SCD GOVT COLLEGE, LDH

ASSIGNMENT ON
MODERN ACCOUNTING
THEORY AND
REPORTING PRACTICES

2014-15
SUBMITTED TO:
SUBMITTED BY:
Dr.ASHWANI BHALLA
MUSKAN KUNDRA
ROLL NO: 6204
M.COM 1(1ST SEM)

TOPIC

IFRS-1
FIRST TIME
ADOPTION OF

IFRSCONTENTS
INDEX
SR.
NO
1.

PARTICULARS

PAGE NO.

GENSIS

4-6

2.

INTRODUCTION

6-7

3.

OBJECTIVES

4.

Reseach Article

9-20

5.

IFRS-1

21

6.

Main Features of IFRS-1

22-26

7.

Exceptions to basic principle

27-29

8.

Scope of IFRS-1

30-31

9.

Steps in IFRS-1

31-34

10.

Explanation of transition to IFRSs

35

11.

Additional Disclosure

36-38

12.

Use of fair value as deemed cost

39

13.

Interim financial reports

40

14.

Effective Date & Degined Terms

41-42

15.

Discussion and Analysis

43-46

16.

Summary

46-49

17
18

Bibliography
Abbreviations

50-53
54

Genesis
International Accounting Standard Board (IASB) in its drive to develop a single
set of high quality, globally acceptable accounting and reporting standards has
made a series of efforts to achieve excellence. In regard to this International
Accounting Standard Board(IASB) adopted all IAS and began developing new
standards known as International Financial Reporting Standards (IFRS).
International Financial Reporting Standards (IFRS) is the collection of financial
reporting standards developed by the International Accounting Standards Board
(IASB). The aim of IFRS is to provide a single set of high quality,
global accounting standards that require transparent and comparable
information in general purpose financial statements.
IFRS is becoming a global language. IFRS are standards, interpretations and
framework for the preparation and presentation of financial statements.
The IFRS Foundation is an independent, not-for-profit private sector
organisation working in the public interest.
Its principal objectives are:

to take account of the financial reporting needs of emerging economies

and small and medium-sized entities (SMEs); and
to bring about convergence of national accounting standards and IFRSs to
high quality solutions.

IFRS are as principles based set of standards that establish broad rules and also
dictate specific treatments.

IFRS Structure

International Financial Reporting Standards comprises of :

International Financial Reporting Standards (IFRS) - standards issued
after 2001
International Accounting Standards (IAS) - standards issued before
2001
Interpretations originated from the International Financial Reporting
Interpretations Committee (IFRIC) - issued after 2001
Standing Interpretations Committee (SIC) - issued before 2001
IFRS assist preparers of financial statements produce and present:
high quality,
transparent and,
Comparable financial information.

IFRS1- First Time Adoption of IFRS

The International Accounting Standards Board (IASB) published IFRS 1 Firsttime Adoption of International Financial Reporting Standards in 2003. Since
then, significant amendments have been made to the Standard (primarily as a

result of changes to other IFRSs). In November 2008, IFRS 1 was substantially

rewritten (without altering the technical content) to make it a more user-friendly
document. Most recently, the Standard was revised in July 2009 to introduce
additional exemptions.
The purpose of IFRS 1 is to establish the rules for an entitys first financial
statements prepared in accordance with IFRSs, particularly regarding the
transition from the accounting principles previously applied by the entity
(previous GAAP).

Introduction
IFRS-1 deals the first time adoption of international financial reporting
standards. If an entity is preparing it's financial reports under an accounting
framework other than international financial reporting standards i.e.(Accounting
standards of their own countries) and decides to change to IFRS then it has to
comply with requirements prescribed by IASB on conversion to IFRS. These
requirements are stated in IFRS-1 (The first time adoption of international
financial reporting standards).
It specifies the procedures any entity applying IFRS for the first time must
follow. IFRS-1 is essentially a road map for prepares of first year financial
statements under IFRS. IFRS-1 also ensures that all first time adopters have
consistent starting point. The process of developing the IFRS-1 was started in
April 2001 when the international Accounting Standard Board (IASB) adopted
SIC-8 first time application of IAS as primary basis of accounting which has
been issued by SIC of IASC in July 1998. SIC was replaced with IFRS1 in the
June 2003.
Since the introduction of IFRS 1 in 2003, amendments have been made to other
IFRSs and IASs. As the latter change, the unique needs of first-time adopters are
considered, and IFRS 1 is updated where and when appropriate.

The previous first-time adoption guidance (SIC 8) required companies to

prepare their statements as if they had always followed International Accounting
Standards (that is, including the impact of previous standards). By contrast,
IFRS 1 requires presentation in accordance with the standards and
interpretations in effect at the reporting date (that is, excluding the impact of
previous standards).
The general principle of IFRS 1 is that the IFRSs effective at the reporting date
(that is, the balance sheet date) should be applied retrospectively to the opening
IFRS balance sheet, the comparative period, and the reporting period covered,
but with certain exceptions and exemptions. For example, if a company
transitions in 2010, they would need to comply with all IFRSs effective
December 31, 2010, subject to the exemptions and exceptions.
There are two categories of exceptions to the principle that an entitys opening
IFRS statement of financial position needs to comply with each IFRS:
i) Optional exemptions from some requirements of other IFRSs.
ii) Mandatory exceptions, which prohibit retrospective application of some
aspects of other IFRSs.

First-time adopter
A first-time adopter is an entity that, for the first time, makes an explicit and
unreserved statement that its general purpose financial statements comply
with IFRSs.
An entity may be a first-time adopter if, in the preceding year, it prepared IFRS
financial statements for internal management use, as long as those IFRS
financial statements were not and given to owners or external parties such as
investors or creditors. If a set of IFRS financial statements was, for any reason,
given to an external party in the preceding year, then the entity will already be
considered to be on IFRSs, and IFRS 1 does not apply.

An entity can also be a first-time adopter if, in the preceding year, its financial
statements asserted compliance with some but not all IFRSs, or included only a
reconciliation of selected figures from previous GAAP to IFRSs.
IFRS 1 focuses on requirements for:
presentation of the opening statement of financial position (opening balance
sheet) at the date of transition,
comparative information as required,
reconciliations between previous GAAP and IFRS, for example with respect to
financial position, financial performance, and cash flows,
other requirements and disclosures.

Objective
The Objectives of IFRS 1 is to ensure that an organizations first
IFRS financial statements (and any interim financial reports for
part of the period covered by those financial statements)
contain high-quality information that :
is transparent for users and comparable over all periods
presented
provides a suitable starting point for accounting under
International Financial Reporting Standards (IFRS)
can be generated at a cost that does not exceed the benefits
to users.

 To standardize accounting methods and procedures.

To lay down principles for preparation and presentation.
To establish benchmark for evaluating the quality of financial
statements prepared by the enterprise.
To ensure the users of financial statements get creditable
financial information.
To attain international levels in the related areas.

Research
Articles
Patro.Archana, Gupta.V.K., Adoption of International Financial
Reporting Standards (IFRS) in Accounting Curriculum in India, Procedia
Economics &Finance, 2012,Vol.2,PP-9
Review
Archana Patro (2012) outlines that ICAI announced its decision to adopt IFRS
in India w.e.f. April 2011 with the objective that this standard will have an
significant impact on capital markets as many European countries have shifted
to IFRS and are ahead of India in including IFRS in the curriculum for students
and concludes that understanding of Indian Generally Accepted Accounting
Principles (GAAP) and IFRS standards is an urgent need for today's students.

Therefore, the adoption of IFRS mainly depends on the need and interest among
students to understand the subject. If students are knowledgeable about the
positive impact of the course, they are more likely to take these courses when
management colleges or universities offer them.

