First Time Adoption of International Financial Reporting Standards


IFRS 1 was issued to ensure that an entity’s 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; and
  • Can be generated at a cost that does not exceed the benefits to users.

IFRS 1 applies to all entities adopting IFRS for the first time on or after 1st January 2004.

A first time adopter is an entity that presents its first IFRS financial statements.  The entity must make an explicit or unreserved statement that the annual financial statements comply with all relevant IFRS’s.

The date of transition to IFRS’s is the beginning of the earliest period for which an entity presents full comparative information under IFRS’s in its first IFRS financial statements.

IFRS 1 states that the starting point for the adoption of IFRS’s for the year ended 31st December 2005 is to prepare an opening IFRS balance sheet at 1st January 2004 (or the beginning of the earliest comparative period).

The general rule is that this balance sheet will need to comply with each IFRS effective at 31st December 2005 (the reporting date).

As a result, the opening balance sheet should:

  • Recognise all assets and liabilities whose recognition is required by IFRS’s
  • Not recognise items as assets or liabilities if the IFRS’s do not permit such recognition
  • Reclassify items that the entity 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 IFRS’s
  • Apply IFRS’s in measuring all recognised assets and liabilities

The opening balance sheet need not be published.  Its main function is to provide opening balances in order that future financial statements can be prepared in accordance with IFRS.


The entity must use the same accounting policies in its opening IFRS balance sheet and throughout all periods presented in its IFRS financial statements.

Those accounting policies must comply with each IFRS effective at the reporting date for its first IFRS financial statements (except with exemptions apply).

This requirement can cause a number of practical difficulties:

  • At the effective date of transition, it is not totally clear which IFRS’s will be in force two years later. Thus, the originally prepared balance sheet may have to be amended several times prior to the publication of the first IFRS financial statements.

The entity cannot apply different versions of IFRS’s that were effective at earlier dates.  However, an entity may apply a new IFRS that is not yet mandatory if it permits early application.

  • The costs of retrospectively applying the recognition and measurement principles of IFRS’s might be considerable. IFRS 1 grants a limited number of exemptions from the general requirements where the cost of complying with them would be likely to exceed the benefits to users.
  • The accounting policies used in the opening IFRS balance sheet may differ from those that it used for the same date using previous GAAP. The resulting adjustments arise from events and transactions before the date of transition to IFRS’s.

The entity must recognise those adjustments in retained earnings (or, if appropriate, another category of equity) at the date of transition to IFRS’s.

The entity must explain how the transition from previous GAAP to IFRS’s affected its reported financial  position, financial performance and cash flows.

Thus, the entity’s first IFRS financial statements should include:

  • Reconciliations of its equity reported under previous GAAP to its equity under IFRS’s for both of the following dates:
    • The date of transition to IFRS’s; and
    • The end of the latest period presented in the equity’s most recent annual financial statements under previous GAAP.
  • A reconciliation of the profit or loss reported under previous GAAP for the latest period in the entity’s most recent annual financial statements to its profit or loss under IFRS’s for the same period.
  • If the entity recognised or reversed any impairment losses for the first time in preparing its opening IFRS balance sheet, 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 IFRS’s.



In general, the transitional provisions in other IFRS’s do not apply to first time adoption.  However, IFRS 1 does not allow full retrospective application of IFRS’s in the following areas:

  • Assets classified as held for sale and discontinued operations
  • Derecognition of financial assets and financial liabilities
  • Estimates
  • Hedge accounting


In addition, the following exemptions may be elected:

  • Previous business combinations do not have to be restated
  • Past currency translation gains/losses included in revenue reserves need not be separated out into the currency translation reserve
  • An entity may elect to measure an item of property, plant and equipment at the date of transition to IFRS’s at its fair value and use that fair value as its deemed cost at that date.
  • Under IAS 32 part of the proceeds of convertible debt is classified as equity. If the debt component is no longer outstanding at the date of transition, there is no need to separate the liability and equity components.

If a subsidiary adopts IFRS’s later than the parent, the subsidiary may value its assets/liabilities either:

  • At its own transition date; or
  • Its parents.


To comply with IAS 1 Presentation of Financial Statements, an entity’s first IFRS financial statements must include at least one year of comparative information under IFRS’s.

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