1. First Time Application (FTA)1 1

2. Overview Background Definitions Scope Transition to IFRSs
Selection of accounting policies
Opening IFRS balance sheet
Presentation and disclosure
Final standard and effective date
Summary of the issues to be discussed and structure of the presentation 2

3. Background New First-Time Application standard
Replaces SIC-8 (which required entities to go back to the beginning of time)
Intends to reduce the cost of first-time application
Addresses the problems such as:
No longer requires application of old IAS to comparative periods
Provides special exemptions when information is not available
Intended to improve historical comparability of financial statements of the entity, but reduces comparability between IFRS reporting entities
The FTA standard will replace SIC-8 which is currently in force.
The main purpose of the FTA standard is to make the conversion to IFRS easier, to reduce the costs of the conversion and to solve a number of practical problems that arise when converting to IFRS.
The first-time application standard is intended to address the problems that have been discussed on the previous slides and does that well. The main disadvantages of the first-time application standard are:
It reduces comparability of financial statements between entities:
The first-time application standard allows several methods of applying IFRS for the first-time, thereby reducing comparability;
The first-time application standard does not require entities to go back to the beginning of time, instead it allows entities to base their opening IFRS balance to be based on previously reported UK GAAP numbers;
The standard is focused on making first-time application easier, which means that it is not always intellectually rigorous. For example, two identical entities that were to convert to IFRS (a) on different dates or (2) from different GAAPs would not necessarily report the same numbers. 3

4. Definitions First IFRS financial statements
The first annual financial statements in which the entity adopts International Financial Reporting Standards (IFRS) as its primary basis of accounting, making an explicit statement of full compliance with all IFRSs
Reporting date
The reporting date of First IFRS financial statements is the end of the latest period covered by the First IFRS financial statements
Date of transition to IFRS
The date of transition to IFRS is the beginning of the earliest comparative period presented in an entity’s First IFRS financial statements
Opening IFRS balance sheet
The entity’s balance sheet (published or unpublished) at the date of transition to IFRS
The next slide provides a graphic overview of these terms. 4

5. Example of European listed company
Presentation of two years comparative figures (2005 and 2004)
Date of transition to IFRS
Opening IFRS balance sheet
Reporting date
31 December 2005
31 December 2002
31 December 2003
31 December 2004
Periods covered by the first IFRS financial statements
The timeline illustrates the definitions that have been introduced in the previous slide. It probably makes sense to discuss the definitions using this slide rather than the previous one.
First IFRS financial statements – The first annual financial statements in which the entity adopts International Financial Reporting Standards (IFRS) as its primary basis of accounting, making an explicit statement of full compliance with all IFRSs
Reporting date – The reporting date of First IFRS financial statements is the end of the latest period covered by the First IFRS financial statements
Date of transition to IFRS – The date of transition to IFRS is the beginning of the earliest comparative period presented in an entity’s First IFRS financial statements
Opening IFRS balance sheet – An entity’s balance sheet (published or unpublished) at the date of transition to IFRSs
Presentation of three years comparative figures (2005,2004 and 2003)
Date of transition to IFRS
Opening IFRS balance sheet
Reporting date
31 December 2005
31 December 2002
Periods covered by the first IFRS financial statements
31 December 2003
31 December 2004 5

6. Scope – When An entity shall apply the new standard in:
Its first IFRS financial statements; and
Each interim financial report presented under IAS 34 Interim Financial Reporting.
Subsidiaries of groups already reporting under IFRS are treated as first-time adopters. However, to avoid restatement of IFRS numbers already reported they are not first-time adopters for recognition and measurement purposes when:
The group published IFRS financial statements in the previous period; and
The subsidiary is wholly-owned or minority shareholders unanimously agree that they subsidiary is not a first-time adopter for recognition and measurement purposes.
An entity shall apply the new standard in:
Its first IFRS financial statements (i.e. the first annual financial statements in which the entity adopts IFRSs by an explicit and unreserved statement in those financial statements of compliance with IFRSs); and
Each interim financial report, if any, that it presents under IAS 34 Interim Financial Reporting for part of the period covered by its first IFRS financial statements.
A subsidiary may have reported to its parent in the previous period using IFRSs without presenting a full set of financial statements under IFRSs. If the subsidiary subsequently begins to present financial statements that contain an explicit and unreserved statement of compliance with IFRSs, it becomes a first-time adopter at that time. In those first IFRS financial statements, the subsidiary shall comply with the disclosure requirements in the FTA standard. However, to avoid restatement of IFRS measurements already reported to the parent, the subsidiary is not treated as a first-time adopter for recognition and measurement purposes if:
the subsidiary was consolidated in financial statements for the previous period and they contained an explicit and unreserved statement of compliance with IFRSs; and
either the subsidiary is wholly-owned or the owners of the minority interests, including those not otherwise entitled to vote, unanimously agree that the subsidiary is not treated as a first-time adopter for recognition and measurement purposes. 6