Teller, R., First-Time Adoption of IFRS, Managerial Incentives, and ValueRelevance: Some French Evidence, Journal of International Accounting
Research,2009, Vol. 8.2,PP- 2
Review
R.Teller (2008) outlines that whether and how managerial incentives influence
the decision to elect optional exemptions when first adopting International
Financial Reporting Standards (IFRS). It also outlines the value-relevance of the
mandatory and optional equity adjustments that must be recognized as a result of
the first-time adoption of IFRS and finally concludes that first, managerial
incentives influence the decision to strategically elect one or more optional
exemptions at the transition date. Second, mandatory equity adjustments are
more valued than French GAAP equity, suggesting that the first-time adoption of
IFRS by French firms is perceived as a signal of an increase in the quality of
their financial statements. Third, the value-relevance of optional IFRS equity
adjustments depends on whether they result in the disclosure of new
information.

Pascan. Doina.Irina, Measuring the impact of first time adoption of IFRS

on the performance of Romania Listed Entities, Procedia Economics and
Finance,2012,Vol.3,PP-5
Review
Irina Doina Pascan (2012),outlines that beginning with 2005 all the entities
listed on the European Union regulated markets must prepare consolidated
financial statements in accordance with International Financial Standards(IFRS)
with the main objective is to identify and measure the impact of first time
adoption on the performance of Romania Listed Companies, performance being
expressed by means of net income. Romanian listed entities compulsorily apply

10

the IFRSs starting with the consolidated financial statements prepared for the
financial year 2007. and concludes that no clear tendency can be identified
regarding changes in net income of listed entities generated by the transition
from Romanian accounting regulations to IFRS.

Tucker.Jon, Yukselturk. Osman, Does mandatory adoption of IFRS

Guarantee Compliance,International Journal of Accounting,2013,Vol
48.3,PP-36
Review
Jon Tucker,Osman Yukselturk (2013) examine whether the mandatory adoption
of IFRS by Turkish listed companies in 2005 was successful in practice and
what role firm and country level factors played in the adoption with the
objective to determine firm-specific factors that affect the degree of change in
both measurement and disclosures and conclude that while the standards clearly
impact certain accounts, adoption is not uniform across accounts. With regard to
disclosures, it concludes that although there are some improvements, the vast
majority of the disclosure items required by IFRS were not disclosed. It also
reveals that the dominance of tax laws, the lack of enforcement, corporate
governance issues, and inadequate management information systems were all
significant constraints to the successful adoption of IFRS.

Gorden .Lawrence A, The impact of IFRS adoption on Foreign Direct

Investment Journal of accounting and Public Policy,2012, Vol31.4, PP-24
Review
Lawrence A Gorden (2012) outlines the impact of IFRS adoption on Foreign
Direct Investment (FDI) on companies and concludes that adoption of IFRS by
a country results in increased FDI inflows. A key potential driver for IFRS
adoption by countries with developing economies is the desire to receive
financial aid from the World Bank. It also indicates that overall increase in FDI
inflows from IFRS adoption is due to the increase in FDI inflows by countries

11

with developing, as opposed to developed, economies. This factor is explicitly

taken into account using a two-stage instrumental variable (IV) model. The
results using the IV model provide strong confirmation of the OLS results.

Callao, Susana,Adoption of IFRS in Spain, Journal of international

accounting ,Auditing and Taxation , 2007, Vol 16.2 ,PP-30
Review
Susana Callao (2007) outlines that in Spain, listed groups are obliged to
prepare consolidated financial information under IFRS, and legislative changes
with the objective to bring local rules into line with international standards have
been tabled. In this context, the potential impact of IFRS is fraught with
uncertainty and concludes that that local comparability has worsened. It
reveals that local comparability is adversely affected if both IFRS and local
accounting standards are applied in the same country at the same time. Reforms
to bring local rules into line with international standards are therefore urgent. It
also finds that there has been no improvement in the relevance of financial
reporting to local stock market operators because the gap between book and
market values is wider when IFRS are applied. While there has been no gain in
terms of the usefulness of financial reporting in the short-term, improved
usefulness may be achieved in the medium to long-term.

Hasan.A.Enas , Development Of accounting regulation in Iraq and the

IFRS adoption decision,International Journal of Accounting,2012
Review
Enas A Hasan(2012) outlines that the decision to adopt International Financial
Reporting Standards (IFRS), and the factors likely to impact the expansion of
IFRS application beyond listed companies . The most significant force in the
decision to adopt IFRS is coercive pressure, from western forces following the
fall of the Ba'ath regime, and from international aid organizations. It was

12

concluded that the accounting system in Iraq is likely to be further advanced

due to mimetic and normative pressures from Iraq's trade partners, multinational
corporations, and the accounting profession and concludes that it is important
that IFRS adoption is accompanied by reform to governance and investor
protection regimes, together with investment in education and training to support
ongoing implementation. Otherwise, IFRS adoption may be perceived as merely
symbolic.

Houqe.Nurul.Muhammad, Zijl.Van.Tony , The Effect of IFRS adoption

and investor protection on earning quality around the world International
Journal Of Accounting,2012,Vol 47.3,PP-22
Review
Muhammad Nurul , Tony Van outlines the effects of mandatory IFRS adoption
and investor protection on the quality of accounting earnings in forty-six
countries around the globe and concludes that earnings quality increases for
mandatory IFRS adoption when a country's investor protection regime provides
stronger protection. This study extends the current literature that shows that
accounting practices are influenced by country-level macro settings. The results
highlight the importance of investor protection for financial reporting quality
and the need for regulators to design mechanisms that limit managers' earnings
management practices.

Holt.Graham, The Road to IFRS, Accounting and business magazine,

June 2009,v-2
Review
Graham Holt (2007) outlines that in 2007, the UK Government made a
commitment that the UK public sector would move towards adopting the IFRS
with the objective to bring about greater consistency and comparability across

13

the global economy and to follow private sector best practice in the UK public
sector. However, experience has shown that the transition is both lengthy and
complex. IFRS 1 has great practical significance for sectors and countries that
are expected to adopt the standards in the near future. The introduction of the
IFRS will be a significant challenge to a council, as seen in the implementation
within the private sector where accounts have, on average, increased by 60% in
content and concludes that many types of entity have not yet made the move to
IFRS and, similarly, many countries have yet to fully adopt IFRS. A detailed
knowledge of IFRS 1 is critical, as it gives entities the opportunity to clean up
their balance sheets before being caught by IFRS.

Ahmed.Kamran,Chalmers.Keryn , A Meta analysis of IFRS adoption,

The International Journal Of Accounting, 2013, Vol48.2 ,PP-44
Review
Kamran Ahmed, Keryn Chalmers(2013) outlines the adoption of IFRS around
the globe that investigates the financial reporting and capital market effects
associated with an accounting regime change. We conduct a meta-analysis of
IFRS adoption studies investigating financial reporting effects, namely value
relevance and earnings transparency in the form of discretionary accruals, as
well as capital market effects, specifically the quality of analysts' earnings
forecasts. Findings concludes that the value relevance of book value of equity
has not increased post-IFRS adoption, whereas the value relevance of earnings
has generally increased when assessed using price models. Results also suggest
that discretionary accruals have not reduced, but analysts' forecast accuracy has
increased significantly post-IFRS adoption. Findings are not affected materially
after controlling for moderating factors including jurisdictional differences such
as legal origin, the accounting and auditing enforcement regime, and differences
between domestic GAAP and IFRS. However, these associations are moderated
by the model used for empirical investigation of value relevance and
discretionary accrual effects; they are also moderated by the adoption being
voluntary or mandatory. The findings provide evidence to inform policy

14

assessments and deliberations of the financial reporting and capital market

effects of adopting IFRS.

