Chapter 35 – Joint Ventures Page 460
8 Disclosures
A venturer is required to disclose a list and description of all significant joint ventures that it has an interest in and the proportion of those interests. In addition, where joint venture
amounts are not reported separately in the financial statements, the venturer should disclose the aggregate of its share of current assets, long-term assets, current liabilities, long-term
liabilities, income and expenditure. [IAS 31.56]
The method under which joint ventures have been recognised should be clearly identified as being either proportionate consolidation or equity accounting. [IAS 31.57]
In addition, a number of disclosures are required in respect of contingent liabilities unless they are remote and capital commitments in relation to the joint venture investment. These
disclosures include information not only on the venturer’s contingent liabilities and capital commitments that have arisen as a result of the joint venture relationship but also on its share
of those amounts of the joint venture itself. [IAS 31.54, 31.55]
9 Chapter Review
This chapter has been concerned with the accounting requirements for investments which give rise to joint control over investees.
This chapter has covered: the scope of IAS 31;
the definitions: joint venture, joint control, jointly controlled operations, jointly controlled assets and jointly controlled entities;
the method of accounting for each type of joint venture; proportionate consolidation and the equity method for jointly controlled entities;
adjustments required for transactions between the venturer and the joint venture; and the disclosure requirements of IAS 31.
Chapter 35 – Joint Ventures Page 461
10 Self Test Questions
Chapter 35
1. Which of the following methods of accounting for its share of each of the joint
ventures assets and liabilities are available to a venturer in a jointly controlled entity, according to IAS31 Interests in joint ventures?
1 The equity method.
2 Proportionate consolidation, combining its share of each with similar
items it controls. 3
Proportionate consolidation, showing separate line items for its share of each.
A
Methods 2 and 3 only
B
Methods 1 and 3 only
C Methods 1 and 2 only
D
Methods 1, 2 and 3
2. The Fluming Company and The Talgarth Company own 60 and 40
respectively of the equity of The Hoophorn Company. Fluming and Talgarth have signed an agreement whereby all the strategic decisions in respect of
Hoophorn are to be taken with the agreement of them both.
Are the following statements true or false, according to IAS27 Consolidated and separate financial statements, IAS28 Investments in associates and
IAS31 Interests in joint ventures?
1 Fluming should classify its investment in Hoophorn as an investment
in a subsidiary. 2
Talgarth should classify its investment in Hoophorn as an investment in an associate.
Statement 1Statement 2
A False
False
B
False True
C
True False
D True
True
Chapter 35 – Joint Ventures Page 462
3. The Apple Company, The Berry Company and The Cherry Company own
30, 30 and 40 respectively of the equity of The Damson Company. Apple and Berry have signed an agreement whereby the strategic decisions
in respect of Damson are to be taken with the agreement of both of them.
Are the following statements true or false, according to IAS31 Interests in joint ventures?
1 Cherry is an investor in Damson.
2 Apple should account for its share in the profits of Damson by
reference to the dividends receivable from Damson. Statement 1
Statement 2
A
False False
B False
True
C
True False
D
True True
4. Are the following statements in respect of the conditions for joint control true
or false, according to IAS31 Interests in joint ventures? 1
The venturers must have a contractual arrangement as to how strategic decisions in respect of a joint venture are to be made.
2 Majority voting is acceptable for strategic decisions in respect of a joint
venture. Statement 1Statement 2
A False
False
B
False True
C True
False
D True
True
Chapter 35 – Joint Ventures Page 463
5. The Wyndale Company has correctly classified its investment in The Flask
Company as an investment in a joint venture. Wyndales statement of financial position shows debt of CU500; Flasks statement of financial position
shows debt of CU700.
Are the following statements true or false, according to IAS31 Interests in joint ventures?
1 Retained earnings in Wyndales consolidated statement of financial
position will be the same, whether Wyndale uses proportionate consolidation or the equity method to account for its interest in Flask.
2 Debt in Wyndales consolidated statement of financial position will be
the same, whether Wyndale uses proportionate consolidation or the equity method to account for its interest in Flask.