7. Scope – Who The FTA standard should be applied by entities which:
Did not present their most recent previous financial statements under IFRS;
Prepared financial statements under IFRS for internal use only, without making them available to the entity’s owners or other external users; or
Did not present financial statements for previous periods.
The purpose of this requirement is to make sure that the FTA standard cannot be applied by entities that would like to “reset” their IAS numbers to some more favourable value (i.e. this is an anti-abuse clause).
The FTA standard should be applied by entities which:
Presented their most recent previous financial statements:
Under national requirements that are not consistent with IFRSs in all respects;
In conformity with IFRSs in all respects, except that the financial statements did not contain an explicit and unreserved statement that they complied with IFRSs;
Containing an explicit statement of compliance with some, but not all, IFRSs;
Under national requirements, using some individual IFRSs to account for items for which national requirements did not exist;
Under national requirements, with a reconciliation of some amounts to the amounts determined under IFRSs;
Prepared financial statements under IFRSs for internal use only, without making them available to the entity’s owners or other external users; or
Did not present financial statements for previous periods. 7

8. Scope – Who
An entity cannot apply the FTA standard when it previously presented a set of financial statements:
Under IFRS;
That complied with both previous GAAP and IFRS; or
Under IFRS, but the auditors qualified their audit report on those financial statements.
The purpose of this requirement is to make sure that the FTA standard cannot be applied by entities that would like to “reset” their IAS numbers to some more favourable value (i.e. this is an anti-abuse clause).
An entity cannot apply the FTA standard when it:
Stopped presenting financial statements under national requirements, having previously presented them as well as another set of financial statements that contained an explicit and unreserved statement of compliance with IFRSs;
Presented financial statements in the previous year under national requirements and those financial statements contained an explicit and unreserved statement of compliance with IFRSs; or
Presented financial statements in the previous year that contained an explicit and unreserved statement of compliance with IFRSs, but the auditors qualified their audit report on those financial statements. 8

9. Scope – Accounting changes
Entities already applying IFRS cannot use the FTA standard when making accounting changes that are the subject of:
Requirements on changes in accounting policies in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors; and
Specific transitional requirements in other IFRS.
The FTA standard cannot be used to circumvent IAS 8 (on accounting changes) or the transitional provisions in individual standards. 9

10. Transition to IFRS Transition to IFRS involves the following:
Selection of accounting policies;
Preparation of an opening IFRS balance sheet;
Presentation and disclosure in an entity’s first IFRS financial statements and interim financial reports
These are the requirements/steps as presented in paragraph 6 of the exposure draft. Each of these bullet points will be discussed subsequently.
Transition to IFRSs involves the following:
Selection of accounting policies that comply with IFRSs
Preparation of an opening IFRS balance sheet at the date of transition to IFRSs as the starting point for subsequent accounting under IFRSs
Presentation and disclosure in an entity’s first IFRS financial statements and interim financial reports 10