Schleicher.Thomas , Tahoun.Ahmed , IFRS adoption in Europe and

investment cash flow sensitivity, The International Journal of
Accounting,2010, Volume 45. 2, PP 143-168
Review
Thomas Schleicher, Ahmed Tahoun (2010) outlines the economic consequences
of the mandatory adoption of IFRS in EU countries by showing which types of
economies have the largest reduction in investment-cash flow sensitivity postIFRS and also examine whether the reduction in investment-cash flow
sensitivity depends on firm size as well as economy type and conclude that
investment-cash flow sensitivity of insider economies is higher than that of
outsider economies pre-IFRS and that IFRS reduces the investment-cash flow
sensitivity of insider economies more than that of outsider economies. Also, find
that small firms in insider economies have the highest sensitivity of investment
to lagged cash flow pre-IFRS, and that they are no longer sensitive to lagged
cash flow post-IFRS. Overall, our results suggest that IFRS adoption might have
improved the functioning of capital markets in relation to small firms in insider
economies.
Landsman.R.Wayne,Maydew.L.Edward, The information Content of
annual earnings announcements and mandatory adoption of IFRS,
Journal of Accounting and Economics, Volume 53.2, 2012, Pages 34-54
Review
Wayne R. Landsman, Edward L. Maydew outlines whether the information
content of earnings announcements abnormal return volatility and abnormal
trading volume increases in countries following mandatory IFRS adoption, and
conditions and mechanisms through which increases occur. Findings conclude
that information content increased in 16 countries that mandated adoption of
IFRS relative to 11 that maintained domestic accounting standards, although the

15

effect of mandatory IFRS adoption depends on the strength of legal enforcement

in the adopting country. Utilizing a path analysis methodology there are three
mechanisms through which IFRS adoption increases information content:
reducing reporting lag, increasing analyst following, and increasing foreign
investment.
DeFond.Mark ,Hu.Xuesong , Impact of mandatory IFRS adoption on
foreign mutual fund ownership, Journal of Accounting and Economics,
2011,Volume 51.3, PP 240-258
Review
Mark DeFond, Xuesong Hu outline(2011) that mandating a uniform set of
accounting standards improves financial statement comparability that in turn
attracts greater cross-border investment. and concludes that there is improved
comparability as a credible increase in uniformity, defined as a large increase in
the number of industry peers using the same accounting standards in countries
with credible implementation. Consistent with this assertion, we find that foreign
mutual fund ownership increases when mandatory IFRS adoption leads to
improved comparability. Following are the highlights of the analysis Foreign
mutual fund ownership increases in the EU after mandatory adoption of IFRS.
The increase in mutual fund ownership is larger when IFRS adoption
improves comparability
. The effects of improved comparability on foreign fund ownership are
primarily driven by foreign global funds, as opposed to foreign regional,
country, and other funds.
Hou.Qingchuan, Jin.Qinglu , Mandatory IFRS adoption and executive
compensation:Evidence from China, China Journal of Accounting
Research, March 2014 Volume 7.1 , PP 9-29
Review
Qingchuan Hou, Qinglu Jin(2014) outlines how the mandatory adoption of
International Financial Reporting Standards (IFRS) affects the contractual
benefits of using accounting information to determine executive compensation

16

in China. After controlling for firm and corporate governance characteristics, it

concluded that there was positive impact of mandatory IFRS adoption on the
accounting-based performance sensitivity of executive compensation.
Subsample analysis suggests that improvements in accounting-based
performance sensitivity after IFRS adoption differ across regions with various
levels of institutional quality and across firms that are affected to a different
extent by the adoption. Additional analysis supports the argument that the
positive effects of IFRS adoption on the use of accounting performance in
executive compensation are driven by the reduction in accounting conservatism
associated with IFRS adoption.

Mller.Victor-Octavian . The impact of IFRS adoption on the Quality of

Consolidated Financial Reporting, Procedia - Social and Behavioral
Sciences, 2014Vol 109, PP 976-982
Review
Victor-Octavian Mller outlines(2014) that in the majority of cases (at least on
the large European stock markets) listed companies own one or more
subsidiaries and therefore are obligated to a dual reporting, being required to
produce two sets of financial statements one at individual level, the other at
group level. Furthermore, as of 2005, companies listed on the European stock
markets had to adopt IFRS for the preparation of their group accounts, thus
needing also to apply different accounting regulations: IFRS for the group
accounts and European directives for individual accounts. The study investigates
through an empirical association study the impact of the mandatory adoption of
IFRS starting with 2005 on the absolute and relative quality (measured through
value relevance) of financial information supplied by the consolidated accounts
for companies listed on the largest European stock markets (London, Paris, and
Frankfurt stock exchanges). The results show an increase of consolidated
statements quality (value relevance) once IFRS were adopted, thus suggesting
also that the IFRS adoption in Europe led to better complying with the OECD
Corporate Governance Principle of high quality disclosure and transparency.
Moreover, we ascertained an increase in the quality surplus supplied by group

17

accounts compared to parent company individual accounts once the IFRS

adoption became mandatory for preparing consolidated financial statements

Alon.Anna , Dwyer.D.Peggy, Early adoption of IFRS as a Strategic

response to transnational and local influences, The International Journal
of Accounting,2014
Review
Anna Alon, Peggy D. Dwyer(2014) outlines that International Financial
Reporting Standards (IFRS) have been adopted by nations throughout the world.
Proponents and standard setters assert that IFRS will produce a number of
benefits including improved transparency, international comparability, market
efficiency, and cross-national investment flow. This study examine factors that
contributed to the early national-level adoption that occurred prior to broad
global acceptance of IFRS. Using a conceptual framework of institutional theory
and resource dependence,it proposes that the interplay of transnational pressures
and local factors influenced the level of adoption. It predicts differential
adoption as a strategic response at three levels of either require IFRS, permit
IFRS, or do not allow IFRS, using a sample of 71 countries. As predicted,
countries with greater resource dependency, as evidenced by weak governance
structures and weak economies, were the early adopters who were more likely to
require the use of IFRS. Further, resource dependence also trumps nationalistic
pressures against transnational conformity.Findings raise concerns that required
adoption may not always be accompanied by an appropriately supportive
infrastructure; thus, there are implications not only for adoption of IFRS, but
also for the diffusion of other transnational regulation that influences global
business environment.

Courtenay.Stephen , The Effect of IFRS adoption conditional upon the

level of pre-adoption divergence, The International Journal of Accounting,
June 2014, Volume 49.2, Pages 147-178

18

Review
Stephen Courtenay (2014) outlines that some of the countries that have
adopted IFRS had national accounting standards similar to IFRS prior to
adopting IFRS, while others had national accounting standards divergent from
IFRS. Prior studies on whether or not International Financial Reporting
Standards (IFRS) adoption improves earnings quality have found mixed results.
The study examine the effects of IFRS adoption by taking into account the level
of divergence prior to the adoption of IFRS. We find that countries experience a
greater drop in earnings management when they have a higher level of
divergence from IFRS prior to IFRS adoption. More specifically, high
divergence countries with higher levels of enforcement benefit the most
followed by high divergence countries with lower levels of enforcement. Lower
divergence countries with higher levels of enforcement do not significantly
benefit from IFRS adoption. Lower divergence countries with lower levels of
enforcement do not benefit from IFRS adoption at all. Results support the
contention that countries with lower quality local accounting standards prior to
IFRS adoption benefit more from IFRS adoption.