Statement 1 Statement 2
A
False False
B False
True
C
True False
D
True True
6. Are the following statements about the sale of a non-current asset by a
venturer to a joint venture true or false, according to IAS31 Interests in joint ventures?
1 In all circumstances the venturer recognises the whole of any
impairment loss arising. 2
In all circumstances the venturer recognises the whole of any gain arising.
Statement 1 Statement 2
A
False False
B False
True
C
True False
D
True True
Chapter 35 – Joint Ventures Page 464
7. The Smart Group comprises The Smart Company and its 75 owned
subsidiary The Krnov Company. Smart also owns one third of the equity of The Truman Company and has signed a contract with the other equity
holders in Truman whereby all strategic financial and operating decisions in respect of Truman require the unanimous consent of all shareholders. Smart
uses proportionate consolidation to account for jointly controlled entities.
The carrying amounts of trade receivables in the separate financial statements of these companies at 31 December 20X7 are:
Smart CU800,0
00 Krnov
CU500,0 00
Truman CU300,0
00 In accordance with IAS27, Consolidated and separate financial statements
and IAS31 Interests in joint ventures, the carrying amount of trade receivables in the consolidated financial statements of Smart should be
A CU1,275
B CU1,300
C CU1,400
D CU1,600
8. The Wigwam Company has a 25 equity interest in The Tepee Company
which has been correctly classified as a jointly controlled entity. Wigwam accounts for its investment in Tepee by proportionate consolidation.
During the year ended 31 December 20X7 Wigwam sold goods to Tepee for CU160,000. Tepee held these goods in its inventory at 31 December 20X7.
The goods had cost Wigwam CU100,000.
What amount in respect of Tepees inventories should Wigwam recognise in its consolidated statement of financial position at 31 December 20X7,
according to IAS31 Interests in joint ventures?
A CU100,000
B CU25,000
C CU36,250
D CU160,000
Chapter 36 – First Time Adoption Page 465
Chapter 36 FIRST TIME ADOPTION
1 Business Context
Any change in the use of an accounting framework is likely to cause entities transitional problems as they change from one set of standards to another. The purpose of I FRS 1 First-
time adoption of international financial reporting standards is to establish common guidelines and practices for entities preparing their financial statements for the first time in accordance
with International Financial Reporting Standards IFRS.
IFRS 1 is essentially a road map of how to move from the preparation of financial statements using local Generally Accepted Accounting Practices GAAP to using international standards;
it reduces uncertainty for users of financial statements and aids transparency. In particular, IFRS 1 means that there will be a clear distinction between changes in reported earnings
arising from:
the underlying economic activity; and changes in accounting recognition and measurement criteria.
2 Chapter Objectives
On completion of this chapter you should be able to: understand the scope and objectives of IFRS 1;
understand the key recognition and measurement criteria in IFRS 1; and demonstrate knowledge of the key disclosure and presentation issues associated
with using international standards for the first time.
3 Objectives, Scope and Definitions of IFRS 1
The objective of IFRS 1 is to ensure that an entitys first IFRS financial statements and its interim financial reports for any part of the period covered by those financial statements
contain high quality information that is transparent for users whilst ensuring that comparability has not been undermined. IFRS 1 includes a number of choices that an entity can make;
although the provision of such choices reduces comparability, the IASB decided that the cost of preparing transitional information in an entity’s first IFRS financial statements should not
outweigh the potential benefit of including such information.
IFRS 1 applies to the preparation of an entity’s first financial statements that are being prepared in accordance with IFRS. In addition, any interim financial reports prepared for part
of the period covered by an entity’s first IFRS financial statements should also be prepared according to the transitional requirements of IFRS 1.
An entity’s first IFRS financial statements are the first annual financial statements in which an entity fully adopts IFRS. An explicit and unreserved statement of compliance with IFRS
should be made in those financial statements. If an entity is already applying IFRS but makes changes to its accounting policies, it should follow IAS 8 Accounting policies, changes in
accounting estimates and errors and not IFRS 1.
