6 following and Paragraph 2.7 following explain the intricacies of this point.

The SEC uses the expression transition year to mean what, in IFRS 1 terms, is the first IFRS reporting period.¹³

2.5.2 First versus Subsequent IFRS Financial Statements

The first IFRS financial statements are those in which an entity states an explicit and unreserved compliance with IFRSs for the first time.¹⁴ Paragraph 2.7 following goes into this in detail.

Discontinuation in respect of the past is of the essence. Before the first IFRS financial statements, an entity should not have used IFRSs by an explicit and unreserved statement of compliance, or presented any financial statements, or been in one of the circumstances that do not lead to a situation of first-time adoption. Alternatively, the context in which the company uses IFRSs should be such as to create the conditions for first-time adoption.¹⁵ An entity that did not present prior financial statements must disclose this fact.¹⁶

IFRS financial statements following the first IFRS financial statements are subsequent IFRS financial statements.

Planning Point: In the early years of preparation of IFRS financial statements a company may use a parallel mode, i.e., it may present both local GAAP and IFRS financial statements for some periods. In this case, it will be in a situation of first adoption only in the period in which it first prepares IFRS financial statements with the required assertion for the first time. When it stops reporting on a dual basis, its IFRS financial statements will be subsequent IFRS financial statements.¹⁷

2.5.3 What First IFRS Financial Statements are and What They are Not

IFRS 1 contains examples of what do and what do not constitute first IFRS financial statements.

Planning Point: This listing is useful to figure out what first IFRS financial statements are and what they are not. Moreover, it reflects most of the situations that entities may face before adopting IFRSs.

Exhibit 2-3 describes the process to ascertain whether certain past and present circumstances permit reference to financial statements as the first IFRS financial statements. In addition to this, financial statements that do not have the features discussed in the following paragraphs cannot be first IFRS financial statements.

Exhibit 2-3 Identification of the First IFRS Financial Statements

Table 2-14

2.5.4 External Use

First IFRS financial statements must be for external use, i.e., addressed to shareholders or other external parties. Financial statements limited to internal use do not qualify as such.¹⁸

2.5.5 Complete Set

First IFRS financial statements must include a complete set of financial statements, including all related aspects. IFRS 1 refers to a complete set under IAS 1. Paragraph 2.13.1 following and 2.13.3 following discuss this topic.

Planning Point: Typically, before arriving at a full adoption, companies may try to convert only part of their accounting records and system to prepare only some aspects of financial reporting on a selected basis, or a trial mode. This is not yet a first-time adoption.¹⁹

2.5.6 Primary Financial Statements

SIC-8 explicitly referred to the use of IASs as the primary basis of accounting for the first time.²⁰ IFRS 1 does not mention primary financial statements.

Planning Point: In general, IFRSs apply to general purpose financial statements (i.e., usually primary financial statements).²¹ However, an entity may well report under two or more comprehensive bases of accounting and use all of these as primary financial statements. Furthermore, many companies use reconciliations or adjusting entries to produce IFRS financial statements starting from local GAAP. An entity that adjusts all, not simply some, accounts starting from local GAAP, and states its full and unreserved compliance with IFRSs in a complete set of financial statements for external use would qualify as presenting first IFRS financial statements, even if it has not yet converted its chart of accounts. However, IFRS 1 clarifies that reconciling only some amounts is not a first-time adoption.²²

2.5.7 Location and Context of the First IFRS Financial Statements

When a company presents IFRS financial statements for different purposes, such as in the annual report to shareholders, in a prospectus for a public offering, in filings to securities regulators, or in other public documents, an issue may arise as to which statements are the first IFRS financial statements. In other situations, different sets of general purpose financial statements may follow different bases of accounting. In other cases, some external authority may compel compliance of one set of general purpose financial statements with IFRSs on a qualified basis.

IFRS 1 does not re-propose the distinction between financial statements and financial reporting and between general purpose and special purpose financial statements. Nonetheless, IAS 1 specifies that IFRSs only apply to financial statements and not to other information contained in other financial reports or documents. In addition, IFRSs apply to general purpose financial statements.²³ Indeed, both financial statements to shareholders and those included in filings for the protection of investors are general purpose financial statements.

Planning Point: If IFRS financial statements are part of a nonpublic document, they are not general purpose financial statements and therefore cannot qualify as first IFRS financial statements. Before the common conceptual framework, the IASB Framework stated that it did not apply to prospectuses. It characterized a prospectus as a special purpose financial report.²⁴ The Basis for Conclusions of IAS 1 implies some leaning towards considering financial statements in public documents as general purpose financial statements, although this standard does not go so far as to state this explicitly.²⁵ The Basis for Conclusions of IFRS 1 explicitly refers to first IFRS financial statements filed to regulators.²⁶ The new Conceptual Framework does not differentiate general purpose financial statements for publicly and closely held companies. However, it distinguishes financial statements included in reports directed to investors, lenders, and other creditors from those that are part of reports restricted to regulators and other parties. Only the former are general purpose financial statements.²⁷ Indeed, the financial statements included in those documents are for the protection of investors, whether actual or potential. An entity that according to national laws reports to shareholders under local GAAP might be required to use full IFRSs for listing purposes. Arguably, both sets of financial statements will be general purpose primary financial statements and the first use of IFRSs in financial statements (with all the required criteria) included in such documents to investors on the stock exchange will qualify as first-time adoption.

If