Kousenidis.Dimitrios ,Leventis .Stergios , The impact of IFRS on

accounting quality evidence from Greece,2013, Advances in Accounting
Review
Dimitrios .Kousenidis, Stergios. Leventis(2013) outlines thatThe present
paper examines the impact of IFRS adoption on the quality of accounting
information within the Greek accounting setting. Using a balanced sample of
firms listed in the Athens Stock Exchange (ASE) for a period of eight years
(20012008) we find convincing evidence that the implementation of IFRS
contributed to less earnings management, more timely loss recognition and
greater value relevance of accounting amounts, compared to the local accounting
standards. Also, our findings document that audit quality further complements
the beneficial impact of IFRS since those companies that are audited by the big-

19

5 audit firms exhibit higher levels of accounting quality. Our findings are robust
in regard to different model specifications and after controlling for firm-specific
effects like size, risk, profitability and growth opportunities.
Clarkson. Peter, Hanna.J.Douglas. "The impact of ifrs adoption on the
value relevance of book value and earnings, Journal of contemporary
Accounting and Economics, June 20th, Vol, 7.1, PP.1-17
Review
PeterClarkson, Douglas.J.Hanna(2011) investigate the impact of IFRS
adoption in Europe and Australia on the relevance of book value and earnings
for equity valuation. Using a sample of 3488 firms that initially adopted
International Financial Reporting Standards (IFRS) in 2005, they are able to
compare the figures originally reported for the 2004 fiscal years to the IFRS
figures that were provided in 2005 as the 2004 IFRS comparative figures. As
part of the inquiry, we introduce a cross-product term, equal to the product
of EPS and BVPS, into the traditional linear pricing models. The estimated
coefficient on the cross-product term is statistically significant and negative, as
theory suggests in the presence of important nonlinearities. Further, there is
increased non-linearity in the data subsequent to IFRS adoption, with the
increase being most pronounced for firms in Common Law countries. With nonlinear effects controlled for, there is no observed change in price relevance for
firms in either Code Law or Common Law countries, contradicting the results
from the linear pricing models. The results also suggest that the distribution of
measurement errors becomes more similar across Code Law and Common Law
countries after the adoption of IFRS, removing one difference between these
groups. Thus, IFRS enhances comparability, an inference that would not be
possible had we confined the analysis only to linear pricing models.

Doukakis.LeonidasC. ."Effect of mandatory IFRS adoption on real and

accrual based earning management activities", Journal of Accounting and
public policy, 5 September, 2014

20

LeonidasC. Doukakis (2014) study examines the effect of mandatory adoption

of International Financial Reporting Standards (IFRS) on both accrual-based and
real earnings management. While prior literature has mainly examined the
effects of IFRS adoption on accrual-based earnings management, no study to
date has focused on the impact of IFRS adoption on real earnings management.
Using a sample of 15,206 observations from 22 European countries between
2000 and 2010, this study employs a control sample of voluntary adopters and
applies a differences-in-differences design to control for confounding concurrent
events. The results suggest that mandatory IFRS adoption had no significant
impact on either real or accrual-based earnings management practices.
Additional analysis on a sub-sample of firms with relatively strong earnings
management incentives supports a dominant role for firm-level reporting
incentives over accounting standards in shaping financial reporting quality.

IFRS-1
On 19 June 2003, the International Accounting Standards Board issued
IFRS 1, First-Time Adoption of International Financial Reporting
Standards. IFRS 1 sets out the procedures that an entity must follow when
it adopts IFRS for the first time as the basis for preparing its general
purpose financial statements.
IFRSs are increasingly becoming a truly global accounting framework with
many countries committed to adopting them in the next few years. For
companies, the process of converting to IFRS and preparing their first IFRS
financial statements will be challenging.IFRS-1 deals the first time adoption of
international financial reporting standards. IFRS 1 First-time Adoption of
International Financial Reporting Standards sets out the procedures that an

21

entity must follow when it adopts IFRSs for the first time as the basis for
preparing its general purpose financial statements
The objective of this Standard is to ensure that first-time IFRS financial
statements contain high quality information that can be prepared at a cost not
exceeding the benefits. IFRS 1 also specifies a number of additional disclosures
for first-time adopters that must be addressed in addition to the normal IFRS
presentation and disclosure requirements.
If an entity is preparing it's financial reports under an accounting framework
other than international financial reporting standards i.e.(Accounting standards
of their own countries) and decides to change to IFRS then it has to comply with
requirements prescribed by IASB on conversion to IFRS. These requirements
are stated in IFRS-1 (The first time adoption of international financial reporting
standards).

Main Features Of IFRS-1

I.
II.

The IFRS-1 applies when an entity adopts IFRS for the first time by an
explicit and unreserved statement of compliance with IFRSs.
In general,the IFRS requires an entity to comply with each IFRS effective
at the end of its first IFRS reporting period.
a. In particular,IFRS requires an entity to do the following :

Derecognise all assets and liabilities whose recognition is NOT required

by IFRSs;
Recognise items as assets or liabilities if IFRSs permit such recognition;
Reclassify items that it recognised under previous GAAP as one type of
asset, liability or component of equity, but are a different type of asset,
liability or component of equity under IFRSs; and
Apply IFRSs in measuring all recognised assets and liabilities.

22

1. Derecognition of some old assets and liabilities.

The entity should eliminate previous-GAAP assets and liabilities from the
opening balance sheet if they do not qualify for recognition under IFRSs.
For example:
a. 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 balance sheet.
b. 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 balance sheet.
c. If the entity's previous GAAP had allowed recognition of reimbursements and
contingent assets that are not virtually certain, these are eliminated in the
opening IFRS balance sheet.
2. Recognition of some new assets and liabilities. 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. For example:

23

a. IAS 39 requires recognition of all derivative financial assets and liabilities,

including embedded derivatives. These were not recognised under many local
GAAPs.
b. IAS 19 requires an employer to recognise its liabilities under defined benefit
plans. These are not just pension liabilities but also obligations for medical and
life insurance, vacations, termination benefits, and deferred compensation. In the
case of "over-funded" plans, this would be a defined benefit asset.
c. 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.
d. Deferred tax assets and liabilities would be recognised in conformity with IAS
12.
3. Reclassification. The entity should reclassify previous-GAAP opening
balance sheet items into the appropriate IFRS classification. Examples:
a. IAS 10 does not permit classifying dividends declared or proposed after the
balance sheet date as a liability at the balance sheet date. In the opening IFRS
balance sheet these would be reclassified as a component of retained earnings.
b. 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.
c. Items classified as identifiable intangible assets in a business combination
accounted for under the previous GAAP may be required to be classified as
goodwill under IAS 22 because they do not meet the definition of an intangible
asset under IAS 38. The converse may also be true in some cases. These items
must be reclassified.
d. IAS 32 has principles for classifying items as financial liabilities or equity.
Thus mandatorily redeemable preferred shares and put shares that may have

24

been classified as equity under previous GAAP would be reclassified as

liabilities in the opening IFRS balance sheet.
e. The reclassification principle would apply for the purpose of defining
reportable segments under IAS 14.
f. The scope of consolidation might change depending on the consistency of the
previous-GAAP requirements to those in IAS 27. In some cases, IFRS will
require consolidated financial statements where they were not required before.
g. 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.
4. Measurement. The general measurement principle there are several
significant exceptions noted below is to apply IFRS in measuring all
recognised assets and liabilities. Therefore, if an entity adopts IFRS for the first
time in its annual financial statements for the year ended 31 December 2005, in
general it would use the measurement principles in IFRSs in force at 31
December 2005.

