Appendix
IFRS 1 – First-time Adoption of International Financial Reporting Standards
Issue: Repeated application of IFRS 1
Question 1
Do you agree with the Board’s proposal to amend the IFRS as described in the exposure draft? If not, why and what alternative do you propose?
No. While we agree that an entity should, in certain circumstances, repeat the application of IFRS 1, we consider that the proposal as drafted has the potential for abuse.
We note that the only requirement in the proposed amendment is that an entity’s previous annual financial statements did not contain an explicit and unreserved statement of compliance with IFRSs. While this might appear a logical approach, it represents a low threshold that could deliberately be breached without a substantive change to amounts reported in an entity’s financial statements, simply to engineer a repeat application of IFRS 1 to take advantage of certain of the reliefs in that standard. It would be impossible to prevent abuse of this nature, as the amendment to IFRS 1 as drafted is clear. We also note that those omissions, in themselves, might not be sufficient for the related financial statements to be viewed from an audit perspective as being sufficiently non-compliant with IFRS to warrant a qualified audit report.
A linked issue is that in some jurisdictions which have incorporated IFRS into their local GAAP, a simplified approach to IFRS is being introduced for certain entities with a reduced disclosure framework; the measurement and presentation requirements are retained in full. It might be straightforward for an entity to move from full IFRS to the simplified approach for a single reporting period, again leading to the potential for an entity artificially to engineer repeat application of IFRS 1.
Consequently, we believe that a more restrictive approach should be introduced, where repeat application of IFRS 1 is required only in those circumstances where, in its previous annual financial statements, an entity has:
- not claimed compliance with IFRS (whether explicitly, through an explicit and unreserved statement of compliance with IFRSs, or implicitly, such as through a statement in its annual report that there are no differences in the amounts reported in the financial statements and those which would have been reported had the reporting entity followed the requirements of IFRS); and
- not complied to a material extent with the measurement requirements of IFRS. In this context, ‘material’ should be referenced to the definition in paragraph 7 of IAS 1.
This brings a related issue, which is that some entities that adopt IFRS for the first time may find that there are no differences to report between their previous GAAP financial statements and their transition date IFRS statement of financial position. In those cases, it will be important to distinguish between a first-time adopter that has not previously reported in accordance with IFRS and has therefore not previously applied IFRS 1 (which should be required to follow, and benefit from the reliefs in, IFRS 1) and an entity which has previously reported in accordance with IFRS, moved back to its local GAAP with no differences in amounts reported under that GAAP in comparison to IFRS, and will now report again in accordance with IFRS (which should not be permitted to apply IFRS 1).
Consideration might also be given to an option for an entity which previously reported in accordance with IFRS, moved to another (perhaps local) GAAP and then moved back to IFRS, to restate the local GAAP amounts in order that its financial statements would reflect its financial position and results as if it had reported in accordance with IFRS from its original transition date. As an example, a subsidiary company of a listed group might have prepared its financial statements in accordance with IFRS in year 1. That company might then be subject to a management buyout and return to its local GAAP in year 2, only to be acquired by another listed group in year 3. It is possible that it would be more straightforward and less costly for that entity to restate the interim non-IFRS year’s financial statements instead of applying all of the detailed requirements of IFRS 1. While the application of certain exemptions in IFRS 1 from the entity’s original transition date might result in a similar effect, this would not be possible in all circumstances (for example, for cumulative translation differences which are covered by IFRS 1.D13).
A further issue, which is not addressed by the amendment but is one which the Board might usefully consider before finalising the amendment, is in circumstances where an entity’s local GAAP has gradually been converged with IFRS such that, at the point at which the entity adopts (or claims compliance with) IFRS for the first time there are no differences between the two GAAPs. While this might be relevant in future, depending on the approach that certain jurisdictions might take to their ultimate adoption of IFRS, it is also already relevant in a number of other jurisdictions.
Question 2
Do you agree with the proposed transitional provisions and effective date for the issue as described in the exposure draft? If not, why and what alternative do you propose?
We agree.
Issue: Borrowing costs relating to qualifying assets for which the commencement date for capitalisation is before the transition date
Question 1
Do you agree with the Board’s proposal to amend the IFRS as described in the exposure draft? If not, why and what alternative do you propose?
