Understanding the disclosure requirements
necessary to comply with IFRS
Subject: Auditing
Level: Professional 1
Author: Maura McElhinney, current examiner.
The Institute of Certified Public Accountants in Ireland
Examiner’s comment: The contents of this article concern AUDITING Syllabus Topic 10
‘IAS’s, IFR’s, SAS’s, of which candidates are expected to have a Knowledge Level 3.
Article information main sources:
1 Deloitte Touche Tohmatsu - IAS Plus June 2003 – IFRS 1 First Time Adoption of IFRS: Q &A
2. PriceWaterhouseCoopers- John McDonnell -‘IFRS means companies can no longer delay
tough decisions’ as published in Accountancy Ireland, Vol 35, N° 5, October 2003
3. Irish Department of Enterprise, Trade and Employment web site
A. Background
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International Financial Reporting Standards (IFRS) are financial accounting and reporting
standards with a global scope that are issued by the International Accounting Standards
Board (IASB) in response to the demand for such standards by international investors and
other users of financial statements that transcend national borders. IFRS provide these users
with consistent and comparable financial information for their decision-making purposes.
The IASB has also adopted the body of Standards issued by the Board of the
International Accounting Standards Committee (IASC). Those pronouncements
continue to be designated "International Accounting Standards" (IAS) and are
deemed to be included in IFRS.
The IASB issued IFRS 1 - First-time Adoption of International Financial Reporting
Standards, which 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.
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 IFRS. An entity is a not
first-time adopter (and IFRS 1 no longer applies) if, in the preceding year, it prepared IFRS
financial statements that were given to owners or external parties such as investors or
creditors. An entity preparing IFRS financial statements in the preceding year for strictly
internal management use would however still be considered as a first-time adopter.
For the purposes of simplification, first time adoption of IFRS will assume to have occurred
for financial years beginning on 1 January 2005 for the AUDITING exams. This will
accordingly imply that the date of the opening IFRS Balance Sheet would be 1 January 2004.
In practice many multinational companies adopted IFRS for their 2004 accounts, and
accordingly had 1 January 2003 as the date of their opening Balance Sheet.
B. Application of implementation of IFRS in Ireland as required by law
With effect from financial periods beginning on or after 1 January 2005:
1. all publicly quoted EU incorporated companies, such as those listed on the Irish and London
Stock Exchanges (ISEQ and LSE) will have to prepare their consolidated financial statements
in accordance with IFRS and IAS, in accordance with EU Regulation (EC) No 1606/2002 of
the European Parliament and of the Council of 19 July 2002
2. publicly traded companies will be free to prepare their annual accounts, and all non-traded
companies will be permitted to prepare their annual and/or consolidated accounts in
accordance with either IFRS or Irish GAAP (FRS/SSAP) per Irish law, which also requires
that once companies adopt IFRS, they will be precluded from reverting to FRS/SSAP and, in
the case of Groups, all companies within the group will have to apply the new standards.
C. Process of applying IFRS for the first time in the preparation of annual financial
statements for the year ended 31 December 2005 as mandated by IFRS 1
1. IFRS financial statements reporting periods and preparation basis
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The 2005 and 2004 financial statements must be prepared using accounting policies that
comply with IFRS in force at financial year-end (i.e.: 31 December 2005) and the opening
Balance Sheet (beginning of the first period for which full comparative financial
statements are presented: i.e.: 1 January 2004) must be restated retrospectively.
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Estimates used in the preparation of Irish GAAP financial statements cannot be revised
using hindsight, unless there is evidence of an error. For example a provision for litigation
made under Irish GAAP would not be revised just because the outcome is known when
the first IFRS financial statements have been prepared.
2. Adjustments required to convert Irish GAAP to IFRS from the date of the opening
Balance Sheet as mandated by IFRS 1
There are far fewer conversion adjustments for Irish/UK GAAP to IFRS than many countries,
given the advanced state of financial accounting and reporting in this part of the world.
These adjustments, taking into account a few mandatory and optional exceptions, should be
recognised directly in retained earnings or other appropriate category of equity at the date of
transition to IFRS (i.e.: 1 January 2004), and may be classified as follows:
2.1 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 IFRS. (No Irish GAAP examples found)
2.2 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. However, the
entity may not 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).
2.3 Reclassification. The entity should reclassify previous-GAAP opening Balance Sheet
items into the appropriate IFRS classification. For example, IAS 32 requires that a compound
financial instrument comprising both an equity and liability instrument (e.g.: convertible debt)
should be split at inception into its separate liability and equity elements, where as Irish
GAAP (FRS 4) does not allow split accounting.
2.4 Valuation and measurement.
The general valuation measurement principle is to apply IFRS in measuring all recognised
assets and liabilities. Hence, financial instruments are recognised on the opening Balance
Sheet at their fair value on that date and the entity has the option of valuing non-current assets
at a date preceding that of the opening Balance Sheet date, and continue to value using Irish
GAAP subsidiary assets and liabilities resulting from business combinations occurring before
the opening IFRS Balance Sheet date.
D. Disclosures in the financial statements of a first-time adopter as mandated by IFRS
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Annual financial statements disclosure
IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS
affected the entity's reported financial position, financial performance, and cash flows. This
includes:
1. Reconciliations of equity reported under previous GAAP to equity under IFRS both (a) at
the date of the opening IFRS balance sheet and (b) the end of the last annual period reported
under the previous GAAP. For an entity adopting IFRS for the first time in its 31 December
2005 financial statements, the reconciliations would be as of 1 January 2004 and 31
December 2004.
2. Reconciliations of profit or loss for the last annual period reported under the previous
GAAP to profit or loss under IFRS for the same period.
3. Explanation of material adjustments that were made, in adopting IFRS for the first time, to
the Balance Sheet, Income Statement, and Cash Flow Statement.
4. If errors in previous-GAAP financial statements were discovered in the course of transition
to IFRS, those must be separately disclosed.
5. If the entity recognised or reversed any impairment losses in preparing its opening IFRS
Balance Sheet, these must be disclosed.
6. Appropriate explanations if the entity has availed itself of any of the specific recognition
and measurement exemptions permitted under IFRS 1 - for instance, if it used fair values as
deemed cost.
7. If the entity elects to present selected financial information for periods before the date of
the opening IFRS Balance Sheet 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.
8. 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).
Interim financial statements and reports immediately preceding the first set of IFRS
annual financial statements
If an entity is going to adopt IFRS for the first time in its annual financial statements for the
year ended 31 December 2005 certain disclosure are required for such financial statements
that comply with IAS 34, comprising explanatory information that includes an explanation of
changes in accounting policies compared to those under previous GAAP and a reconciliation.