5. Adjustments required to move from previous GAAP to IFRS at the time

of first-time adoption. These should be recognised directly in retained earnings
or other appropriate category of equity at the date of the transition to IFRSs.
III.

The IFRS grants limited exemptions from these requirement on specified

areas where the cost of complying with them exceeds the benefits to users
of financial statements.

IV.

The IFRS required disclosures that explain how transition from previous
GAAP to IFRS affected the entities Reported financial position,financial
performance & cash flows.

25

V.

An entity is required to apply IFRS if its Ist financial statements are of a

period beginning on or after 1July2009. Earlier application is encouraged.

Example:- XYZ ltd. Decides to adopt IFRS from the Financial year 201112i.e April 2011-12.
Solution:- In this regard financial statements should be applied
retrospectively in the opening IFRS statement of financial position, the
comparative period and the first IFRS reporting period. Practically,it must
apply all IFRSs effective at the date retrospectively to 2011 -12 and 201011 reporting periods and to the opening statement of financial position as
on 1April 2010(assuming one year of comparative information).

26

In the above example

TRANSITION DATE- It is the beginning of the earliest period for which
comparative information is required to be presented in the financial
statements i.e 1 April 2010.
REPORTING DATE- It is the date upto which the set of IFRS financial
statements is being prepared i.e 31 March 2012 .
First IFRS Reporting period The latest reporting period covered by an
entitys first IFRS financial statements i.e commencing on or after 1 April
2011.
Comparitive Year- Immediately preceeding year of the first year of
reporting year i.e 2010-11.

IFRS-1 adapts this general principle of retrospective application by adding

limited number of very important exceptions and exemptions. The
exceptions are mandatory whereas exemptions are optional a first time
adopter may choose whether and which exemptions to apply.

Exceptions To the basic measurement principle in IFRS 1

27

1. Optional exceptions.
There are some important exceptions to the general restatement and
measurement principles set out above. The following exceptions are
individually optional, not mandatory:
Business combinations that occurred before opening balance sheet date
a. An entity may keep the original previous-GAAP accounting, that is, not
restate:
previous mergers or goodwill written-off from reserves;
the carrying amounts of assets and liabilities recognised at the date of
acquisition or merger;
how goodwill was initially determined (do not adjust the purchase price
allocation on acquisition).
b. However, should it wish to do so, an entity can elect to restate all business
combinations starting from a date it selects prior to the opening balance sheet
date.
c. In all cases, the entity must make an initial IAS 36 impairment test of any
remaining goodwill in the opening IFRS balance sheet, after reclassifying, as
appropriate, previous GAAP intangibles to goodwill.
d. IFRS 1 includes an appendix explaining how a first-time adopter should
account for business combinations that occurred prior to transition to IFRS.
Property, plant, and equipment, intangible assets, and investment property
carried under the cost model
a. These assets may be measured at their fair value at the opening IFRS balance
sheet date (this option applies to intangible assets only if an active market
exists). Fair value becomes the "deemed cost" going forward under the IFRS
cost model. (Deemed cost is an amount used as a surrogate for cost or
depreciated cost at a given date.)

28

b. If, before the date of its first IFRS balance sheet, the entity had revalued any
of these assets under its previous GAAP either to fair value or to a price-indexadjusted cost, that previous-GAAP revalued amount at the date of the
revaluation can become the deemed cost of the asset under IFRS.
c. If, before the date of its first IFRS balance sheet, the entity had made a onetime revaluation of assets or liabilities to fair value because of a privatisation or
initial public offering, and the revalued amount became deemed cost under the
previous GAAP, that amount (adjusted for any subsequent depreciation,
amortisation, and impairment) would continue to be deemed cost after the initial
adoption of IFRS.
IAS 19 - Employee benefits: actuarial gains and losses
An entity may elect to recognise all cumulative actuarial gains and losses for all
defined benefit plans at the opening IFRS balance sheet date (that is, reset any
corridor recognised under previous GAAP to zero), even if it elects to use the
IAS 19 corridor approach for actuarial gains and losses that arise after first-time
adoption of IFRS. If an entity does not elect to apply this exemption, it must
restate all defined benefit plans under IAS 19 since the inception of those plans
(which may differ from the effective date of IAS 19).
IAS 21 - Accumulated translation reserves
An entity may elect to recognise all translation adjustments arising on the
translation of the financial statements of foreign entities in accumulated profits
or losses at the opening IFRS balance sheet date (that is, reset the translation
reserve included in equity under previous GAAP to zero). If the entity elects this
exemption, the gain or loss on subsequent disposal of the foreign entity will be
adjusted only by those accumulated translation adjustments arising after the
opening IFRS balance sheet date. If the entity does not elect to apply this
exemption, it must restate the translation reserve for all foreign entities since
they were acquired or created.
2.

Mandatory exceptions.

29

There are also three important exceptions to the general restatement and
measurement principles set out above that are mandatory, not optional. These
are:
IAS 39 - Derecognition of financial instruments
A first-time adopter is not permitted to recognise financial assets or financial
liabilities that had been derecognised under its previous GAAP in a financial
year beginning before 1 January 2001 (the effective date of IAS 39). This is
consistent with the transition provision in IAS 39.172(a). However, if an SPE
was used to effect the derecognition of financial instruments and the SPE is
controlled at the opening IFRS balance sheet date, the SPE must be
consolidated.
IAS 39 - Hedge accounting
The conditions in IAS 39.122-152 for a hedging relationship that qualifies for
hedge accounting are applied as of the opening IFRS balance sheet date. The
hedge accounting practices, if any, that were used in periods prior to the opening
IFRS balance sheet may not be retrospectively changed. This is consistent with
the transition provision in IAS 39.172(b). Some adjustments may be needed to
take account of the existing hedging relationships under previous GAAP at the
opening balance sheet date.

30

SCOPE OF IFRS 1
1.IFRS 1 is applicable to the entity's first set of IFRS financial statements and
each interim financial report for part of the period covered by its first IFRS
financial statements.
2. An entity's first IFRS statements is defined as the first annual financial
statements in which the entity adopts IFRSs, by an explicit and unreserved
statement of compliance with IFRS.
3. Following are some of the examples of situations where an entity's
financial statements under IFRS would be considered as first IFRS
financial statements and therefore would be subject to IFRS 1
requirements:
(a) An entity presented its most recent previous financial statements:
- in accordance with national requirements which are not
consistent with IFRSs in all respects;
- in conformity with IFRSs in all respect, except that the financial
statements did not contain an explicit and unreserved statement
of compliance with IFRS;
- containing explicit compliance with some but not all IFRSs;
- under national requirements inconsistent with IFRS, using some
IFRSs to account for items for which national requirements did not exists;
- in accordance with national requirements, with a reconciliation of
some amounts to the amounts determined under IFRSs;
(b) an entity prepared financial statements in accordance with IFRSs for internal
use only, without making them available to the entity's owners or any other
external users;
(c) an entity prepared reporting package in accordance with IFRSs for
consolidation purposes without preparing a complete set of financial statements
as defined in IAS 1;
(d) did not present financial statements for previous period.
4. If the most recent financial statements of an entity contained an explicit and
unreserved statement of compliance with IFRS then it will not be considered as
a first-time adopter. For example IFRS 1 does not apply when an entity:

31

(a) stops presenting financial statements in accordance with national

requirements, having previously presented them as well as another
set of financial statements that contained an explicit and unreserved
statement of compliance with IFRSs
(b) presented financial statements in the previous year in accordance with
national requirements and those financial statements contained an explicit and
unreserved statement of compliance with IFRSs;
or
(c) presented financial statements in the previous year that contained an explicit
and unreserved statement of compliance with IFRSs, even if the auditors
qualified their audit report on those financial statements.
5. IFRS 1 does not apply to changes in accounting policy made by an entitythat
already applies IFRSs.

