Steven Brice
Steven Brice

Strategic Decisions in the IFRS Conversion Process

Why CPA firms should look closely at the first-time adoption Standard, IFRS 1, before making any decisions when applying IFRS.

February 22, 2010
by Steven Brice

Unlike many other accounting bases, International Financial Reporting Standards (IFRS) has an entire accounting standard devoted to first-time adoption. This standard is absolutely necessary because IFRS as the ‘new kid on the block’ didn’t belong to any nation. Thus the countries that now use it were required to adopt it and IFRS 1 First-time Adoption of International Financial Reporting Standards provides a suitable means for that adoption process.

The general principle underlying IFRS adoption is that a first-time adopter should apply the version of each IFRS which is effective at the end of its first IFRS reporting period fully retrospectively. Therefore, the first IFRS financial statements are presented as if the entity had always applied IFRS. Given this would appear to be a particularly onerous task, IFRS 1 was written to provide some guidance and certain exemptions to this general principle for first-time adopters.


This Standard governs the manner in which a company converts its financial statements to IFRS. It outlines the required disclosures setting out the effects of transition on the financial statements; principally through the requirement for reconciliation tables for equity, income and cash flows. But additionally, it supports companies through the transition phase by making it easier for them to adopt IFRS. IFRS 1 grants limited exemptions from full retrospective application in specified areas where the cost of complying with them would likely exceed benefits. IFRS 1 also prohibits retrospective application of IFRS in some areas, particularly where retrospective application would require judgments by management about past conditions after the outcome of a particular transaction is already known.

Exceptions Under IFRS 1

IFRS 1 contains a list of exceptions making transition easier upon first-time adoption. This list is split into two: those with mandatory exceptions and those with optional exceptions. The International Accounting Standards Board (IASB) did not think retrospective application of IFRS could be performed without sufficient reliability. IFRS 1 contained mandatory exceptions from retrospective application, whereas for other accounting standards. However, the IASB thought that the costs of applying IFRS retrospectively may exceed the benefits in certain circumstances, and therefore created the second list of optional exemptions from retrospective application.

Mandatory exceptions to the retrospective application of other IFRS:

  • Accounting estimates
  • De-recognition of financial assets and financial liabilities
  • Hedge accounting
  • Non-controlling interests

Optional exemptions:

  • Business combinations
  • Share-based payment transactions
  • Insurance contracts
  • Fair value or revaluation as deemed cost
  • Leases
  • Employee benefits
  • Cumulative translation differences
  • Investments in subsidiaries, jointly controlled entities and associates
  • Assets and liabilities of subsidiaries, associates and joint ventures
  • Compound financial instruments
  • Designation of previously recognised financial instruments
  • Fair value measurement of financial assets or financial liabilities at initial recognition
  • Decommissioning liabilities included in the cost of property, plant and equipment
  • Financial assets or intangible assets accounted for in accordance with IFRIC 12 Service Concession Arrangements
  • Borrowing costs
  • Transfers of assets from customers

While some of the transition exemptions will not be necessary for U.S. Generally Accepted Accounting Principles (GAAP) filers, because of the similarities between the two accounting bases, there will still be a considerable amount of decision making that would be required if a U.S. company were making the transition to IFRS.

Making the right election on matters such as using the fair value for property, plant and equipment as its deemed historical cost; and electing to eliminate accumulated foreign currency gains and losses arising from the translation of a foreign subsidiary can have a significant impact on profitability in the current and future periods, and further reaching consequences.

Example: Under GAAP property, plant and equipment is carried at cost less depreciation, with no revaluation alternative allowed. When moving to IFRS, companies will at the date of transition be able to set the current fair value as the deemed cost of an asset or to fully retrospectively apply the IAS 16 cost model (which has a number of key differences to GAAP). If the fair value as deemed cost option is taken, there is an accounting policy choice to use the revaluation model or the cost model as the subsequent measurement basis of the asset. Any new deemed cost would be considered to be the new cost basis that would be used for impairment testing and subsequent calculation of depreciation expense. The disadvantages of setting fair value as deemed cost of an asset would include a potential higher depreciation expense in the income statement over the expected useful life of the asset and also the difficulty or expense in establishing the fair value at the date of transition. However, the advantages may include the following:

  1. Fully retrospective application of IAS 16 may be difficult especially with rules surrounding component accounting;
  1. An increase in asset value may generate significant additional borrowing capacity for a company, and therefore improve cash management; or
  1. If covenant compliance is narrow, increasing the deemed cost of an asset may help to prevent any potential breaches.

CPA Insider™ readers should note that the adoption of IFRS would require an amendment to a company’s credit agreements, which may allow a company to renegotiate a tight covenant, but the increased value by itself would not remedy a tight covenant.

Companies that are in the transition phase need to consider the advantages and disadvantages of each of the optional exemptions carefully because there is no one overriding principle and the benefits and disadvantages will often be specific to the individual IFRS adopter.

Readers should also note that where IFRS is expanding its usage across the globe, the IASB has continued to make changes to IFRS 1 so that transition to IFRS is burden free with respect to retrospective application of standards. Most notably IFRS 1 was amended in July 2009 adding additional exemptions relating to oil-and-gas assets, a move that Canada favored particularly.


Without underestimating the burden that convergence to IFRS may bring to a CPA firm, it should be comforting to know that there is a framework in place to help guide a company through the transition process. However, to best take advantage of the options available in IFRS 1, it is essential that a clear understanding of what these exemptions are and how they relate to your company be obtained at an early juncture.

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Steven Brice is a technical partner in the financial reporting advisory group for Mazars UK. For U.S. IFRS, you can contact Remi Forgeas, CPA, who is an audit and assurance partner for Mazars in the U.S.

* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™.