TRANSITION TO THE IFRS FOR SMEs

Section 35

Transition to the IFRS for SMEs

Scope of this section

35. 1 This section applies to a first-time adopter of the IFRS for SMEs, regardless of whether its previous accounting framework was full IFRS or another set of generally accepted accounting principles (GAAP) such as its national accounting standards or another framework such as the local income tax basis.

35. 2 An entity that has applied the IFRS for SMEs in a previous reporting period, but whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with the IFRS for SMEs, must either apply this section or apply the IFRS for SMEs retrospectively in accordance with Section 10 Accounting Policies, Estimates and Errors as if the entity had never stopped applying the IFRS for SMEs. When such an entity does not elect to apply this section, it is still required to apply the disclosure requirements in paragraph 35.12A in addition to the disclosure requirements in Section 10.

First-time adoption

35. 3 A first-time adopter of the IFRS for SMEs shall apply this section in its first financial statements that conform to this Standard.

35. 4 An entity’s first financial statements that conform to this Standard are the first annual financial statements in which the entity makes an explicit and unreserved statement in those financial statements of compliance with the IFRS for SMEs. Financial statements prepared in accordance with this Standard are an entity’s first such financial statements if, for example, the entity:
    1. did not present financial statements for previous periods;
    2. presented its most recent previous financial statements under national requirements that are not consistent with this Standard in all respects; or
    3. presented its most recent previous financial statements in conformity with full IFRS.

35. 5 Paragraph 3.17 defines a complete set of financial statements.

35. 6 Paragraph 3.14 requires an entity to disclose, in a complete set of financial statements, comparative information in respect of the previous comparable period for all monetary amounts presented in the financial statements, as well as specified comparative narrative and descriptive information. An entity may present comparative information in respect of more than one comparable prior period. Consequently, an entity’s date of transition to the IFRS for SMEs is the beginning of the earliest period for which the entity presents full comparative information in accordance with this Standard in its first financial statements that conform to this Standard.

Procedures for preparing financial statements at the date of transition

35. 7 Except as provided in paragraphs 35.9–35.11, an entity shall on its date of transition to the IFRS for SMEs (ie the beginning of the earliest period presented):
    1. recognise all assets and liabilities whose recognition is required by the IFRS for SMEs;
    2. not recognise items as assets or liabilities if this Standard does not permit such recognition;
    3. reclassify items that it recognised under its previous financial reporting framework as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under this Standard; and
    4. apply this Standard in measuring all recognised assets and liabilities.

35. 8 The accounting policies that an entity uses on adoption of this Standard may differ from those that it used for the same date using its previous financial reporting framework. The resulting adjustments arise from transactions, other events or conditions before the date of transition to this Standard. Consequently, an entity shall recognise those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to this Standard.

35. 9 On first-time adoption of this Standard, an entity shall not retrospectively change the accounting that it followed under its previous financial reporting framework for any of the following transactions:
    1. derecognition of financial assets and financial liabilities. Financial assets and liabilities derecognised under an entity’s previous accounting framework before the date of transition shall not be recognised upon adoption of the IFRS for SMEs. Conversely, for financial assets and liabilities that would have been derecognised under the IFRS for SMEs in a transaction that took place before the date of transition, but that were not derecognised under an entity’s previous accounting framework, an entity may choose (a) to derecognise them on adoption of the IFRS for SMEs or (b) to continue to recognise them until disposed of or settled.
    2. hedge accounting. An entity shall not change its hedge accounting before the date of transition to the IFRS for SMEs for hedging relationships that no longer exist at the date of transition. For hedging relationships that exist at the date of transition, the entity shall follow the hedge accounting requirements of Section 12 Other Financial Instrument Issues, including the requirements for discontinuing hedge accounting for hedging relationships that do not meet the conditions of Section 12.
    3. accounting estimates.
    4. discontinued operations.
    5. measuring non-controlling interests. The requirements of paragraph 5.6 to allocate profit or loss and total comprehensive income between non-controlling interest and owners of the parent shall be applied prospectively from the date of transition to the IFRS for SMEs (or from such earlier date as this Standard is applied to restate business combinations—see paragraph 35.10(a)).
    6. government loans. A first-time adopter shall apply the requirements in Section 11 Basic Financial Instruments, Section 12 and Section 24 Government Grants prospectively to government loans existing at the date of transition to this Standard. Consequently, if a first-time adopter did not, under its previous GAAP, recognise and measure a government loan on a basis that is consistent with this Standard, it shall use its previous GAAP carrying amount of the loan at the date of transition to this Standard as the carrying amount of the loan at that date and shall not recognise the benefit of any government loan at a below-market rate of interest as a government grant.

