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IFRS 4 was issued in 2004 and is seen as an interim Standard pending completion of the IASB’s project on insurance contracts. IFRS 4 allows entities to continue
to use their existing accounting policies for liabilities arising from insurance contracts as long as the existing policies meet certain minimum requirements as set out in
IFRS 4. IFRS 4 also requires disclosures that identify and explain the amounts in an insurer’s financial statements arising from insurance contracts. The IASB
recognized that it could be quite onerous for entities to apply the requirements of IFRS 4 retrospectively. Therefore, IFRS 1 provides an optional exemption whereby
an entity issuing insurance contracts (an insurer) may elect upon first-time adoption to apply the transitional provisions of IFRS 4, Insurance Contracts. These
transitional provisions require an insurer to apply IFRS 4 prospectively for reporting periods beginning on or after January 1, 2005, with earlier application permitted.
While this may have represented significant relief for entities that adopted IFRS in 2005, its benefit for the “second wave” of adopters is primarily in restricting the
amount of retrospective application required (i.e., from 2005 to date of transition).
On July 23, 2009, the IASB amended IFRS 1 to exempt entities using the full cost method from retrospective application of IFRS for oil and gas assets.
FAIR VALUE OR REVALUATION AS DEEMED COST
An entity may elect to measure an item of property, plant, and equipment at fair value at the date of its transition to IFRS and use the fair value as its deemed cost at
that date. A first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant, and equipment at or before the date of transition to IFRS as
deemed cost at the date of revaluation if the revaluation amount, at the date of revaluation, was broadly comparable to either its fair value or cost (or depreciated cost
under IFRS adjusted for changes in general or specific price index).
These elections are equally available for investment property measured under the cost model and intangible assets that meet the recognition criteria and the criteria
for revaluation (including existence of an active market).
If a first-time adopter has established a deemed cost under the previous GAAP for any of its assets or liabilities by measuring them at their fair values at a particular
date because of an event such as privatization or an initial public offering (IPO), it is allowed to use such an event-driven fair value as deemed cost for IFRS at the date
of that measurement.
Facts
CASE STUDY 4
An entity acquires a factory building for $6 million on January 1, 20X7, with an expected remaining useful life of 40 years at that date. The building is
revalued on January 1, 20X8, to $6.5 million and the resulting adjustment is recognized in equity. The building has a depreciated carrying amount of $5.85
million on January 1, 20X8, and $6.3 million on January 1, 20X9. The depreciation method under previous GAAP is acceptable under IAS 16 and the
revaluation is equivalent to fair value at the date of revaluation.
The entity selects the cost model as its accounting policy for measurement after recognition of buildings in accordance with IAS 16 and has a date of
transition of January 1, 20X9. At January 1, 20X9, the building has a market value of $6.92 million.
Required
Discuss the options available to the entity at the date of transition regarding the valuation of the building.
Solution
Under IFRS 1, the entity has an option to measure the building at
1. Fair value at the date of transition
2. The previous GAAP revaluation
3. An amount where it applies IAS 16 etrospectively
The following journal entries are required in each case:
1. Fair value at January 1, 20X9
Factory building (6.92 – 6.3) $0.62 million
Retained earnings $0.62 million
Adjustment of carrying amount to fair value as deemed cost
Revaluation surplus (6.5 – 5.85) $0.65 million
Retained earnings $0.65 million
Reversal of original revaluation at January 1, 2008