First Adoption of IFRS by an entity in particular country – a case study

Scenario:
You are an accounting adviser in an entity in particular country. The entity faces the problem of first translating its financial statements into IFRS. You are asked to explain the process of first adoption of IFRS.
Note: your case study is not based on any existing company for the reason that you cannot make a translation without additional information gathered from the top management of the company.

Required:
1. Select the country an entity comes from and list the main differences between the local accounting requirements (local GAAP) and IFRS.
2. Prepare the statement of financial position and income statement (or equivalent of statement of comprehensive income, if applicable) according to the local GAAP for two accounting periods. Preparing these two statements, include some (minimum 3) typical differences between local GAAP and IFRS from the list you have produced in question 1.
3. Translate the statement of financial position and income statement (or equivalent of statement of comprehensive income, if applicable) into IFRS for the year 2. (I.e. the opening statement of financial position is at the beginning of year 2. Use the “Translation Table”. The impact of related tax (deferred tax) has also to be included.
4. Prepare all financial statements required by IAS 1 Presentation of Financial Statements. (Notes are not required)
5. Explain the impact of the first adoption of IFRS on the entity’s financial position and performance according to the requirements of IFRS 1.
6. Write a commentary describing the problems regarding first time adoption of IFRS in the chosen country and the particular entity.
Note: Do NOT try to translate a real company’s financial statements as this is impossible without certain knowledge gained from the company.

This assignment is in the form of a scenario, which covers the main learning outcomes for this module (the learning outcomes can be also found on page 3 of your module guides).

1 Knowledge and understanding Discuss the purpose of, and progress towards, the international harmonisation of accounting practices.
2 Knowledge and understanding Identify some of the key emerging issues in international accounting.
3 Intellectual, practical, affective and transferable skills Critically evaluate the similarities and differences in financial accounting practices globally and their implications for international business activity.
Expectations and Assessment Criteria

Task Expectations / Marking Criteria Learning outcome
1. Select the country the entity comes from and list the main differences between the local accounting requirements (local GAAP) and IFRS. Students must describe the differences between local GAAP and IFRS in particular country and provide the source of information used (10 marks) 3
2. Prepare the statement of financial position and income statement (or equivalent of statement of comprehensive income, if applicable) according to the local GAAP for two accounting periods. Students prepare the statement of financial position and the income statement comprising some typical transactions in the business chosen. Students must include at least 3 differences between local GAAP and IFRS. (10 marks) 3
3. Translate the statement of financial position and income statement into IFRS for the year 2. The opening Balance sheet for translation is the Balance sheet at 31st December of the year 1. Students are required to construct “Translation table” that includes the translation from local GAAP into IFRS. (30 marks) 3
4. Prepare all financial statements required by IAS 1 Presentation of Financial Statements Students need to demonstrate the knowledge of IAS 1. Mark allocation:
Financial statements 5 marks each (total 20 marks). 1 & 2
5. Explain the impact of the first adoption of IFRS on an entity’s financial position and performance according to the requirements of IFRS 1. Students must demonstrate knowledge of IFRS 1 and its disclosure requirements. (15 marks) 1 & 2
6. Write a commentary describing the problems regarding the first time adoption of IFRS in chosen country and the particular entity. This document should be in a basic report format. Students must write the report explaining the situation to the users, ie. non accountants. (15 marks) 1 & 3
Total marks 100

The entity was established on 1st January 2012. The Opening Statement of Financial Position included Cash of 100,000 and Share capital of the same amount. The entity follows the accounting requirements of Country X (X GAAP).

In country X:
1. The costs of advertising are considered as Intangible assets and the costs are amortised over five years on the straight-line basis.
2. All Intangible assets (including those with indefinite useful life) are amortised over a period of five years.
3. No rules for Investment property exist; Investment property is accounted for in the same way as Property, plant and equipment and measured at historical cost, i.e. the possibility of measuring the Investment property at fair value does not exist.

Transactions in 2012
1. The entity paid 20,000 in cash for the movie that will be broadcast on local TV in the future and will introduce the entity’s new product (advertisement). The amortisation of the movie is 20,000 ÷ 5 = 4,000 and is a part of administrative expenses in the Statement of Comprehensive Income.
2. The entity paid 30,000 in cash for the brand name of the world-leading product. The useful life of the brand name is indefinite. The amortisation of the brand is 30,000 ÷ 5 = 6,000 and is a part of administrative expenses in the Statement of Comprehensive Income.
3. The entity paid 10,000 in cash for the purchase of land that will be rented to the third party under the operating lease.
Accounting entries 2012 (T accounts) – Country X

Cash Share Capital Intangible assets
Amortisation of Intangibles (Administrative expenses) Land

Transactions 2013 (X GAAP)
1. Amortisation of the movie 4,000.
2. Amortisation of brand 6,000.
Accounting entries 2013 (T accounts) – Country X

Cash Share Capital Intangible assets
Amortisation of Intangibles (Administrative expenses) Land Retained earnings

Note
The fair value of the land at the end of 2012 was 40,000.
The fair value of the land at the end of 2013 was 45,000.
Translation table for IFRS Opening Statement of Financial Position at January, 1st, 2013
X GAAP Advertisement Brand Land IFRS
Fixed assets
Intangible assets
Land
Current assets
Cash
Total assets

Equity
Share capital
Profit (Retained earnings)
Current liabilities
—-
Total equity and liabilities

Translation table for IFRS Statement of Financial Position at December, 31st, 2013
X GAAP Advertisement Brand Land IFRS
Fixed assets
Intangible assets
Land
Current assets
Cash
Total assets

Equity
Share capital
Retained earnings
Profit
Current liabilities
—-
Total equity and liabilities

Translation table for the Statement of Comprehensive Income
X GAAP Advertisement Brand Land IFRS
Revenue
Administration
Non-operating profit
Gain from land revaluation
Profit
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