35. 10 An entity may use one or more of the following exemptions in preparing its first financial statements that conform to this Standard:
    1. business combinations. A first-time adopter may elect not to apply Section 19 Business Combinations and Goodwill to business combinations that were effected before the date of transition to this Standard. However, if a first-time adopter restates any business combination to comply with Section 19, it shall restate all later business combinations.
    2. share-based payment transactions. A first-time adopter is not required to apply Section 26 Share-based Payment to equity instruments that were granted before the date of transition to this Standard, or to liabilities arising from share-based payment transactions that were settled before the date of transition to this Standard.
    3. fair value as deemed cost. A first-time adopter may elect to measure an item of property, plant and equipment, an investment property or an intangible asset on the date of transition to this Standard at its fair value and use that fair value as its deemed cost at that date.
    4. revaluation as deemed cost. A first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant and equipment, an investment property or an intangible asset at, or before, the date of transition to this Standard as its deemed cost at the revaluation date.
    5. (da) event-driven fair value measurement as deemed cost. A first-time adopter may have established a deemed cost in accordance with its previous GAAP for some or all of its assets and liabilities by measuring them at their fair value at one particular date because of an event, for example, a valuation of the business, or parts of the business, for the purposes of a planned sale. If the measurement date:
       1. is at or before the date of transition to this Standard, the entity may use such event-driven fair value measurements as deemed cost at the date of that measurement.
       2. is after the date of transition to this Standard, but during the periods covered by the first financial statements that conform to this Standard, the event-driven fair value measurements may be used as deemed cost when the event occurs. An entity shall recognise the resulting adjustments directly in retained earnings (or, if appropriate, another category of equity) at the measurement date. At the date of transition to this Standard, the entity shall either establish the deemed cost by applying the criteria in paragraph 35.10(c)–(d) or measure those assets and liabilities in accordance with the other requirements in this section.
    6. cumulative translation differences. Section 30 Foreign Currency Translation requires an entity to classify some translation differences as a separate component of equity. A first-time adopter may elect to deem the cumulative translation differences for all foreign operations to be zero at the date of transition to the IFRS for SMEs (ie a ‘fresh start’).
    7. separate financial statements. When an entity prepares separate financial statements, paragraph 9.26 requires it to account for its investments in subsidiaries, associates and jointly controlled entities either:
       1. at cost less impairment;
       2. at fair value with changes in fair value recognised in profit or loss; or
       3. using the equity method following the procedures in paragraph 14.8.

• If a first-time adopter measures such an investment at cost, it shall measure that investment at one of the following amounts at the date of transition:
  1. cost determined in accordance with Section 9 Consolidated and Separate Financial Statements; or
  2. deemed cost, which shall be either fair value at the date of transition to the IFRS for SMEs or previous GAAP carrying amount on that date.

