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IFRS 1 - First-time Adoption of IFRSs April 27, 2009

Karen Higgins & Clair Grindley, Deloitte & Touche LLP

Agenda – IFRS 1: First-time Adoption

• A Canadian Transition Perspective• IFRS 1 – An Overview• IFRS 1 – Key Decisions

– Elections, their impacts and application in practice

• IFRS 1 – Considerations for Canadian financial statement preparers

• Next Steps and Resources• Questions?

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IFRS 1 – A Canadian Transition

Perspective

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A Canadian transition perspective• Requirement to determine your IFRS starting point.• No “perfect” or single answer for any entity.• IFRS 1 decisions will be influenced by questions such as:

– Do we want to minimize changes in the numbers?– How much will it cost us to implement a policy with or without an IFRS 1

election?– Do we have the available information? – Can we present a “better” financial position or result due to a policy choice or

IFRS 1 election?– What are other companies doing?– What about future changes in IFRSs?

Potential equity impact of IFRS 1

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Equity: Canadian GAAP

Possible scope for IFRS 1 equity decrease

Possible scope for IFRS 1 equity increase

• Certain adjustments made under IFRS 1 may be a mandatory aspect of conversion.

• In other areas, an elective decision may be available which could impact equity at transition.

• There is, therefore, no fixed starting point and judgment is required.

• Key decisions may also impact earnings…….See next slide.

A Canadian transition perspective

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Potential Earnings Impact of IFRS (1)

Ear

ning

s

2008 2009 2010 2011 2012 2013

Canadian GAAP Potential

IFRS earnings implications

A Canadian transition perspective

IFRS 1 – An Overview

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IFRS 1 – An Overview

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• Mandatory for all first-time adopters of IFRSs.

• Objectives

– Framework for IFRS Conversion

– Consistent starting point for reporting under IFRSs

– Specific requirements and detailed disclosures

– Clearly convey to the user of the financials the impact of converting from Canadian GAAP to IFRS.

• Cost/Benefits Approach.

• Comprised of overriding principles, alternative treatments (IFRS 1 elections), disclosure requirements and implementation guidance.

IFRS 1 – An Overview• Starting point for IFRSs is the Opening Statement of Financial

Position (“OSFP”). This is prepared at the date of transition.– Date of transition to IFRS – “the beginning of the earliest period for which

an entity presents full comparative information under IFRS in its first IFRS financial statements.”

• General principle for the OSFP is retrospective application• The same policies must be used throughout all periods presented

AND these policies must comply with the IFRSs effective at the end of the first IFRS year-end.

• The “normal” requirements around changes in accounting policies (IAS 8) do not apply to a first-time adopter – rather the specific guidance in IFRS 1 must be followed.

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IFRS 1 – An OverviewOpening Statement of Financial Position (Sainsbury) Prior GAAP

IFRSDate of transition

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IFRS 1 – An Overview• In order to alleviate the transition process, 15 elective decisions

(“exemptions”) are currently available under IFRS 1.• The use of these one-time exemptions is discretionary and may be

elected for practical or strategic reasons. These are covered in the next section.

• There are also 5 mandatory exceptions.• IFRS 1 also prescribes fairly expansive (interim and annual)

disclosures to explain the impact of transition. This includes certain income and equity reconciliations.

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IFRS 1 – Key Decisions

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IFRS 1 – Key DecisionsFifteen Optional Exemptions from Retrospective Application• Business combinations• Fair value or revaluation as deemed

cost– property, plant and equipment– investment property– intangible assets

• Employee benefits (defined benefit obligations)

• Cumulative translation differences• Compound financial instruments• Assets and liabilities of subsidiaries,

associates and joint ventures• Designation of previously recognized

financial instruments

• Share-based payment transactions• Insurance contracts• Decommissioning liabilities• Leases• Fair value measurement of financial

assets or financial liabilities at initial recognition

• Borrowing costs• Service Concession Arrangements• Cost of subsidiary in parent financial

statements

Additional exemptions expected pre-2011

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IFRS 1 – Key Decisions

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IFRS 1 ExemptionICAEW Survey of 151 EU Public Companies

Sainsbury – First IFRS Financial Statements

Your Company

Business Combinations

Yes – 100% Yes

?Fair Value as Deemed Costs

Some – 36%Yes (NB – pre-IFRS used revaluation model for certain properties)

Employee Benefits Yes – 100% Yes

Cumulative Translation Differences

Yes – 100% Yes

What are other companies doing? Use of IFRS 1 exemptions in practice

IFRS 1 – Key DecisionsBusiness Combinations

• Avoids restatement of business Combinations prior to the date of transition to IFRS.

• If restating, may either restate all business combinations pre-transition or after a selected date.

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In Practice (Sainsbury’s)

• IFRS 3 – “The Group has elected not to apply IFRS 3 ‘Business Combinations’ retrospectively to acquisitions that took place before the date of transition. As a result, the carrying amount of goodwill in the UK GAAP balance sheet at 27 March 2004 is brought forward to the IFRS opening balance sheet without adjustment.”