Chapter 36 – First Time Adoption Page 466
4 Recognition and Measurement
4.1 Reporting requirements in the year of adoption
An entity should prepare and present an opening IFRS statement of financial position at the date of its transition to IFRSs. This is the beginning of the earliest period for which
comparative financial information is presented and is the starting point for its adoption of IFRS.
An entity should choose its accounting policies based on the latest versions of international standards current at its reporting date for the end of its first financial statements i.e. the end of
the latest period covered by its first IFRS financial statements. Once selected, these accounting policies should be applied to all periods reported. Earlier versions of standards
should not be used in the comparative periods. The latest standards are used since these contain the most up to date requirements and therefore provide the best accounting
treatment. [IFRS 1.7]
Illustration 1
An entity has a 31 December accounting year end and intends to prepare its financial statements to comply with IFRS for the first time in the year to 31 December 2008. The
entity reports one year of comparative information.
Comparative year First year of application
2007 2008
112007 31122007
31122008 The date of transition to IFRS is 1 January 2007.
The ‘opening IFRS statement of financial position’ at 1 January 2007 should be restated in accordance with IFRS current at 31 December 2008, as the basis for the 2007 comparative
information.
Subject to some exemptions, which are mentioned briefly later, an entity should restate information on an IFRS basis as if the entity had always followed international standards.
Action Example
Recognise all assets and liabilities as required by IFRS. This may require the
recognition of items not previously recognised.
Development costs expensed in profit or loss under local GAAP may need to be capitalised
if they meet IFRS recognition criteria.
Derecognition of assets and liabilities that do not meet IFRS recognition criteria but
have been recognised under existing GAAP. General provisions previously recognised
under an entity’s local GAAP may not be permitted under IAS 37 Provisions,
contingent liabilities and contingent assets.
Reclassification of items recognised under previous GAAP as one type of asset, liability
or component of equity under a different classification.
Redeemable preference shares currently classified as equity may need to be
reclassified as liabilities.
Chapter 36 – First Time Adoption Page 467
Action Example
Apply IFRS in measuring all recognised assets and liabilities. This may result in the
restatement of the carrying amount of assets and liabilities.
Deferred tax balances may have been discounted to present value under an entity’s
local GAAP. IAS 12 Income taxes does not permit the discounting of deferred tax and
therefore the amount will need to be remeasured on an undiscounted basis.
Illustration 2
An entity is a first-time adopter of IFRS. It has previously reported under local generally accepted accounting practices local GAAP. The entity has identified the following items as
requiring a different treatment in the opening IFRS statement of financial position.
1. An intangible asset acquired two years ago which was not recognised as an asset
under local GAAP but which meets IFRS recognition criteria. The asset should be recognised in the opening IFRS statement of financial position.
2. Development costs recognised under local GAAP in the opening statement of financial
position do not meet IFRS recognition criteria. The development costs should be removed from the opening IFRS statement of financial position.
4.2 Exemptions
As explained above, on first time adoption of IFRS an entity is required to restate its results as if it had always followed international standards. A number of exemptions are, however,
permitted on a cost benefit basis, i.e. where the cost of preparing such information is likely to be in excess of any benefit achieved from restating it.
There is a risk that when information is restated, the outcome of subsequent events which affect restated items is used to refine that information. This is discussed further below in
relation to the use of estimation techniques. IFRS 1 includes a number of prohibitions on the use of retrospective application where this is thought to be a particular issue.
The exemptions in IFRS 1 are briefly set out below. Business combinations – an exemption from having to apply IFRS 3 Business
combinations to all past business combinations is provided. An entity is however permitted to apply IFRS 3 to a past business combination but if it does so, then all
subsequent combinations should be restated under IFRS 3.
Fair value or revaluation as deemed cost – an entity adopting the cost model for property, plant and equipment under IAS 16 Property, plant and equipment is
permitted to use fair value at the date of transition to IFRS. This value is then ‘frozen’ becomes deemed cost within the IFRS financial statements. This approach is also
permitted for investment properties and intangible assets. A past valuation may also be used as deemed cost provided that it is broadly similar to fair value or depreciated
cost.