11. Selection of accounting policies
The same accounting policies shall be applied throughout all periods presented and in the opening IFRS balance sheet;
Those accounting policies shall comply with each IFRS operative at the reporting date for the First IFRS financial statements;
An entity shall not apply different versions of standards or interpretations that were operative at earlier dates;
An entity shall apply IFRS and SIC in its first financial statements as if they had always been in effect, unless they provide specific guidance on FTA
An entity shall apply IFRIC interpretations in its first financial statements as if they had always been in effect, unless the interpretation provides specific guidance on FTA
Contrary to SIC-8, the FTA standard does not require application of old IASs to comparative periods. Instead, it requires consistent application of all IASs and SICs extant at the reporting date for the entity’s first IFRS financial statements. However, there are some exemptions:
An entity shall use the same accounting policies throughout all periods presented in its First IFRS financial statements, and also in its opening IFRS balance sheet
Those accounting policies shall comply with each IFRS operative at the reporting date for its First IFRS financial statements
An entity shall not apply different versions of standards or interpretations that were operative at earlier dates, unless another requirement of the new standard specifies otherwise
The transitional requirements in some IFRSs or SIC interpretations specify prospective application. Nevertheless, except if specified specifically in the new standard, an entity shall apply those standards and interpretations in its first financial statements as if they had always been in effect
A first-time adopter shall apply an IFRIC Interpretation retrospectively unless the Interpretation contains transitional provisions that require or permit prospective application and those transitional provisions refer explicitly to first-time adopters 11

12. Opening IFRS balance sheet
An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRS.
Recognition
The entity shall in its opening balance sheet:
Recognise all assets and liabilities whose recognition is required by IFRS;
Not recognise items as assets or liabilities if IFRS do not permit such recognition; and
Reclassify items that the entity recognised under previous GAAP in accordance with IFRS.
Recognition
The entity shall in its opening balance sheet:
Recognise all assets and liabilities whose recognition is required by IFRSs;
Not recognise items as assets or liabilities if IFRSs do not permit such recognition; and
Reclassify items that the entity recognised under its previous GAAP as one type of asset, liability or component of equity, but that are a different type of asset, liability or component of equity under IFRSs. 12

13. Opening IFRS balance sheet
Measurement
In its opening IFRS balance sheet, an entity shall apply IFRS in measuring all recognised assets and liabilities, except:
When undue cost or effort would be required to determine:
Historical cost of property, plant and equipment
Cumulative translation adjustment re. foreign operations
For certain specific items:
Employee benefit assets or liabilities under defined benefit plans
Business combinations
Event-driven fair values (e.g. privatisation or IPO related) may be used as deemed cost
Retrospective hedge designation is not permitted but certain exemptions exist for financial instruments
Any adjustments to amounts previously reported should be recognised in equity rather than in income.
Measurement
In its opening IFRS balance sheet, an entity shall apply IFRS in measuring all recognised assets and liabilities, except:
When undue cost or effort would be required to determine:
Historical cost of property, plant and equipment
Cumulative translation adjustment re. foreign operations
For certain specific items:
Employee benefit assets or liabilities under defined benefit plans
Business combinations
Event-driven fair values (e.g. privatisation or IPO related) may be used as deemed cost
Retrospective hedge designation is not permitted
Any adjustments to amounts previously reported should be recognised in equity rather than in income. 13

14. Opening IFRS balance sheet
General rule : full retrospective application of all IFRS effective at the reporting date
but entities have an option :
To use all limited exemptions authorized by the FTA IFRS to the extent these exemptions are applicable, OR
Not to use the limited exemptions authorized by the FTA IFRS but shall then apply the IFRS which were effective in each period
Measurement
In its opening IFRS balance sheet, an entity shall apply IFRS in measuring all recognised assets and liabilities, except:
When undue cost or effort would be required to determine:
Historical cost of property, plant and equipment
Cumulative translation adjustment re. foreign operations
For certain specific items:
Employee benefit assets or liabilities under defined benefit plans
Business combinations
Event-driven fair values (e.g. privatisation or IPO related) may be used as deemed cost
Retrospective hedge designation is not permitted
Any adjustments to amounts previously reported should be recognised in equity rather than in income. 14

15. Undue cost or effort
If an entity is unable to determine amounts in accordance with IFRS without undue cost or effort then the following rules apply:
Property, plant and equipment
Valuation at fair value at the date of transition for:
Property, plant and equipment; and
Investment property accounted for under the IAS 40 cost method
Property, plant and equipment
The wording in the exposure draft of the FTA standard is rather unfortunate. Right now it is not clear from the wording of paragraph 17 whether the frozen values of FRS 15 could be used as deemed cost or not.
Cumulative translation adjustment
In many cases it will not be possible to restate the cumulative translation adjustment in accordance with IFRS because this would effectively require the entity to go back in time a recreate IFRS financial statements for all the periods in which the foreign operation existed. 15