32

RECOGNITION AND MEASUREMENT

Opening IFRS statement of financial position
An entity shall prepare and present an opening IFRS statement of financial
position at the date of transition to IFRSs. This is the starting point for its
accounting in accordance with IFRSs.
Accounting policies
An entity shall use the same accounting policies in its opening IFRS statement
of financial position and throughout all periods presented in its first IFRS
financial statements.
An entity shall not apply different versions of IFRSs that were effective at
earlier dates. An entity may apply a new IFRS that is not yet mandatory if that
IFRS permits early application.
Exceptions to the retrospective application of other IFRSs
PARAGRAPH 13 :
This IFRS prohibits retrospective application of some aspects of other IFRSs.
These exceptions are set out in paragraphs 1417 .
PARAGRAPH 14 :
An entitys estimates in accordance with IFRSs at the date of transition to IFRSs
shall be consistent with estimates made for the same date in accordance with

33

previous GAAP (after adjustments to reflect any difference in accounting

policies), unless there is objective evidence that those estimates were in error.
PARAGRAPH 15 :
An entity may receive information after the date of transition to IFRSs about
estimates that it had made under previous GAAP. In accordance with paragraph
14, an entity shall treat the receipt of that information in the same way as nonadjusting events after the reporting period in accordance with IAS 10 Events
after the Reporting Period.
For example, assume that an entitys date of transition to IFRSs is 1 January
20X4 and new information on 15 July 20X4 requires the revision of an estimate
made in accordance with previous GAAP at 31 December 20X3. The entity shall
not reflect that new information in its opening IFRS statement . Instead, the
entity shall reflect that new information in profit or loss (or, if appropriate, other
comprehensive income) for the year ended 31 December 20X4.
PARAGRAPH 16 :
An entity may need to make estimates in accordance with IFRSs at the date of
transition to IFRSs that were not required at that date under previous GAAP. To
achieve consistency with IAS 10, those estimates in accordance with IFRSs shall
reflect conditions that existed at the date of transition to IFRSs. In particular,
estimates at the date of transition to IFRSs of market prices, interest rates or
foreign exchange rates shall reflect market conditions at that date.
PARAGRAPH 17 :
Paragraphs 1416 apply to the opening IFRS statement of financial position.
They also apply to a comparative period presented in an entitys first IFRS
financial statements, in which case the references to the date of transition to
IFRSs are replaced by references to the end of that comparative period.
PARAGRAPH 18 :
An entity may elect to use one or more of the exemptions contained in. An
entity shall not apply these exemptions by analogy to other items.

34

PRESENTATION AND DISCLOSURE

Comparative information
With respect to comparative information required, an entitys first IFRS financial
statements must include at least
three statements of financial position
two statements of comprehensive income
two separate income statements (if presented)
two statements of cash flows
two statements of changes in equity
related notes, including comparative information
These requirements were mandated with the 2007 changes to IAS 1, and apply
for fiscal periods beginning on or after January 1, 2009. The previous
requirement was for a minimum of one year of comparative information.
Non-IFRS comparative information and historical summaries
IFRS 1 does not provide exemptions from the presentation and disclosure
requirements in other IFRSs, except that if an entity chooses to include
historical summaries of selected data for periods before the first period for
which they present full comparative information under IFRS, or
comparative information under previous GAAP that is in addition to the
required comparatives under IFRS,International Financial Reporting Standard 1
(IFRS 1), First-Time Adoption of IFRS 7
these summaries and additional comparatives do not need to comply with IFRS.
For example, 10-year trend graphs or tables wouldnt need to be converted to
IFRS. However, where financial statements contain these types of historical
summaries or additional comparative information under previous GAAP, the
entity is required to label the previous GAAP information prominently as not
being prepared under IFRS, and

35

 disclose the nature of the main adjustments that would make it comply with
IFRS. The entity is not required to quantify those adjustments .

Explanation of transition to IFRSs

Entities are required to explain how the transition from previous GAAP to IFRS
affected its reported financial position, financial performance, and cash flows .
These explanations help users understand
the impact and implications of the organizations transition to IFRS
how users need to change their analytical models to make the best use of the
organizations information that is now being presented using IFRS
The required explanations are to be done using a series of reconciliations, with
sufficient detail to enable users to understand material adjustments to the balance
sheet and statement of comprehensive income.
The required reconciliations include the following :
a) Reconciliations of its equity reported under previous GAAP to its equity
under IFRS for both of the following dates:
the date of transition to IFRS
the end of the latest period presented in the entitys most recent annual
financial statements under previous GAAP
b) A reconciliation to its total comprehensive income under IFRS for the latest
period in the entitys most recent annual financial statements, starting with total
comprehensive income under previous GAAP for the same period or (if total
comprehensive income wasnt reported) profit or loss under previous GAAP.
c) If the entity recognized or reversed any impairment losses for the first time in
preparing its opening IFRS balance sheet, it is required to include the disclosures
that IAS 36 Impairment of Assets would have required if the entity had
recognized those impairment losses or reversals in the period beginning with the
date of transition to IFRS. This disclosure highlights impairment losses recorded
on transition to IFRS. Without such disclosures, these losses might receive less
attention than impairment losses recorded in earlier or later periods.

36

Additional disclosures
A few final disclosure requirements are as follows:
If an entity presented a statement of cash flows under its previous GAAP, it
must also explain the material adjustments to the statement of cash flows.
If an entity becomes aware of errors made under previous GAAP, the
reconciliations must distinguish the correction of those errors from changes in
accounting policies
If an entity did not present financial statements for previous periods, its first
IFRS financial statements must disclose that fact
International Financial Reporting Standard 1 (IFRS 1), First-Time Adoption of
IFRS
A September 2009 survey of accounting standards used by Global Fortune 500
companies revealed that just less than half of them use IFRS or their home
countries have committed to adopt IFRSs within the next few years. Perhaps
most significant, the percentage of worldwide market capitalization on stock
exchanges has shown a dramatic shift: from just under 50% in 2002, US
exchanges now account for approximately 35% of market capitalization. The
worldwide adoption of IFRSs can only help in this regard.
Conversion to IFRSs also provides an opportunity to assess and realign systems
and improve internal controls. The increased information needs can result in
greater links between finance
and operations, thereby increasing knowledge sharing. We need to view this
change as an opportunity to improve and realign internal systems and improve
teamwork, rather than just as a compliance exercise.
PARAGRAPH 23
An entity shall explain how the transition from previous GAAP to IFRSs
affected its reported financial position, financial performance and cash flows.

37

PARAGRAPH 24
To comply with paragraph 23, an entitys first IFRS financial statements shall
include:
(a) reconciliations of its equity reported in accordance with previous GAAP to
its equity in
accordance with IFRSs for both of the following dates:
(i) the date of transition to IFRSs; and
(ii) the end of the latest period presented in the entitys most recent annual
financial statements in accordance with previous GAAP.
(b) a reconciliation to its total comprehensive income in accordance with IFRSs
for the latest period in the entitys most recent annual financial statements. The
starting point for that reconciliation shall be total comprehensive income in
accordance with previous GAAP for the same period or, if an entity did not
report such a total, profit or loss under previous GAAP.
(c) if the entity recognised or reversed any impairment losses for the first-time in
preparing its opening IFRS statement of financial position, the disclosures that
IAS 36 Impairment of Assets would have required if the entity had recognised
those impairment losses or reversals in the period beginning with the date of
transition to IFRSs.
PARAGRAPH 25
The reconciliations required by paragraph 24(a) and (b) shall give sufficient
detail to enable users to understand the material adjustments to the statement of
financial position and statement of comprehensive income. If an entity presented
a statement of cash flows under its previous GAAP, it shall also explain the
material adjustments to the statement of cash flows.
PARAGRAPH 26
If an entity becomes aware of errors made under previous GAAP, the
reconciliations required by paragraph 24(a) and (b) shall distinguish the
correction of those errors from changes in accounting policies
.

