Application of IFRS 1 to estimates
Entity A”s first IFRS financial statements have a reporting date of 31 December 2013 and include comparative information for one year. In its previous GAAP financial statements for 31 December 2012, Entity A accounted for its pension plan on a cash basis. However, under IAS 19 the plan is classified as a defined benefit plan and actuarial estimates are required.
A will need to make estimates under IFRSs at the relevant date that reflect conditions that existed at the relevant date. This means, for example, Entity A”s:
(i) discount rates at 1 January 2012 (date of transition) and 31 December 2012 for the pension plan and for provisions should reflect market conditions at those dates; and
(ii) actuarial assumptions at 1 January 2012 and 31 December 2012 about future employee turnover rates should not reflect conditions that arose after those dates – such as a significant increase in estimated employee turnover rates as a result of a curtailment of the pension plan in 2013.
Entity B accounted for inventories at the lower of cost and net realisable value under its previous GAAP. Entity B”s accounting policy is consistent with the requirements of IAS 2 – Inventories. Under previous GAAP, the goods were accounted for at a price of £1.25/kg. Due to changes in market circumstances, Entity B ultimately could only sell the goods in the following period for £0.90/kg.
Assuming that Entity B”s estimate of the net realisable value was not in error, it will account for the goods at £1.25/kg upon transition to IFRSs and will make no adjustments because the estimate was not in error and its accounting policy was consistent with IFRSs. The effect of selling the goods for £0.90/kg will be reflected in the period in which they were sold.
Entity C”s first IFRS financial statements have a reporting date of 31 December 2013 and include comparative information for one year. In its previous GAAP financial statements for 31 December 2011, Entity C accounted for a provision of $150,000 in connection with a court case. Entity C”s accounting policy was consistent with the requirements of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, except for the fact that Entity C did not discount the provision for the time value of money. The discounted value of the provision at 31 December 2011 would have been $135,000. The case was settled for $190,000 during 2012.
In its opening IFRS statement of financial position Entity C will measure the provision at $135,000. IFRS 1 does not permit an entity to adjust the estimate itself, unless it was in error, but does require an adjustment to reflect the difference in accounting policies. The unwinding of the discount and the adjustment due to the under-provision will be included in the comparative statement of comprehensive income for 2012.
Entity D”s first IFRS financial statements have a reporting date of 31 December 2013 and include comparative information for one year. In its previous GAAP financial statements for 31 December 2012, Entity D did not recognise a provision for a court case arising from events that occurred in September 2012. When the court case was concluded on 30 June 2013, Entity D was required to pay €1,000,000 and paid this on 10 July 2013.
In preparing its comparative statement of financial position at 31 December 2012, the treatment of the court case at that date depends on the reason why Entity D did not recognise a provision under its previous GAAP at that date.
Scenario 1 – Previous GAAP was consistent with IAS 37. At the date of preparing its 2012 financial statements, Entity D concluded that the recognition criteria were not met. In this case, Entity D”s assumptions under IFRSs are to be consistent with its assumptions under previous GAAP. Therefore, Entity D does not recognise a provision at 31 December 2012 and the effect of settling the court case is reflected in the 2013 statement of comprehensive income.
Scenario 2 – Previous GAAP was not consistent with IAS 37. Therefore, Entity D develops estimates under IAS 37, which requires that an entity determines whether an obligation exists at the end of the reporting period by taking account of all available evidence, including any additional evidence provided by events after the end of the reporting period. Similarly, under IAS 10, the resolution of a court case after the end of the reporting period is an adjusting event if it confirms that the entity had a present obligation at that date. In this instance, the resolution of the court case confirms that Entity D had a liability in September 2012 (when the events occurred that gave rise to the court case). Therefore, Entity D recognises a provision at 31 December 2012. Entity D measures that provision by discounting the €1,000,000 paid on 10 July 2013 to its present value, using a discount rate that complies with IAS 37 and reflects market conditions at 31 December 2012.