16. Undue cost or effort Cumulative translation adjustment
The cumulative translation difference re. foreign operation at the date of transition to IFRSs is deemed to be equal to the amount determined under local GAAP.
Property, plant and equipment
The wording in the exposure draft of the FTA standard is rather unfortunate. Right now it is not clear from the wording of paragraph 17 whether the frozen values of FRS 15 could be used as deemed cost or not.
Cumulative translation adjustment
In many cases it will not be possible to restate the cumulative translation adjustment in accordance with IFRS because this would effectively require the entity to go back in time a recreate IFRS financial statements for all the periods in which the foreign operation existed. 16

17. Employee benefits
An entity shall measure net employee benefit assets or liabilities under defined benefit plans in accordance with IAS 19 Employee Benefits, except that no actuarial gains or losses shall remain unrecognised.
Upon first-time adoption of IFRS there will not be any unrecognised actuarial gains/losses or unrecognised transitional differences. 17

18. Business combinations (1)
Restatement of business combinations under the FTA standard:
No reclassification of business combinations;
Only include assets and liabilities that meet IFRS recognition criteria;
If IFRS requires cost-based measurement:
carrying amount under previous GAAP shall be deemed cost under IFRS, and shall be the basis for subsequent cost-based depreciation or amortisation.
If IFRS requires measurement not on a cost-basis:
Restatement on the basis required by IFRS, any resulting change in the carrying amount shall be recognised in retained earnings.
Please note that Appendix B to the FTA standard deals specifically with Business Combinations.
Restatement of business combinations under the FTA standard:
Business combinations recognised before application of IFRS shall not be reclassified
The opening balance sheet shall only include assets and liabilities that meet IFRS recognition criteria
For those assets and liabilities acquired in that business combination for which IFRS require a cost based measurement, their carrying amount under previous GAAP at the date of transition to IFRS shall be their deemed cost under IFRS at that date. That deemed cost shall be the basis for subsequent cost-based depreciation or amortisation
For those assets and liabilities acquired in that business combination for which IFRS require a measurement basis that is not a cost-based measurement, the entity shall restate that asset or liability on the basis required by IFRS. The entity shall recognise in retained earnings any resulting change in the carrying amount 18

19. Business combinations (2)
The carrying amount of goodwill under previous GAAP shall be adjusted as follows:
Intangible assets that do not meet recognition criteria under IFRS should be added to goodwill;
The entity should perform an impairment test under IAS 36 and reduce the carrying amount of goodwill to the extent that it is impaired;
Any positive goodwill shall be amortised prospectively from the date of transition to IFRS; and
Any negative goodwill shall be recognised in retained earnings at the date of transition to IFRS
Please note that Appendix B to the FTA standard deals specifically with Business Combinations.
The carrying amount of goodwill under the previous GAAP shall be adjusted as follows:
Intangible assets that do not meet recognition criteria under IFRS should be added to goodwill;
The entity should perform an impairment test under IAS 36 and reduce the carrying amount of goodwill to the extent that it is impaired.
Any positive goodwill shall be amortised prospectively from the date of transition to IFRS
Any negative goodwill shall be recognised in retained earnings at the date of transition to IFRSs 19

20. Financial instruments (1)
Recognition
All assets and liabilities should be recognised in accordance with IFRS, even if they were not recognised under previous GAAP
Investments
Retroactive designation of investments permitted (held-to-maturity, available-for-sale, trading and originated loans and receivables)
Recycling of pre-IFRS fair value gains on available-for-sale investments permitted
Rules regarding recognition/derecognition should be applied retrospectively. Investments should be designated retrospectively. 20

