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According to a previous version of the Standard relating to property, plant, and equipment (IAS 16), under the allowed alternative treatment, when property
was revalued, the “fair value” was its market value “for existing use.” Later this aspect of IAS 16 was revised in order to conform to the guidance in IAS 22.
Now the Standard stipulates that when property, plant, and equipment is revalued, the market value should be fair value, which is the amount for which it can
be exchanged between knowledgeable, willing parties in an arm’s-length transaction, without restricting the definition of fair value to market value for
“existing use.”
In some cases, this difference in terminology could have a significant impact on the valuation of the property if different versions of the IAS are applied for
different time periods during which the requirement changed. Consider the case of land and building that is currently being used as a factory building by an
entity that is contemplating switching from national GAAP to IFRS. According to the earlier version of IAS 16, the fair value would be based on its market
value for “existing use;” under the revised version of IAS 16, where that restriction has been removed, the market value would be its fair value (i.e., “the
amount for which it can be exchanged between knowledgeable, willing parties in an arm’s-length transaction”). Thus, if the intention of the entity is to convert
the factory building at a later date into a shopping mall, then its market value would be quite different (compared to a case where there is no such plan of
change in “existing use”) because it would be a valuation driven by the market value of the property based on its “intended use” (as opposed to its “existing
use”).
TRANSITIONAL PROVISIONS IN OTHER IFRS
Certain IAS have transitional provisions that are included at the end of those Standards, just before the paragraph(s) relating to the “effective date” of the IFRS, and
are meant to facilitate transition to the new Standard. In other words, transitional provisions allow entities adopting a new Standard to deviate from the provisions of
other existing Standards, to an extent; usually this takes place in cases when retrospective application of those Standards would make it cumbersome to apply the new
Standard.
IFRS 1 recognizes that the transitional provisions in other IFRS apply to changes in accounting policies made by an entity that already uses IFRS, and thus it
provides that the transitional provisions in other IFRS do not apply to first-time adopters. If IFRS 1 had not provided this clarification, then there would be confusion
as to whether first-time adopters, would need to apply the transitional provisions in certain International Accounting Standards (IAS)
TARGETED EXEMPTIONS FROM OTHER IFRS
IFRS 1 allows a first-time adopter to elect to use one or more targeted exemptions.
Under IFRS 1, paragraph 13, a first-time adopter of IFRS may elect to use exemptions from the general measurement and restatement principles in one or more of
these instances:
1. Business combinations
2. Share-based payment transactions
3. Insurance contracts and oil and gas assets
4. Deemed cost
5. Leases
6. Employee benefits
7. Cumulative translation differences
8. Investments in subsidiaries, jointly controlled entities, and associates
9. Assets and liabilities of subsidiaries, associates, and joint ventures
10. Financial instruments
11. Decommissioning liabilities included in the cost of property, plant, and equipment
12. Financial assets or intangible assets accounted for in accordance with IFRIC 12, Service Concession Arrangements
13. Borrowing costs
14. Transfers of assets from customers
BUSINESS COMBINATIONS
IFRS 3 was revised in January 2008. The new Standard is applicable to business combinations for which the acquisition date occurs during the first annual reporting
period beginning on or after July 1, 2009. Earlier application is permitted, subject to transitional provisions – but not for accounting periods beginning before June 30,
2007. For first-time adopters
• If the first IFRS reporting period begins between July 1, 2007 and June 30, 2009, IFRS 3 (2008) may be applied in advance of its effective date, subject to the
general transitional provisions.
• If the first IFRS reporting period begins on or after July 1, 2009, IFRS 3 (2008) must be applied.
It is important to note that if retrospective application of IFRS 3 (2008) is selected, IFRS 1 requires consistent application of IFRS 3 (2008)—that is, IFRS 3 (2004)
should not be applied to any of the entity’s previous business combinations.
One of the most complex areas that first-time adopters will need to address is the accounting for business combinations. Entities will need to consider whether to
apply IFRS 3, Business Combinations, retrospectively to all past business combinations, or to avail of the IFRS 1 exemption in this regard. Even where the exemption
is applied, significant issues can arise. Entities are permitted to apply IFRS 3 retrospectively to all past business combinations.
Full retrospective application could be very onerous and, in many cases, will be impracticable. Any entity intending to follow this path will need to ensure that it has
the information needed to apply the acquisition method retrospectively in accordance with IFRS 3, which in particular includes
• Calculation of the cost of the business combination.