In June, the IASB published its first International Financial Reporting Standard—IFRS 1. Perhaps appropriately, the standard ‘First-time Adoption of International Financial Reporting Standards’ sets requirements for those companies that adopt IFRS (including International Accounting Standards developed by the former International Accounting Standards Committee). It will therefore be relevant to the consolidated accounts of listed companies, which are required by an EU Regulation to comply with adopted international accounting standards for accounting periods starting after 1 January 2005, and also any other companies that use adopted international standards.

The standard is based on the proposals set out in an exposure draft which was published in July last year and which was set out in an ASB Consultation Paper. Like the exposure draft, the standard’s governing principle is that the accounting policies required by IFRS for the first financial statements are to be applied to all periods presented. There are certain exemptions from this that may be used if an entity so elects and some cases in which retrospective application is prohibited.

An important case in which retrospective application is prohibited is that financial assets and financial liabilities that have been derecognised under the basis of accounting in use before January 2001 are not be recognised in IFRS accounts even if this would normally be required. This reflects the current requirements of IAS 39 ‘Financial Instruments: Recognition and Measurement’. In its Basis for Conclusions, the IASB has noted that it may amend or delete this exception in the process of completing its improvements to IAS 39. The issue is particularly important as arrangements under which financial assets and liabilities are held off balance sheet can remain in place for many years. The ASB will follow IASB’s deliberations closely on this point.

The standard is somewhat different from the proposals in the exposure draft, which envisaged that entities would be required to use either all of the proposed exemptions or none of them. Because it gives greater flexibility over the use of options, the standard does not permit the use of the alternative approach proposed in the exposure draft, under which financial statements would be presented as if the entity had always applied IFRS: this would require consideration of superseded IFRS. There are some other, more detailed, changes from the exposure draft. These include the requirements for business combinations, hedge accounting and cumulative translation differences.

The ASB has welcomed publication of the standard, which will be helpful for companies that are facing the transition to IFRS, and has noted that its requirements are mainly sensible and pragmatic.