Financial Reporting

A Detailed Overview of IFRS 1

A detailed overview of IFRS 1

The IASB is in charge of establishing IFRS and approving interpretations of those standards. The International Financial Reporting Standards (IFRS) are designed for profit-oriented businesses. The financial statements of these businesses provide information on performance, position, and cash flow that is relevant to a variety of users when making financial decisions. These users include primary users such as current and potential investors, lenders, and other creditors, as well as secondary users such as employees, vendors, clients, governments and their agencies, regulators, and the general public. The guidelines used during the compilation of a company’s first IFRS-based financial statements are known as IFRS 1, or First Time Adoption of IFRS. IFRS 1 was established to make it easier for businesses to transition to international standards, and it includes practical provisions to make first-time adoption more cost-effective.

First-time adoption

A first-time adopter is a company that declares explicitly and unambiguously that its general-purpose financial statements comply with IFRSs for the first time. If an organization created IFRS financial statements for its internal management use in the previous year but did not make such IFRS financial statements accessible to shareholders or external parties such as investors or creditors, it may be considered a first-time adopter. However, if a set of IFRS financial statements was made available to owners or external parties for whatever reason in the previous year, the entity will be considered to be on IFRSs already, and IFRS 1 will not apply.

If an entity’s financial statements claimed compliance with some but not all IFRSs in the previous year, or simply included a reconciliation of certain statistics from previous GAAP to IFRSs, it can also be considered as a first-time adopter. (An entity’s previous GAAP refers to the GAAP it used prior to adopting IFRSs.)

However, a company is not a first-time adopter if its financial statements stated compliance with IFRSs in the previous year, even if the auditor’s report stated that compliance with IFRSs was qualified, or if there was compliance with both previous GAAP and IFRSs in the previous year.

An entity that implemented IFRSs in an earlier reporting period but did not have an explicit and unqualified statement of compliance with such IFRSs in its most recent annual financial statements can choose to implement the requirements of IFRS 1 (comprising the various permitted exemptions to complete retrospective application) or may even retrospectively apply IFRSs in line with IAS 8 Accounting Policies, Changes in Accounting Estimates & Errors as if it had never stopped implementing them.

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Requirements of IFRS 1

When transitioning from national GAAP to IFRS, an entity should follow the IFRS 1 requirements. It applies to a company’s first IFRS financial statements as well as any interim reports produced via IAS 34, ‘Interim financial reporting,’ within that time period. It also applies to entities that have applied for the first time more than once (i.e., repeated first-time applications). The essential requirement is that all IFRSs in effect at the reporting date be applied retrospectively. However, the necessity for retrospective application has a number of discretionary exemptions and compulsory exceptions.

The essential premise of IFRS 1 is that all Standards that are effective as of the closing balance sheet or the reporting date of the first IFRS Financial Statements must be applied retrospectively.

IFRS states that companies should:

  • Determine the first set of financial statements.
  • Make an opening balance sheet on the transition date.
  • Select accounting policies that meet the requirements of IFRS and apply them retrospectively to all of the periods covered by the initial financial statements.
  • Determine whether any of the optional exemptions from the retrospective application should be used.
  • Apply the four mandatory exclusions to the retrospective application of the IFRS.
  • Extensive disclosures should be made to explain the transition to IFRS.

Opening Balance Sheet

The Opening Balance Sheet serves as the starting point for all consequential accounting under these standards, and it is generated on the date of transition, which is the commencement of the first period for which the full comparative information is presented in line with the International Financial Reporting Standards.

IFRS 1 states that the opening Balance Sheet of an entity should:

  • Include all of the Assets and Liabilities permitted by these standards.
  • Exclude any asset or liability that is not permitted by these standards.
  • All items should be measured in accordance with these standards.
  • Prepare and present the Opening Balance Sheet along with the first IFRS Financial Statements of an entity.
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Unless one of the Optional Exemptions or Mandatory Exemptions does not require or permit recognition, classification, or measurement in accordance with the foregoing, these General Principles must be observed.

