First time adoption of IFRS Case Study 1 Entity B prepares financial statements that contain an explicit and unreserved statement of compliance with IFRS. The auditors' report on the financial statements for the year ended 31 December 20X6 was qualified, because of a disagreement over the application of IAS 32 to a complex financial instrument. 1 P a g e Entity B's management has agreed to change the accounting for the complex financial instrument for the year ending 31 December 20X7. Question: Can the financial statements as at 31December 20X7 be considered as the entity s first IFRS financial statements. IFRS 1 is not applied when an entity previously prepared financial statements that contained an explicit statement of compliance with IFRS, but for which the auditors' report was qualified. Therefore, entity B's financial statements for the year ending 31 December 20X7 will not be its first IFRS financial statements. Case study 2 Entity V's management intends to present entity V's first IFRS financial statements for the year ending 31 December 20Y0. The date of transition to IFRS is 1 January 20X9 and the opening IFRS balance sheet is prepared as at this date. Entity V acquired at least one business every year from 20X0 to 20X9 and accounted for the business combinations in accordance with its previous GAAP. Entity V's management intends to apply the business combinations exemption in IFRS 1 and not restate any business combinations in the years from 20X0 to 20X6. However, entity V's management intends to restate the accounting entries it made in connection with the 20X7 business combination, but not restate the acquisitions made in 20X8 or 20X9. Question: Can the management take the option for all years other than 20X7 as mentioned above and why? Entity V's management can elect not to restate any business combinations before the date of transition to IFRS. However, if it elects to restate any business combination, then all subsequent business combinations must also be restated. Management must also restate the combinations in 20X8 if it elects to restate the acquisition in 20X7. Management cannot avoid restating the business combination transaction in 20X9. This transaction took place in the period covered by the comparatives in the first IFRS financial statements. Entity V's management must, therefore, apply IFRS 3 (revised) to this business combination, because it is the business combination standard in force at the reporting date, 31 December 20Y0. Case study 3 Entity XYZ chooses the revaluation option available under IFRS 1 for all of its assets as at the transition date. Question: If an entity chooses to apply the revaluation option for its property, plant and equipment items, is it required to follow the revaluation model under IAS 16 i.e. Porperty, plant and equipment. No. Under IFRS 1 the revalued amounts become the deemed cost and subsequent accounting is done on a cost basis. Case study 4 An entity prepares financial statements to a December year end. Under its previous GAAP it adopted a policy of revaluing its land and buildings. It carried out a full revaluation at 31 December 20X0 (valuing them at C1m), an interim valuation at 31
December 20X3 (valuing them at C2m), and another full valuation at 31 December 20X5 (valuing them at C2.5m). The land and buildings were stated at C1.8m in the financial statements immediately prior to revaluation at 31 December 20X5, having had C100,000 of depreciation charged in 20X4 and C100,000 charged in 20X5. The revaluations were equivalent to fair value. The entity adopts IFRS for its financial statements to 31 December 20X6 and its date of transition is 1 January 20X5. It decides to take advantage of the 'fair value as deemed cost' exemption with respect to the land and buildings. It will adopt a costbased policy under IAS 16 and will use its valuation made under previous GAAP. Question: Can the valuation as at 31 December 20X5 can be used? If yes, why and if not what other option is allowed? The entity cannot use the valuation of C2.5m at 31 December 20X5 as deemed cost at 1 January 20X5, as this valuation took place after its date of transition. Instead it should use the interim valuation at 31 December 20X3 as deemed cost for the land and buildings. On the assumption that the previous GAAP depreciation was in compliance with IFRS, the carrying value at the entity's date of transition should be C1.9m, being the deemed cost of C2m adjusted for depreciation charged in 20X4 of C100,000. In its opening IFRS balance sheet the land and buildings will be stated at: Cost------------------------C2,000 Depreciation---------------C100 Net book value----------c1,900 Case study 5 Multiple choice questions Since the assets are now held on a deemed-cost basis under IFRS the entity's previously disclosed revaluation surplus will be transferred to retained earnings on transition to IFRS 1. Under which one of the following circumstances would an entity s current year s financial statements not qualify as first IFRS financial statements? (a) The entity prepared its financial statements under IFRS in the previous year and these were meant for internal purposes only. (b) The entity prepared the previous year s financial statements under its national GAAP. (c) The entity prepared its previous year s financial statements in conformity with all requirements of IFRS, but these statements did not contain an explicit and unreserved statement that they complied with IFRS. (d) The entity prepared its previous year s financial statements in conformity with all requirements of IFRS, and these statements did contain an explicit and unreserved statement that they complied with IFRS. 2. XYZ Inc. is a first-time adopter under IFRS 1. The most recent financial statements it presented under its previous GAAP were as of December 31, 2005. It has adopted IFRS for the first time and intends to present the first IFRS financial statements as of December 31, 2006. It plans to present two-year comparative information for the years 2005 and 2004. The opening IFRS balance sheet should be prepared as of (a) January 1, 2005. 2 P a g e
