Parent adopts IFRSs before subsidiary
Entity A presents its (consolidated) first IFRS financial statements in 2008. Its foreign subsidiary B, wholly owned by Entity A since formation, prepares information under IFRSs for internal consolidation purposes from that date, but Subsidiary B will not present its first IFRS financial statements until 2013.
If Subsidiary B applies option (a), the carrying amounts of its assets and liabilities are the same in both its opening IFRS statement of financial position at 1 January 2012 and Entity A”s consolidated balance sheet (except for adjustments for consolidation procedures) and are based on Entity A”s date of transition.
Alternatively, Subsidiary B may apply option (b) and measure all its assets or liabilities based on its own date of transition to IFRSs (1 January 2012). However, the fact that Subsidiary B becomes a first-time adopter in 2013 does not change the carrying amounts of its assets and liabilities in Entity A”s consolidated financial statements.
Under option (b) a subsidiary would prepare its own IFRS financial statements, completely ignoring the IFRS reports that its parent uses in preparing its consolidated financial statements.
Under option (a) the numbers in a subsidiary”s IFRS financial statements will be as close to those used by its parent as possible. However, differences other than those arising from business combinations will still exist in many cases, for example:
- a subsidiary may have hedged an exposure by entering into a transaction with a fellow subsidiary. Such transaction could qualify for hedge accounting in the subsidiary”s own financial statements but not in the parent”s consolidated financial statements; or
- a pension plan may have to be classified as a defined contribution plan from the subsidiary”s point of view, but is accounted for as a defined benefit plan in the parent”s consolidated financial statements.
The IASB seems content with the fact that the exemption will ease some practical problems, [IFRS 1.BC62], though it will rarely succeed in achieving more than a moderate reduction of the number of reconciling differences between a subsidiary”s own reporting and the numbers used by its parent.
More importantly, the choice of option (a) prevents the subsidiary from electing to apply all the other voluntary exemptions offered by IFRS 1, since the parent had already made the choices for the group at its date of adoption. Therefore, option (a) may not be appropriate for a subsidiary that prefers to use a different exemption (i.e. fair value as deemed cost) for property, plant and equipment due, for example, to a tax reporting advantage. Also, application of option (a) would be more difficult when a parent and its subsidiary have different financial years. In that case, IFRS 1 would seem to require the IFRS information for the subsidiary to be based on the parent”s date of transition to IFRSs, which may not even coincide with an interim reporting date of the subsidiary; the same applies to any joint venture or associate.
A subsidiary may become a first-time adopter later than its parent, because it previously prepared a reporting package under IFRSs for consolidation purposes but did not present a full set of financial statements under IFRSs. The above election may be ‘relevant not only when a subsidiary”s reporting package complies fully with the recognition and measurement requirements of IFRSs, but also when it is adjusted centrally for matters such as review of events after the reporting period and central allocation of pension costs. [IFRS 1.IG31]. Adjustments made centrally to an unpublished reporting package are not considered to be corrections of errors for the purposes of the disclosure requirements in IFRS 1. However, a subsidiary is not permitted to ignore misstatements that are immaterial to the consolidated financial statements of its parent but material to its own financial statements.
If a subsidiary was acquired after the parent”s date of transition to IFRSs then it cannot apply option (a) because there are no carrying amounts included in the parent”s consolidated financial statements, based on the parent”s date of transition. Therefore, the subsidiary is unable to use the values recognised in the group accounts when it was acquired.
The exemption is also available to associates and joint ventures. This means that in many cases an associate or joint venture that wants to apply option (a) will need to choose which shareholder it considers its ‘parent for IFRS 1 purposes and determine the IFRS carrying amount of its assets and liabilities by reference to that parent”s date of transition to IFRSs.
Parent becomes a first-time adopter later than its subsidiary
If an entity becomes a first-time adopter later than its subsidiary the entity should in its consolidated financial statements, measure the subsidiary”s assets and liabilities at the carrying amounts that are in the subsidiary”s financial statements, after adjusting for consolidation and for the effects of the business combination in which the entity acquired the subsidiary. The same applies for associates or joint venture, substituting equity accounting adjustments. [IFRS 1 Appendix D17].
Unlike other first-time adoption exemptions, this exemption does not offer a choice between different accounting alternatives. In fact, while a subsidiary that adopts IFRS later than its parent can choose to prepare its first IFRS financial statements by reference to its own date of transition to IFRSs or that of its parent, the parent itself must use the IFRS measurements already used in the subsidiary”s financial statements, adjusted as appropriate for consolidation procedures and the effects of the business combination in which it acquired the subsidiary. [IFRS 1.BC63]. This exemption does not preclude the parent from adjusting the subsidiary”s assets and liabilities for a different accounting policy, e.g. cost or revaluation for accounting for property, plant and equipment. The exemption, however, limits the choice of exemptions (e.g. the deemed cost exemption) with respect to the accounts of the subsidiary in the transition date consolidated accounts.
The following example, which is based on the guidance on implementation of IFRS 1, illustrates how an entity should apply these requirements.