Exemptions to IFRS 1

The International Accounting Standards Board (i.e., IASB) has given for some voluntary exclusions for the retrospective application of IFRS 1 while acknowledging the expense of extracting the information required to retrospectively apply all the applicable IFRS and the repercussions of doing so. As a result, IFRS 1 gives the entity the option of doing a cost-benefit analysis to determine whether it wishes to apply IFRS retrospectively in some specific scenarios.

The optional exemptions apply to standards that the IASB believes would be too difficult to apply retrospectively or would result in a cost that would outweigh any benefits to users. Optionally, any, all, or none of the exemptions could be used.

These optional exemptions are related to the following:

  • Business combinations
  • Deemed cost
  • The designation of previously recognized financial instruments
  • Share-based payment transactions
  • Leases
  • The financial assets or intangible assets accounted for in accordance with IFRIC 12
  • Cumulative translation differences
  • Compound financial instruments
  • Assets and liabilities of the entity’s subsidiaries, associates & joint ventures
  • Borrowing costs
  • The investments in the entity’s subsidiaries, joint ventures & associates
  • Designation of contracts to acquire or sell a non-financial item
  • Insurance contracts
  • Extinguishing financial liabilities with equity instruments
  • Regulatory deferral accounts (IFRS 14)
  • Severe hyperinflation
  • Joint arrangements
  • Fair value measurement of all financial assets or financial liabilities at initial recognition
  • Stripping costs in the production period of a surface mine
  • Decommissioning of liabilities that are included in the cost of a property, plant & equipment
  • Customer contracts

The compulsory exceptions apply to situations when applying the IFRS rules retrospectively is deemed inappropriate. The following exceptions are not optional, but are required:

  • Estimates
  • Non-controlling interests
  • The manner of classification & measurement of financial assets (under IFRS 9)
  • Hedge accounting
  • The derecognition of financial assets and liabilities
  • Impairment of some financial assets
  • Government loans
  • Embedded derivatives (under IFRS 9 or IAS 39)

Some reconciliations from the earlier GAAP to IFRS are also required under the rules.

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Some adjustments needed to shift from previous GAAP to IFRSs

The entity should remove previous-GAAP assets and liabilities from the opening statement of financial position (Opening B/S) if they do not qualify for recognition under IFRSs. For example, IAS 38 does not permit recognition of expenditure on any of the following as an intangible asset: research, start-up, pre-operating, and pre-opening expenses, advertising and promotion, training, moving, and relocation. If the company’s previous GAAP had recognized these as assets, they are removed in the opening IFRS statement of financial position.

In contrast, even if assets and liabilities were never recognized under previous GAAP, the firm should recognize all assets and liabilities that are required to be recognized by IFRS[1]. IAS 39, for example, requires that all derivative financial assets and liabilities, including embedded derivatives, be recognized. Many local GAAPs failed to recognize these.

The company will have to re-classify previous-GAAP opening statements of financial position items into the appropriate IFRS classification. Dividends issued or proposed after the date of the statement of financial position, for example, are not allowed to be classified as a liability at the date of the statement of financial position, according to IAS 10. If such liability had been recognized under old GAAP, it would be reversed in the opening IFRS financial statement.

Considerations of accounting policies under IFRS

A number of Standards give businesses the option of choosing between different accounting policies. Companies must carefully consider the accounting policies that will be applied to the opening balance sheet and be aware of the impact for the current and future periods. Therefore, companies should use this chance to review their accounting policies from a fresh perspective.


When a business adopts IFRSs for the first time as the basis for generating its general-purpose financial statements, IFRS 1 called the “First-time Adoption of International Financial Reporting Standards” lays out the procedures that must be followed. This standard helps entities in transitioning from previous GAAP to IFRS.

Read our article:Applicability of Accounting standards on Mergers & Acquisitions – Ind AS 103 and AS 14

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