Chapter 7: Transition to IFRS

IFRS 1 requires retrospective application of IAS 29 effective at the reporting date of the entity’s first IFRS financial statements – that is, as if IAS 29 had always been applied.

An entity should restate its non-monetary assets and liabilities that were acquired or originated during a past period of hyper-inflation for the effects of changes in purchasing power from transaction date until the end of the period of hyper-inflation. Equity components, such as share capital, are restated. IFRS 1 provides exemptions from retrospective application of IFRSs to some equity items, such as an exemption from the requirement to determine the cumulative translation reserve at the date of transition. These exemptions should not be applied to other items by analogy.

Cumulative adjustment at first-time adoption in economies that have ceased to be hyperinflationary Entities preparing IFRS financial statements for the first time, in economies that have ceased to be hyper-inflationary, will need to make a cumulative adjustment to the non-monetary items in the balance sheet. All adjustments to non-monetary items are recognised in retained earnings.

Deemed cost at first-time adoption Question A country moved out of hyper-inflation eight years ago. Is it possible to avoid restatement in accordance with IAS 29, on transition to IFRS, by electing to use the IFRS 1 ‘fair value as deemed cost’ exemption? Answer The ‘fair value as deemed cost’ exemption under IFRS 1 only covers property, plant and equipment, investment property under the cost model, and intangible assets carried at fair value. An entity might have nonmonetary liabilities in the balance sheet requiring restatement, such as deferred income. Intangible assets carried at cost less amortisation (For example, where there is no active market) will also require IAS 29 restatement if they were acquired during the period of hyper-inflation. Components of equity, such as share capital, should also be restated for inflation effects from the transaction date to the end of the period of hyperinflation.

Transition to IFRS after a period of severe hyper-inflation

An entity might, at some point, cease to be subject to severe hyper-inflation and resume reporting under IFRS. The date on which an entity’s functional currency ceases to be subject to severe hyper-inflation is known as the ‘functional currency normalisation date’. This occurs when:

• one or both of the characteristics of severe hyper-inflation no longer exist; or
• the first-time adopter changes its functional currency to a currency that is not subject to severe hyper-inflation.

An entity cannot comply with IFRS, due to the severe hyper-inflation in periods before the date of transition to IFRS, so the comparative information for this period cannot be prepared in accordance with IFRS.

The entity should therefore consider whether disclosure of non-IFRS comparative information and historical summaries would provide useful information to the users of the financial statements. An entity that applies the severe hyper-inflation exemption should explain the transition to IFRS, including how and why the entity ceased to have a functional currency subject to severe hyper-inflation.

When an entity’s IFRS transition date is on or after the functional currency normalisation date, it can elect to measure assets and liabilities acquired before that date at fair value, and it can use that fair value as deemed cost in the opening IFRS statement of financial position.

IFRS 1 defines the date of transition as the beginning of the earliest period for which an entity presents comparative information under IFRS in its first IFRS financial statements.

Where the functional currency normalisation date falls within the comparative period, that period could be less than 12 months, provided that a complete set of financial statements (as required by IAS 1) is provided for that shorter period.

Presentation of comparatives An entity’s first IFRS financial statements should include at least three statements of financial position, two statements of comprehensive income, two separate income statements (if presented), two statements of cash flows, and two statements of changes in equity and related notes, including comparative information, to comply with IAS 1. Comparatives are therefore required; however, they do not always have to be for a full 12 months, because IFRS 1 explicitly states that this could be for less than 12 months.

IFRS 1 transition with comparatives Entity A determines that it will re-adopt IFRS as its basis of preparation through applying IFRS 1 for the year ended 31 December 20Y0. Entity A’s date of transition to IFRS is 1 February 20X9, because this is the date on which its functional currency was no longer subject to severe hyperinflation (that is, its functional currency normalisation date). On this date, entity A elects to measure its non-monetary assets and liabilities at fair value as deemed cost. Entity A’s comparative period can be less than 12 months, provided that it presents at least three statements of financial position, two statements of comprehensive income, two statements of cash flows and two statements of changes in equity and the related notes. Therefore, the period reported should be as follows: Statement of financial position: 1 February 20X9, 31 December 20X9 and 31 December 20Y0. Statements of comprehensive income, statements of cash flows and statements of changes in equity: 1 February 20X9 – 31 December 20X9 and 1 January 20Y0 – 31 December 20Y0. The periods covered by the notes should be consistent with the related primary statement information. For example, notes related to inventory should include balances as at 1 February 20X9, 31 December 20X9 and 31 December 20Y0. The entity cannot adopt IFRS before the financial year ending 31 December 20Y0; otherwise, the financial statements would not be compliant with the requirements of IAS 1 and IFRS 1.