Business Combinations

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IFRS 1 – Key Decisions

Possible Pros Possible Cons

Alleviates retrospective application issues (which may not be possible for many acquisitions)

• For some companies there may be strategic benefits of retrospective application

• Even with the exemption a number of detailed steps are still required (IFRS 1 – Appendix C)

Avoids potential conflict with “estimates” exception under IFRS 1 (e.g. how do you determine fair values without use of hindsight?)

Pros and cons: Example of application:

•Impact would depend on specific features of a transaction.

• Differences relate to:• Contingent consideration• Negative goodwill• Measurement date• Transaction costs• Restructuring costs.

IFRS 1 – Key DecisionsFair Value / Deemed Cost

• Property plant and equipment, investment property, and certain intangibles.

• Reset balance to fair value at date of transition, record entry through equity.

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In Practice (Sainsbury’s)

• IAS 16 – “The Group has elected to treat the revalued amount of properties at 28 March 2004 as deemed cost as at that date and will not revalue properties for accounting purposes in the future.”

Fair Value / Deemed Cost – Possible Impacts

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IFRS 1 – Key Decisions

Possible Pros Possible Cons

Alleviates retrospective application issues

Cost of valuation expert/resources

Potential equity bump, asset increase (note - related tax impact also)

Future amortization increase

CDN GAAP

IFRS – with Exemption

IFRS – no Exemption

At Transition: Balance Sheet ($M)

PP&E 500 700 450

Post Transition: Income Statement ($M)

Dep’n expense

14 20 13

Pros and cons: Example of application:

IFRS 1 – Key DecisionsEmployee Benefits

• Accrued benefit obligations/assets arising from defined benefit plans.

• Recognize all cumulative actuarial gains and losses in equity at date of transition, entry is recorded through retained earnings.

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In Practice (Sainsbury’s)

IAS 19 – “The Group has elected to recognise all cumulative actuarial gains and losses at the date of transition.”

IFRS 1 – Key DecisionsEmployee Benefits – Possible Impacts

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Possible Pros Possible Cons

Potential equity bump – if in an actuarial gain position

Potential equity hit – if in an actuarial loss position

Future decrease in compensation (benefits) expense - if in an actuarial loss position

Future increase in compensation (benefits) expense – if in an actuarial gain position

Alleviates retrospective application issues

-

Reduces specialists costs to apply retrospectively -

•Assume unrecognized actuarial losses of $100M at transition.• Under Canadian GAAP, these would be recognized as part of benefits expense in future periods.

• If elect IFRS 1 Exemption• At transition: Increase liability by $100M.• Post transition: Decrease benefit expense of $”X”M.

Example of application:Pros and cons:

IFRS 1 – Key DecisionsCumulative Translation Differences

• Reset Cumulative translation differences on foreign operations to zero at date of transition.

• Means gain or loss on disposal of foreign operations will exclude pre-transition translation differences.

• In Practice (Sainsbury’s) IAS 21 – “Under IFRS, cumulative translation differences arising on the consolidation of foreign entities are required to be recycled through the income statement when a foreign entity is sold as part of the gain or loss on sale. IFRS 1 allows the Group to not record cumulative translation differences arising before the date of transition. The Group has elected to take this exemption and has brought forward a nil balance in respect of these translation differences.”

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IFRS 1 – Considerations for

Canadian F/S Preparers

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• Many issuers refer to IFRS 1 in some form, but at this point relatively few refer to any of the specific exemptions available under IFRS 1, a rare example of an issuer providing some of its conclusions is shown below…

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IFRS 1 – Considerations for Canadian F/S Preparers

IFRS 1 – Considerations for Canadian F/S Preparers

• Deloitte IFRS Transition Survey http://www.zoomerang.com/Survey/?p=WEB228J32MRE5D

Results of the survey will be shared and can be shown in various formats

This chart depicts early stage results of exemptions taken under IFRS 1.

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Next Steps and Resources

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Next Steps and ResourcesIFRS 1 Education and TrainingCICA courses include:• IFRS Immersion Course (4-day)• Indepth IFRS 1 Course: First-time adoption (3-day)

Provincial Institute courses include:• IFRS topic/standard-specific courses• Industry-focused IFRS courses• Coming in the Fall 2009 – new 1-day IFRS 1 course

For full list of IFRS courses and events: http://www.cica.ca/ifrseducation

Next Steps and Resources

• Deloitte IFRS Website www.iasplus.com– Daily news updates in IASB developments– Summaries of standards and interpretations– Reference materials for download

• Deloitte e-learning modules www.iasplus.com– IFRS training modules for each IAS, IFRS and the Framework– Includes self-tests, available free of charge

• Contacts Karen Higgins (416) 601-6238 khiggins@deloitte.ca Clair Grindley (416) 601-6034 clgrindley@deloitte.ca

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Questions & Answers?

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This presentation is provided for educational and information purposes only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.