Derecognition of some previous GAAP assets and liabilities
The entity should eliminate previous-GAAP assets and liabilities from the opening statement of financial position if they do not qualify for recognition under IFRSs. [IFRS 1.10(b)] 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 costs
- training
- advertising and promotion
- moving and relocation
If the entity’s previous GAAP had recognised these as assets, they are eliminated in the opening IFRS statement of financial position.
If the entity’s previous GAAP had allowed accrual of liabilities for “general reserves”, restructurings, future operating losses, or major overhauls that do not meet the conditions for recognition as a provision under IAS 37, these are eliminated in the opening IFRS statement of financial position.
If the entity’s previous GAAP had allowed recognition of contingent assets as defined in IAS 37.10, these are eliminated in the opening IFRS statement of financial position.
Recognition of some assets and liabilities not recognised under previous GAAP.
Conversely, the entity should recognise all assets and liabilities that are required to be recognised by IFRS even if they were never recognised under previous GAAP. [IFRS 1.10(a)] For example:
IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded derivatives. These were not recognised under many local GAAPs.
IAS 19 requires an employer to recognise a liability when an employee has provided service in exchange for benefits to be paid in the future. These are not just post-employment benefits (e.g., pension plans) but also obligations for medical and life insurance, vacations, termination benefits, and deferred compensation. In the case of ‘over-funded’ defined benefit plans, this would be a plan asset.
IAS 37 requires recognition of provisions as liabilities. Examples could include an entity’s obligations for restructurings, onerous contracts, decommissioning, remediation, site restoration, warranties, guarantees, and litigation.
Deferred tax assets and liabilities would be recognised in conformity with IAS 12.
Reclassification
The entity should reclassify previous-GAAP opening statement of financial position items into the appropriate IFRS classification. [IFRS 1.10(c)] Examples:
IAS 10 does not permit classifying dividends declared or proposed after the statement of financial position date as a liability at the statement of financial position date. If such liability was recognised under previous GAAP, it would be reversed in the opening IFRS statement of financial position.
If the entity’s previous GAAP had allowed treasury stock (an entity’s own shares that it had purchased) to be reported as an asset, it would be reclassified as a component of equity under IFRS.
Items classified as identifiable intangible assets in a business combination accounted for under the previous GAAP may be required to be reclassified as goodwill under IFRS 3 because they do not meet the definition of an intangible asset under IAS 38. The converse may also be true in some cases.
IAS 32 has principles for classifying items as financial liabilities or equity. Thus, mandatorily redeemable preferred shares that may have been classified as equity under previous GAAP would be reclassified as liabilities in the opening IFRS statement of financial position.
Note that IFRS 1 makes an exception from the “split-accounting” provisions of IAS 32. If the liability component of a compound financial instrument is no longer outstanding at the date of the opening IFRS statement of financial position, the entity is not required to reclassify out of retained earnings and into other equity the original equity component of the compound instrument.
The reclassification principle would apply for the purpose of defining reportable segments under IFRS 8.
Some offsetting (netting) of assets and liabilities or of income and expense items that had been acceptable under previous GAAP may no longer be acceptable under IFRS.
Measurement
The general measurement principle – there are several significant exceptions noted below – is to apply effective IFRSs in measuring all recognised assets and liabilities.
How to recognise adjustments required to move from previous GAAP to IFRSs
Adjustments required to move from previous GAAP to IFRSs at the date of transition should be recognised directly in retained earnings or, if appropriate, another category of equity at the date of transition to IFRSs.
Estimates
In preparing IFRS estimates at the date of transition to IFRSs retrospectively, the entity must use the inputs and assumptions that had been used to determine previous GAAP estimates as of that date (after adjustments to reflect any differences in accounting policies). The entity is not permitted to use information that became available only after the previous GAAP estimates were made except to correct an error.
Changes to disclosures
For many entities, new areas of disclosure will be added that were not requirements under the previous GAAP (perhaps segment information, earnings per share, discontinuing operations, contingencies and fair values of all financial instruments) and disclosures that had been required under previous GAAP will be broadened (perhaps related party disclosures).
Disclosure of selected financial data for periods before the first IFRS statement of financial position
If a first-time adopter wants to disclose selected financial information for periods before the date of the opening IFRS statement of financial position, it is not required to conform that information to IFRS. Conforming that earlier selected financial information to IFRSs is optional.
If the entity elects to present the earlier selected financial information based on its previous GAAP rather than IFRS, it must prominently label that earlier information as not complying with IFRS and, further, it must disclose the nature of the main adjustments that would make that information comply with IFRS. This latter disclosure is narrative and not necessarily quantified.