IFRS 1

International Financial Reporting Standard 1: First-time Adoption of International Financial Reporting Standards or IFRS 1 is an international financial reporting standard issued by the International Accounting Standards Board (IASB). It sets out requirements on the preparation and presentation of financial statements and interim financial reports by entities that are adopting the IFRS for the first time, to ensure that they contain high-quality information. ^[1]

IFRS 1 has been cited by Association of Chartered Certified Accountants (ACCA) as having "great practical significance" in jurisdictions that are adopting the IFRSs. ^[2] The standard has been endorsed by the European Commission for use in the European Union, ^[3] with the Commission Services finding in 2009 that the latest version of IFRS 1 has benefits that outweigh the costs of adoption. ^[4]

Overview of IFRS 1

IFRS 1 aims to ensure that an entity's first financial statements after adopting IFRS, and interim statements for partial periods under IFRS, will:

• be transparent and comparable;
• provide a "suitable starting point" for the entity's accounting under IFRS; and
• have benefits that exceed the cost of preparation. ^[1]

Scope

IFRS 1 applies to an entity's "first IFRS financial statements" and interim financial reports for parts of the period covered by the first IFRS financial statements. ^[1]

The standard defines an entity's first financial statement as "the first annual financial statements in which the entity adopts IFRSs, by an explicit and unreserved statement in those financial statements of compliance with IFRSs". Specific cases include financial statements of firms whose most recent financial statements were prepared by national requirements not consistent with IFRS or that did not present financial statements in previous periods. ^[1]

Recognition and Measurement

In the first financial statement, IFRS 1 requires entities to present an opening IFRS statement of financial position using accounting policies in compliance with each IFRS effective as of the end of its first IFRS reporting period. However, accounting estimates at the date of transition to IFRSs are to be consistent with estimates made by the previously used GAAP. ^[1]

Any adjustments due to the previous use of a different GAAP are to be recognized directly in retained earnings or another category of equity if appropriate. ^[1]

Presentation and Disclosure

IFRS 1 requires entities to explain the effect of the transition to IFRS on their financial position, financial performance, and cash flows. For example, it requires entities to present certain reconciliations between accounting amounts under the previous GAAP and that under IFRS. ^[1]

An entity is permitted to use the fair value of an item of property, plant and equipment at the date of transition to IFRSs as its deemed cost at that date. If it does so, the entity is required to disclose the aggregate of these fair values and aggregate adjustments from the previous GAAP. ^[1]

Additionally, interim financial reports covering part of the period of the first IFRS financial statement are also required to include reconciliations from the previous GAAP, among other requirements. ^[1]

History and Amendments

The project on the first-time adoption of IFRSs was added to IASB's agenda in September 2001, IFRS 1 was issued in June 2003, and a restructured version was issued on November 24, 2008. There have been several amendments to the standard since it was released, including an amendment in December 2010 to guide entities emerging from severe hyperinflation. ^[5]

Illustrative Examples

1. Reconciliation of Equity at Transition Date

Scenario: An entity adopts IFRS on January 1, 2024. Under previous local GAAP, it capitalized research costs of $50,000, which must be expensed under IAS 38 (IFRS).

Item	Local GAAP	IFRS Adjustment	IFRS Balance	Rationale
Intangible Assets	$50,000	($50,000)	$0	Research costs cannot be capitalized under IFRS. [6]
Retained Earnings	$200,000	($50,000)	$150,000	Adjustments are recognized in equity at transition. [7]
Total Equity	$200,000	($50,000)	$150,000	Opening balance for IFRS reporting.

2. Deemed Cost for Property, Plant and Equipment (PPE)

Scenario: An entity chooses to revalue a factory at its fair value of $1,000,000 at the transition date (Jan 1, 2024) instead of using its local GAAP carrying amount of $850,000.

Event	Debit	Credit	Amount	Rationale
Asset Revaluation	PPE (Asset)	Retained Earnings	$150,000	Fair value used as "deemed cost" at transition. [8]
New IFRS Base		PPE Balance	$1,000,000	This becomes the starting point for IFRS depreciation.

Disclosure Requirements (IFRS 1)

IFRS 1 requires an entity to explain how the transition from previous GAAP to IFRSs affected its reported financial position, financial performance, and cash flows. ^[9]

Paragraph	Category	Disclosure Requirement	Description / Examples
IFRS 1.24(a)	Reconciliations	Equity Reconciliation	A reconciliation of equity reported under previous GAAP to equity under IFRS for the date of transition and the end of the latest period presented.
IFRS 1.24(b)		Profit or Loss Reconciliation	A reconciliation of the total comprehensive income under IFRS for the latest period in the entity’s most recent annual financial statements.
IFRS 1.25	Impairment	Previous GAAP Errors	If the entity recognized or reversed impairment losses for the first time in preparing its opening IFRS Statement of Financial Position, these must be disclosed.
IFRS 1.30	Fair Value as Deemed Cost	Use of Exemptions	If an entity uses fair value in its opening IFRS statement as "deemed cost" for an item of PPE or intangible assets, the aggregate of those fair values must be disclosed.
IFRS 1.23	Explanation of Transition	Nature of Main Adjustments	A description of the nature of the main adjustments that would make the financial statements comply with IFRS.
IFRS 1.27A	Designation of Assets	Financial Instruments	Disclosure of the fair value of financial assets or liabilities designated into categories (like FVTPL) at the date of transition that were not so designated under previous GAAP.
IFRS 1.32	Interim Reports	First Interim Disclosure	If an entity presents an interim report for part of the period covered by its first IFRS financial statements, it must include reconciliations for that interim period.

References

1. IFRS Foundation, 2012. International Financial Reporting Standard 1: First-time Adoption of International Financial Reporting Standards. Retrieved on December 24, 2013.
2. ACCA, 2012. IFRS 1 First Time Adoption. Retrieved on December 24, 2013.
3. EFRAG, 2012. The EU endorsement status report. Retrieved on May 4, 2012.
4. European Commission, 2009. Endorsement of the IFRS 1 First-time Adoption of International Financial Reporting Standards. Retrieved on May 4, 2012.
5. Deloitte Global Services Limited, 2013. IFRS 1 — First-time Adoption of International Financial Reporting Standards. Retrieved on December 24, 2013.
6. IASB. IAS 38, Para 54.
7. IASB. IFRS 1, Para 11.
8. IASB. IFRS 1, Para D5.
9. IASB. IFRS 1, Paragraph 23-33.

External links

• Official IFRS 1 Standard (IFRS Foundation)
• Summary of IFRS 1 by Deloitte