21. Financial instruments (2)
Hedging
Hedges that were not designated before application of IFRS cannot be designated retrospectively
Hedges that were designated should be accounted for under IAS 39 prospectively from the date of application of IFRS:
Fair value hedges are accounted for as follows:
Adjust carrying amount of the hedged assets and liabilities at the date of transition to IFRS to reflect the portion of the fair value of the hedging instrument at that date that reflects the risk hedged;
Recognise in retained earnings any net adjustment to the hedged item and hedging instrument; and
If the hedge meets IAS 39 criteria (including documentation on date of transition), account for the hedge under IAS 39 hedge accounting rules.
Retrospective designation of hedges is not permitted. However, existing designated hedges are accounted for as hedges in the opening balance sheet. If the hedge continues to meet the IAS 39 hedge criteria after preparation of the opening IFRS balance sheet then it should be accounted for as hedge prospective. If not, then the entity should account for the hedge in accordance with the rules for ineffective hedges. 21

22. Financial instruments (3)
Hedges (cont’d)
Cash flow hedges
If the hedged transaction is no longer expected to occur, reclassify deferred gains/losses to retained earnings;
If IAS 39 hedge criteria have been met (including documentation on date of transition) and the transaction is still expected to occur, classify gains/losses as a separate component of equity and recycle when the hedged item affects the income statement; and
Continue to apply IAS 39 hedge accounting after transition to IFRSs if the hedged transaction is still highly probable and other hedge criteria have been met. 22

23. Estimates
Similar estimates required under previous GAAP using a methodology consistent with IFRS:
Estimates consistent with estimates made under previous GAAP, unless it is clearly shown that those estimates were errors.
Similar estimates required under previous GAAP using a methodology not consistent with IFRS:
Estimates consistent with the estimates required under previous GAAP, after adjusting for the difference in methodology.
If similar estimates were not required by previous GAAP:
Estimates shall reflect the information available when the entity prepares its first IFRS financial statements, but shall not reflect conditions that are indicative of conditions that arose after the date of transition to IFRS. 23

24. Presentation and disclosure (1)
Comparative information
IFRS requires at least one year of comparative information
Explanation of transition to IFRS
Equity reconciliation from previous GAAP to IFRS on:
Date of transition to IFRS; and
End of the latest period presented under previous GAAP;
Reconciliation of income for the latest period presented;
The reconciliation shall give sufficient detail to enable users to understand the material adjustments and distinguish between changes in accounting policies, changes of estimates and correction of errors
Disclosure of impairment losses recognised or reversed upon transition to IFRS;
Explain material changes to the cash flow statements.
For details please refer to the exposure draft. 24

25. Presentation and disclosure (2)
Use of fair value as deemed cost
If the entity use fair value as deemed cost for (1) property, plant and equipment or (2) investment property then it shall disclose:
The aggregate of those fair values;
The aggregate adjustments to the carrying amounts reported under previous GAAP; and
Explain why the measurement required by IFRS would involve undue cost or effort.
Historical summaries
IFRS does not require disclosure of historical summaries;
The entity does not need to adjust historical summaries (i.e. no quantitative restatement), but needs to disclose the nature of the adjustments required that would make the data comply with IFRS.
For details please refer to the exposure draft.
Please note that it is not clear whether the IASB actually has any jurisdiction over historical summaries that are not part of the IFRS financial statements. 25

26. Presentation and disclosure (3)
Interim financial reports
If the entity presents an interim report in accordance with IAS 34 then it shall present:
Its equity under previous GAAP at the end of the comparable interim period to its equity under IFRS at that date; and
Its profit or loss under previous GAAP for that comparable interim period (current and year-to-date) to its profit or loss under IFRS for that period;
The first interim reports should also include the following reconciliation:
Equity reconciliation from previous GAAP to IFRS on:
Date of transition to IFRS; and
End of the latest period presented under previous GAAP;
Reconciliation of income for the latest period presented.
Due to the drafting of IAS 34 it is possible for entities reporting under IFRS to produce interim reports that do not comply with IFRS (of course, the entity cannot claim IFRS compliance in that case). 26

27. Final standard and effective date
The IASB plans to finalise the FTA standard in Q
It is uncertain whether the IASB will maintain the effective date of 1 January 2003 in the final version of the standard, but the IASB will encourage earlier application.
Entities that want to convert to IFRS before the FTA standard comes into force will have to apply SIC-8.
Ernst & Young’s comment letter on the FTA exposure draft will include a comment that the IASB should not require application of the FTA standard for any date before its actual publication. 27

28. End Part II 28