(b) January 1, 2003. (c) January 1, 2004. (d) January 1, 2006. 3. Which one of the following is not a required adjustment in preparing an opening IFRS balance sheet? (a) Recognize all assets and liabilities whose recognition is required under IFRS. (b) Derecognize items as assets or liabilities if IFRS do not permit such a recognition. (c) Disclose as comparative information all figures under previous GAAP alongside figures for the current year presented under IFRS. (d) Measure all recognised assets and liabilities according to principles contained in IFRS. 4. Which one of the following does not qualify for an exemption allowed by IFRS 1? (a) Business combinations that occurred before or prior to the date of transition to IFRS. (b) Financial instruments (other than compound financial instruments). (c) Cumulative translation differences. (d) Cumulative unrecognised actuarial gains and losses under IAS 19. 5. Which one of the following does not qualify for exemption under IFRS 1 for the purposes of retrospective application? (a) Hedge accounting. (b) Financial assets and financial liabilities derecognised prior to January 1, 2001. (c) Estimates made under previous GAAP. (d) Fair value accounting for investment property. 1 d; 2 c; 3 c; 4 - b; 5 d 3 P a g e
Presentation of financial statements Case study 1 A company produces airplanes. The length of time between first purchasing raw materials to make the planes and the date the company completes the production and delivery is 10 months. The company receives payment for the planes 6 months after delivery. Question: (a)how should the company show its inventory and trade receivables in its classified statement of financial position? (b) Would the answer be different if the production time was 14 months and the time between delivery and payment was a further 15 months? (a)the time between the first purchase of goods and the realisation of those goods in cash is 16 months (10 months + 6 months). The age of inventory held by the company at the year end will range between zero months to 10 months, and once the goods are delivered, it will take a further 6 months to receive payment. All of the inventory should be classified as a current asset, even though some of the inventory will not be realised in cash within 12 months of the reporting period. This is because the inventory is realised in the entity s normal operating cycle, as envisaged by IAS 1 (revised) paragraph 66(a). However, the expected date of recovery of the inventory should be disclosed by the company. The trade receivables will be realised in cash within 12 months of the reporting period and are, therefore, included as a current asset as we would expect. (b) No. The inventory and trade receivables should still be classified as a current asset. In this case, the inventory is, on average, older but nevertheless it is realised in cash in the entity s normal operating cycle. Similarly, the trade receivables are realised in cash as part of the operating cycle and should be classified as a current asset, even though they will not be realised in cash within 12 months of the reporting period. In addition to disclosing the expected date of recovery of the inventory, the maturity date of the trade receivables, a financial asset, will require disclosure under IFRS 7, 'Financial instruments: Disclosures'. Case study 2 A parent provides a loan to a subsidiary. Interest of 8% is paid annually. The loan is repayable on demand. Question: How should the loan be classified in the parent s statement of financial position? Ordinarily, financial assets due on demand are current assets. However, the demand feature may be primarily a form of protection or a tax-driven feature of the loan and it may be the expectation and intention of both parties that the loan will remain outstanding for the foreseeable future. If this is the case, the instrument is, in substance, long-term in nature and should be classified as a non-current asset. If there is an intention that the loan will be repaid within 12 months of the reporting period, it should be classified as a current asset. Case study 3 Please draw up a proforma statement of comprehensive income under IFRS (2 statement approach)? Case study 4 Please draw up a proforma balance sheet under IFRS? Case study 5 Multiple choice 1. Which of the following reports is not a component of the financial statements according to IAS 1? (a) Balance sheet. 4 P a g e
questions (b) Statement of changes in equity. (c) Director s report. (d) Notes to the financial statements. 2. XYZ Inc. decided to extend its reporting period from a year (12-month period) to a 15-month period. Which of the following is not required under IAS 1 in case of change in reporting period? (a) XYZ Inc. should disclose the reason for using a longer period than a period of 12 months. (b) XYZ Inc. should change the reporting period only if other similar entities in the geographical area in which it generally operates have done so in the current year; otherwise its financial statements would not be comparable to others. (c) XYZ Inc. should disclose that comparative amounts used in the financial statements are not entirely comparable. 3. Which of the following information is not specifically a required disclosure of IAS 1? (a) Name of the reporting entity or other means of identification, and any change in that information from the previous year. (b) Names of major/significant shareholders of the entity. (c) Level of rounding used in presenting the financial statements. (d) Whether the financial statements cover the individual entity or a group of entities. 4. Which one of the following is not required to be presented as minimum information on the face of the balance sheet, according to IAS 1? (a) Investment property. (b) Investments accounted under the equity method. (c) Biological assets. (d) Contingent liability. 5. When an entity opts to present the income statement classifying expenses by function, which of the following is not required to be disclosed as additional information? (a) Depreciation expense. (b) Employee benefits expense. (c) Director s remuneration. (d) Amortization expense. 1 c; 2 b; 3 b; 4 d; 5 c 5 P a g e