8. compound financial instruments. Paragraph 22.13 requires an entity to split a compound financial instrument into its liability and equity components at the date of issue. A first-time adopter need not separate those two components if the liability component is not outstanding at the date of transition to this Standard.
9. deferred income tax. A first-time adopter may apply Section 29 Income Tax prospectively from the date of transition to the IFRS for SMEs.
10. service concession arrangements. A first-time adopter is not required to apply paragraphs 34.12–34.16 to service concession arrangements entered into before the date of transition to this Standard.
11. extractive activities. A first-time adopter using full cost accounting under previous GAAP may elect to measure oil and gas assets (those used in the exploration, evaluation, development or production of oil and gas) on the date of transition to the IFRS for SMEs at the amount determined under the entity’s previous GAAP. The entity shall test those assets for impairment at the date of transition to this Standard in accordance with Section 27 Impairment of Assets.
12. arrangements containing a lease. A first-time adopter may elect to determine whether an arrangement existing at the date of transition to the IFRS for SMEs contains a lease (see paragraph 20.3) on the basis of facts and circumstances existing at that date, instead of when the arrangement was entered into.
13. decommissioning liabilities included in the cost of property, plant and equipment. Paragraph 17.10(c) states that the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. A first-time adopter may elect to measure this component of the cost of an item of property, plant and equipment at the date of transition to the IFRS for SMEs, instead of on the date(s) when the obligation initially arose.
14. operations subject to rate regulation. If a first-time adopter holds items of property, plant and equipment or intangible assets that are used, or were previously used, in operations subject to rate regulation (ie to provide goods or services to customers at prices/rates established by an authorised body) it may elect to use the previous GAAP carrying amount of those items at the date of transition to this Standard as their deemed cost. If an entity applies this exemption to an item, it need not apply it to all items. The entity shall test those assets for impairment at the date of transition to this Standard in accordance with Section 27.
15. severe hyperinflation. If a first-time adopter has a functional currency that was subject to severe hyperinflation:
    1. if its date of transition to this Standard is on, or after, the functional currency normalisation date, the entity may elect to measure all assets and liabilities held before the functional currency normalisation date at fair value on the date of transition to this Standard and use that fair value as the deemed cost of those assets and liabilities at that date; and
    2. if the functional currency normalisation date falls within a twelve month comparative period, an entity may use a comparative period of less than twelve months, provided that a complete set of financial statements (as required by paragraph 3.17) is provided for that shorter period.
16. If it is impracticable for an entity to make one or more of the adjustments required by paragraph 35.7 at the date of transition, the entity shall apply paragraphs 35.7–35.10 for such adjustments in the earliest period for which it is practicable to do so, and shall identify which amounts in the financial statements have not been restated. If it is impracticable for an entity to provide any of the disclosures required by this Standard, including those for comparative periods, the omission shall be disclosed.

Disclosures

Explanation of transition to the IFRS for SMEs

35. 12 An entity shall explain how the tran35sition from its previous financial reporting framework to this Standard affected its reported financial position, financial performance and cash flows.

35. 12A An entity that has applied the IFRS for SMEs in a previous period, as described in paragraph 35.2, shall disclose:
    1. the reason it stopped applying the IFRS for SMEs;
    2. the reason it is resuming the application of the IFRS for SMEs; and
    3. whether it has applied this section or has applied the IFRS for SMEs retrospectively in accordance with Section 10.

Reconciliations

35. 13 To comply with paragraph 35.12, an entity’s first financial statements prepared using this Standard shall include:
    1. a description of the nature of each change in accounting policy;
    2. reconciliations of its equity determined in accordance with its previous financial reporting framework to its equity determined in accordance with this Standard for both of the following dates:
       1. the date of transition to this Standard; and
       2. the end of the latest period presented in the entity’s most recent annual financial statements determined in accordance with its previous financial reporting framework.
    3. a reconciliation of the profit or loss determined in accordance with its previous financial reporting framework for the latest period in the entity’s most recent annual financial statements to its profit or loss determined in accordance with this Standard for the same period.

35. 14 If an entity becomes aware of errors made under its previous financial reporting framework, the reconciliations required by paragraph 35.13(b) and (c) shall, to the extent practicable, distinguish the correction of those errors from changes in accounting policies.

35. 15 If an entity did not present financial statements for previous periods, it shall disclose that fact in its first financial statements that conform to this Standard.