38

PARAGRAPH 27
IAS 8 does not deal with changes in accounting policies that occur when an
entity first adopts IFRSs. Therefore, IAS 8s requirements for disclosures about
changes in accounting policies do not apply in an entitys first IFRS financial
statements.
PARAGRAPH 28
If an entity did not present financial statements for previous periods, its first
IFRS financial statements shall disclose that fact.

Designation of Financial assets or financial liablities

PARAGRAPH 29
An entity is permitted to designate a previously recognized financial asset or
financial liability as a financial asset or financial liability at fair value through
profit or loss. The entity shall disclose the fair value of financial assets or
financial liabilities designated into each category at the date of designation and
their classification and carrying amount in the previous financial statements.

Use of fair value as Deemed Cost

PARAGRAPH 30
If an entity uses fair value in its opening IFRS statement of financial position as
deemed cost for an item of property, plant and equipment, an investment
property or an intangible asset the entitys first IFRS financial statements shall
disclose, for each line item in the opening IFRS statement of financial position:
(a) the aggregate of those fair values; and
(b) the aggregate adjustment to the carrying amounts reported under previous
GAAP.

39

Use of Deemed cost for investment in Subsidiaries, Joint

Ventures and Associates
PARAGRAPH 31
Similarly, if an entity uses a deemed cost in its opening IFRS statement of
financial position for an investment in a subsidiary, jointly controlled entity or
associate in its separate financial statements, the entitys first IFRS separate
financial statements shall disclose:
(a) the aggregate deemed cost of those investments for which deemed cost is
their previous GAAP carrying amount;
(b) the aggregate deemed cost of those investments for which deemed cost is fair
value; and
(c) the aggregate adjustment to the carrying amounts reported under previous
GAAP.
Use of deemed cost for oil and gas assets
Paragraph31A
If an entity uses the exemption in paragraph D8A(b) for oil and gas assets, it
shall disclose that fact and the basis on which carrying amounts determined
under previous GAAP were allocated.

Use of deemed cost for operations subject to rate

regulation
Paragraph31B
If an entity uses the exemption in paragraph D8B for operations subject to rate
regulation, it shall disclose that fact and the basis on which carrying amounts
were determined under previous GAAP.

40

Interim financial reports

To comply with paragraph 23, if an entity presents an interim financial report in
accordance with IAS 34 for part of the period covered by its first IFRS financial
statements, the entity shall satisfy the following requirements in addition to the
requirements of IAS 34:
(a) Each such interim financial report shall, if the entity presented an interim
financial report for the comparable interim period of the immediately preceding
financial year, include:
(i) a reconciliation of its equity in accordance with previous GAAP at the end of
that comparable interim period to its equity under IFRSs at that date; and
(ii) a reconciliation to its total comprehensive income in accordance with IFRSs
for that comparable interim period (current and year to date). The starting point
for that reconciliation shall be total comprehensive income in accordance with
previous GAAP for that period or, if an entity did not report such a total, profit
or loss in accordancewith previous GAAP.
(b) In addition to the reconciliations required by (a), an entitys first interim
financial report in accordance with IAS 34 for part of the period covered by its
first IFRS financial statements shall include the reconciliations described in
paragraph 24(a) and (b) (supplemented by the details required by paragraphs 25
and 26) or a cross reference to another published document that includes these
reconciliations.
(c) If an entity changes its accounting policies or its use of the exemptions
contained in this IFRS, it shall explain the changes in each such interim financial
report in accordance with paragraph 23 and update the reconciliations required
by (a) and (b).
33 IAS 34 requires minimum disclosures, which are based on the assumption
that users of the interim financial report also have access to the most recent
annual financial statements. However, IAS 34 also requires an entity to disclose
any events or transactions that are material to an understanding of the current
interim period. Therefore, if a first-time adopter did not, in its most recent
annual financial statements in accordance with previous GAAP, disclose
information material to an understanding of the current interim period, its
interim financial report shall disclose that information or include a crossreference to another published document that includes it.

41

Effective date
Paragraph 34
An entity shall apply this IFRS if its first IFRS financial statements are for a
period beginning on or after 1July 2009. Earlier application is permitted.
Paragraph35
An entity shall apply the amendments in paragraphs D1(n) and D23 for annual
periods beginning on or after1 July 2009. If an entity applies IAS 23 Borrowing
Costs (as revised in 2007) for an earlier period, thoseamendments shall be
applied for that earlier period.
36 IFRS 3 Business Combinations (as revised in 2008) amended paragraphs 19,
C1 and C4(f) and (g). If an
entity applies IFRS 3 (revised 2008) for an earlier period, the amendments shall
also be applied for that earlier period.

Defined Terms
Date of transition to IFRSs
The beginning of the earliest period for which an entity presents full
comparative information under IFRSs in its first IFRS financial statements.
Deemed cost
An amount used as a surrogate for cost or depreciated cost at a given date.
Subsequent depreciation or amortisation assumes that the entity had initially
recognised the asset or liability at the given date and that its cost was equal to
the deemed cost.
Fair value
The amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arms length transaction.
First IFRS financial statements

42

The first annual financial statements in which an entity adopts International

Financial Reporting Standards (IFRSs), by an explicit and unreserved
statement of compliance with IFRSs.
First IFRS reporting period
The latest reporting period covered by an entitys first IFRS financial
statements.
first-time adopter
An entity that presents its first IFRS financial statements.
International Financial Reporting Standards (IFRSs)
Standards and Interpretations adopted by the International Accounting Standards
Board (IASB).
Previous GAAP
The basis of accounting that a first-time adopter used immediately before
adopting IFRSs.

43

Discussion and Analysis

Impact of IFRS
The IFRS adoption and convergence efforts impact much more than just the
accounting function. Additional functions that are impacted include the
following:
Information systems
Tax
Treasury
Investor relations
Sales
Human resources

Present scenario
India is one of the over 100 countries that have or are moving towards
IFRS (International Financial Reporting Standards) convergence with a
view to bringing about a uniformity in reporting systems globally,
enabling businesses, finances and funds to access more opportunities.
Indian companies are listed on overseas stock exchanges and have to
recast their accounts to be compliant with GAAP requirements of those
countries.
Foreign companies having subsidiaries in India are having to recast their
accounts to meet Indian & overseas reporting requirements which are
different.
Foreign Direct Investors (FDI), overseas financial institutional investors
(FII) are more comfortable with compatible accounting standards and
companies accessing overseas funds feel the need for recast of accounts in
keeping with globally accepted standards.

44

 ICAI has decided to implement IFRS in India. The Ministry of Corporate

Affairs has also announced its commitment to convergence to IFRS by
2011.

Is IFRS different than US GAAP?

There are differences between IFRS and US GAAP but they are more
alike than different for most commonly encountered transactions.
IFRS is largely grounded in the same principles as US GAAP.
The US and international standard setters are currently working on
convergence projects to better align the standards and reduce these
differences.

IFRS is applicable to WHOM?

Compliance with IFRS in India is restricted to Public Entities which
include those companies & entities listed on any stock exchange or have
raised money from the public, or have a substantial public interest, or
public sector companies.
IFRS in India would cover the following public interest entities in the first
phase.
Listed companies Banks, insurance companies, mutual funds, and
financial institutions
Turnover in preceding year > INR 1 billion
Borrowing in preceding year > INR 250 million
Holding or subsidiary of the above
IFRS is not applicable to SMEs as of now.