Although we understand the Board’s intent, as described in the Basis for Conclusions, we do not believe that proposed amendment is consistent with the transitional provisions of IAS 23. The drafting of the proposed amendment is also not sufficiently clear to avoid the potential for confusion in its application.
The transitional provisions in IAS 23.27 note that:
‘When the application of this Standard constitutes a change in accounting policy, an entity shall apply the Standard to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after the effective date.’
This means that for an entity that did not previously capitalise borrowing costs, IAS 23 will only be applied to qualifying assets for which the commencement date is on or after the effective date of IAS 23. However, a first-time adopter would appear to be required to apply IAS 23 to all qualifying assets which are under construction at its transition date, regardless of whether its previous accounting policy was to capitalise borrowing costs.
It is also not clear what would be regarded as a change in accounting policy for the purposes of the amendment to IFRS 1. It is possible that the change from an entity’s previous GAAP requirements (which may have included a requirement to capitalise borrowing costs) is significant enough to result in this being viewed as a change of accounting policy, due to the change in methodology. In such cases, there would again be a clear conflict between the transitional requirements of IAS 23 and the proposed amendments to IFRS 1.
We presume that the intent of the amendment to IFRS 1 is that an entity is required to capitalise borrowing costs in respect of all qualifying assets with effect from its transition date regardless of whether they are under construction at that date and regardless of its previous accounting policy for borrowing costs. We agree with this approach, as it means that entities that adopt IFRS, at dates that may be some time after existing IFRS reporters transition to IAS 23 (revised 2007), will be required to account prospectively in the same way as existing IFRS reporters.
However, assuming our understanding is correct, a direct reference from IFRS 1 to the transitional provisions of IAS 23 is not appropriate, as their requirements are different (specifically, the requirements of IAS 23.27). The amendment to IFRS 1 might be redrafted as follows:
Borrowing costs
D23: A first-time adopter may apply the transitional provisions set out in paragraphs 27 and 28 of IAS 23, as revised in 2007, subject to the requirements of subparagraph b) below which override the related requirement of paragraph 27 to apply IAS 23 only to those assets for which the commencement date for capitalisation is on or after the effective date. In those paragraphs references to the effective date shall be interpreted as 1 January 2009 or the date of transition to IFRSs, whichever is later. An entity electing to apply this exemption can choose to apply the requirements in IAS 23 from an earlier date as permitted by paragraph 28 of IAS 23. From the date on which an entity applying this exemption applies IAS 23, it:
a) shall not restate the borrowing cost component that was capitalised under previous GAAP and included in the carrying amount of assets at that date; and
b) shall account for borrowing costs incurred on or after that date, including those incurred on or after that date on qualifying assets already under construction, in accordance with IAS 23.
Question 2
Do you agree with the proposed transitional provisions and effective date for the issue as described in the exposure draft? If not, why and what alternative do you propose?
Subject to our comments set out in response to question 1, we agree.
IAS 1 Presentation of Financial Statements
Issue: Clarification of requirements for comparative information
Question 1
Do you agree with the Board’s proposal to amend the IFRS as described in the exposure draft? If not, why and what alternative do you propose?
We agree with the Board’s proposal.
Given the frequent use of the term ‘required comparative period’, it would be helpful for this to be added to the list of definitions in IAS 1.7.
Consideration might be given to whether there are any appropriate consequential amendments that should be made to IFRS 1 First-time Adoption of International Financial Reporting Standards.
Question 2
Do you agree with the proposed transitional provisions and effective date for the issue as described in the exposure draft? If not, why and what alternative do you propose?
We agree.
IAS 34 Interim Financial Reporting
Issue: Interim financial reporting and segment information for total assets
Question 1
Do you agree with the Board’s proposal to amend the IFRS as described in the exposure draft? If not, why and what alternative do you propose?
We agree.
Question 2
Do you agree with the proposed transitional provisions and effective date for the issue as described in the exposure draft? If not, why and what alternative do you propose?
We do not understand the rationale for specifying that the amendment is to be applied prospectively, rather than retrospectively. This might imply that the Board’s intention is that in the period of adoption of the amendment to IAS 34, an entity would need to disclose amounts for total assets as comparative for the prior period (if the disclosure had previously been given), even though no amounts would be disclosed for the current period. We suggest that ‘prospectively’ is deleted from paragraph 52.