When IFRS?
IFRS for public entities in India is applicable from 01/04/2011.
The opening IFRS balance sheet at the date of transition to IFRS
01/04/2010, which is the start date for full comparative information
presentation in IFRS

45

Analysis
Can an entity be a first-time adopter if, in the preceding year, it has
prepared IFRS financial
statements for internal management use?
Yes, as long as those IFRS financial statements were not given to owners or
external parties such as investors or creditors. If a set of IFRS statements was,
for any reason, given to an external party in the preceding year, then the
entity will already be considered to be on IFRS and IFRS 1 does not apply
.
What if, last year, an entity said it complied with selected, but not all, IFRS,
or it included in its previous -GAAP financial statements a reconciliation of
selected figures to IFRS figures?
It can still qualify as a first-time adopter.
When does IFRS 1 take effect?
IFRS 1 applies if an entitys first IFRS financial statements are for a period
beginning on or after 1 January 2004.Earlier application is encouraged.
If an entity adopts IFRS for the first time in its annual financial statements
for the year ended 31December 2005, what is it required to do?
1. Accounting policies. The entity should select its accounting policies based on
IFRS in force at 31 December 2005. (The exposure draft that preceded IFRS 1
had proposed that an entity could use the IFRS that were in forceduring prior
periods, as if the entity had always used IFRS. That option is not included in the
final standard.)
2. IFRS reporting periods. The entity should prepare at least 2005 and 2004
financial statements and restateretrospectively the opening balance sheet
(beginning of the first period for which full comparative financial
statements are presented) by applying the IFRS in force at 31 December 2005.
a. Since IAS 1 requires that at least one year of comparative prior period
financial information be presented, the opening balance sheet will be 1 January
2004 if not earlier.

46

b. If a 31 December 2005 adopter reports selected financial data (but not full
financial statements) on an IFRS basis for periods prior to 2004, in addition to
full financial statements for 2004 and 2005, that does not
change the fact that its opening IFRS balance sheet is as of 1 January 2004.
If an entity is going to adopt IFRS for the first time in its annual financial
statements for the year ended31 December 2005, is any disclosure required
in its financial statements prior to the 31 December 2005statements?
Yes, but only if the entity presents an interim financial report that complies with
IAS 34. Explanatory information and
a reconciliation are required in the interim report that immediately precedes the
first set of IFRS annual financial
statements. The information includes changes in accounting policies compared
to those under previous local GAAP.
A parent or investor may become a first-time adopter earlier than or later
than its subsidiary,
associate, or joint venture investee. In these cases, how is IFRS 1 applied?
1. If the subsidiary has adopted IFRS in its entity-only financial statements
before the group to which it belongs adopts IFRS for the consolidated financial
statements, then the subsidiarys first-time adoption date is still the date at which
it adopted IFRS for the first-time, not that of the group. However, the group
must use the IFRS measurements of the subsidiarys assets and liabilities for its
first IFRS financial statements except for adjustments relating to the business
combinations exemption and to conform group accounting policies.
3. If the group adopts IFRS before the subsidiary adopts IFRS in its entity-only
financial statements, then the subsidiary has an option either (a) to elect that
the group date of IFRS adoption is its transition date or (b) to first time adopt
in its entity-only financial statements.
3. If the group adopts IFRS before the parent adopts IFRS in its entity-only
financial statements, then the parents first-time adoption date is the date at
which the group adopted IFRS for the first time.
4. If the group adopts IFRS before its associate or joint venture adopts IFRS in
its entity-only financial statements,then the associate or joint venture should
have the option to elect that either the group date of IFRS adoption is its
transition date or to first-time adopt in its entity-only financial statements

47

Summary
The Current Scenario Of IFRS in different countries is as follows:
Over 12,000 companies in over 100 countries have already adopted IFRS.
In the European Union, member states whose securities are listed on EU
regulated stock exchanges prepare Consolidated Financial Statements as
per IFRS.
In Israel, Australia and New Zealand, IFRS has been adopted as national
accounting standards.
China has formulated local GAAP which are IFRS based, although some
differences still exist.
Other countries like Canada, India and South Korea are attempting to
complete the transition to IFRS by 2011 while Mexico and Japan are
working towards convergence by 2012, which would eliminate major
differences between their current standards and IFRS.
IFRS should be adopted in INDIA due to following reasons:
One language
Comparability enhanced
Understanding enhanced
One set of books
Access to Global capital markets
Low cost of capital
Attract foreign investment
Elimination of multiple reports
But there are certain Issues in transitioning :
To get a sense of the types of issues likely to arise during an organizations
transition to IFRS, it is useful to look beyond our own borders. Here are some
issues experienced by first-time IFRS adopters:

48

 During the transition to IFRS, companies face intense pressure on resources,

particularly if there is a period where two reporting systems are required, and the
increased disclosure requirements and information needs often overwhelm the
existing accounting information system. Moreover, the extent of the impact on
systems was often underestimated.
Increased disclosures needed to meet requirements may be just as
cumbersome (or more so) than the necessary changes to the statements
themselves and the underlying transaction recording.
To conclude our look at IFRS 1, here are some actions that can be prioritized, in
order to take advantage of opportunities:
International Financial Reporting Standard 1 (IFRS 1), First-Time Adoption of
IFRS 9
assess training needs and determine plans
analyze IFRSs and their impact on reporting requirements
evaluate and budget for the costs and benefits of transition
plan the change-management strategy
analyze the required changes to accounting information systems
look for opportunities to incorporate IFRS into operations and existing
systems, and
centralize accounting systems to streamline
review key performance measures and assess required changes
redevelop a communication strategy to address expanded information
begin educating investors and other stakeholders on how IFRS will impact
your financial reporting
But there are also significant benefits that result from IFRS conversion,
including the potential for:
streamlined reporting and the creation of cost efficiencies for global companies
improved communication between international subsidiaries
increased staff mobility across international borders
improved acquisition opportunities
improved access to capital markets

49

Conclusion
Looking at the present scenario of the world economy and the position of India
convergence with IFRS can be strongly recommended. But at the same time it
can also be said that this transition to IFRS will not be a swift and painless
process.. Implementing IFRS would rather require change in formats of
accounts, change in different accounting policies and more extensive disclosure
requirements.
Therefore all parties concerned with financial reporting also need to share the
responsibility of international harmonization and convergence. Keeping in mind
the fact that IFRS is more a principle based approach with limited
implementation and application guidance and moves away from prescribing
specific accounting treatment all accountants whether practicing or nonpracticing have to participate and contribute effectively to the convergence
process. This would lead to subsequent revisions from time to time arising from
its global implementation and would help in formulation of future international
accounting standards.
A continuous research is in fact needed to harmonize and converge with the
international standards and this in fact can be achieved only through mutual
international understanding both of corporate objectives and rankings attached to
it.

50

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Websites
www.iasplus.com
www.ifrs.org
www.ey.com
www.pwc.com
www.webcrawler.com
www.icai.org
www.icwai.org
http://www.questia.com/favicon.png

Abbreviations
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EU-European Union
FDI-Foreign Direct Investment
GAAP- globally acceptable accounting principles.
IAS- International Accounting Standards
IASB- International Accounting Standard Board
IFRIC- Interpretations originated from the International
Financial Reporting Interpretations Committee
IFRS- international financial reporting standards
IFRS-1- first time adoption of international financial
reporting standards
SIC- Standing Interpretations Committee

55