Employee benefits – an entity is not required to split out all past actuarial gains and losses in a retirement benefit plan since it was created, even if it is going to use what
is essentially a deferral method for future gains and losses known as the “corridor” approach in IAS 19 Employee benefits.
Cumulative translation differences – IAS 21 The effects of changes in foreign
Chapter 36 – First Time Adoption Page 468
exchange rates requires an entity to identify translation differences that have not been reported in profit or loss, for later recognition. The exemption permits all such
translation differences to be deemed to be zero at the date of transition.
Compound financial instruments – a compound financial instrument is one which has attributes of both a liability and equity. International standards require that the two
elements are separated; the exemption does not require the separation where the liability element is no longer outstanding.
Timing of adoption in groups – where a parent and its subsidiaries adopt international standards at different times, elections are permitted that simplify the adoption process
in the subsidiaries’ separate financial statements. In December 2007 an Exposure Draft was published setting out an exemption in relation to
the requirements of IAS 27 Consolidated and separate financial statements. Where an entity is required to present separate financial statements in accordance with IAS 27, the Exposure
Draft proposes that deemed cost may be used to recognise its investments in subsidiaries, associates and jointly controlled entities. Deemed cost may be either fair value or the
previous GAAP carrying amounts at the entity’s date of transition to IFRS.
4.3 Estimates
Once an entity has chosen its IFRS accounting policies, it may need to revisit estimates that were made under its previous accounting framework. The entity should consider whether
such estimates meet the measurement criteria under international standards. In reassessing estimates, an entity should not take into account information that has come to light since the
relevant financial statements were prepared. For example, an entity should make estimates under IFRS at the date of transition to IFRS as if they had been calculated using IFRS at the
date of their original assessment. Subsequent information should be considered in the same way as non-adjusting events under IAS 10 Events after the reporting period unless there is
evidence that the original estimates contained errors. [IFRS 1.31]
New estimates may need to be made at the date of transition to IFRS. Where this is the case, these estimates should be made based on information that existed at the date of transition.
5 Presentation and Disclosure
5.1 Comparative information
To comply with IAS 1 Presentation of financial statements an entity is required to report at least one year of comparative information.
Entities may have presented historical summaries of financial information for periods before the first period for which full comparative information is presented, for example a three or five
year summary statement of comprehensive income. Such summaries are not required to be restated to comply with the recognition and measurement requirements of IFRS. However,
where such summaries are presented and have not been restated under IFRS, the information should be clearly identified as being prepared under a different accounting
framework. Although it is not necessary to restate this information, the main adjustments that would be required if it were restated under IFRS should be identified and explained. No
quantification is necessary.
5.2 Explanation of transition
An entity should explain how the transition from its previous GAAP to IFRS has affected the financial statements in relation to its financial performance and position and cash flows.
[IFRS 1.38]
Chapter 36 – First Time Adoption Page 469
5.2.1 Reconciliations
To assist with the requirement to explain the transition in an entitys first IFRS financial statements, an entity is required to present a number of reconciliations; these include:
a reconciliation of equity reported under previous GAAP to that reported under IFRS at the date of transition to IFRS. In addition, a reconciliation of equity should be
provided for the previously reported figures that were for the latest period presented in the entitys most recent annual financial statements under previous GAAP to IFRS.
For example, for an entity that adopts IFRS for the first time in its financial statements for the year to 31 December 2008 and presents one year of comparative information,
a reconciliation of its equity as at 1 January 2007 and 31 December 2007 should be presented;
a reconciliation to its total comprehensive income under IFRSs for the latest period in the entitys most recent annual financial statements. The starting point for that
reconciliation should be total comprehensive income under previous GAAP for the same period. Using the example above, this will be a reconciliation for the period
ending 31 December 2007;
where the entity reported a statement of cash flows under previous GAAP, the main adjustments made to restate the comparatives should be explained; and
additional disclosures should be presented in relation to any impairment losses i.e. the reduction in an asset’s recoverable amount below its carrying amount or
reversals of impairment losses recognised for the first time when preparing its opening IFRS statement of financial position.
6 Chapter Review
This chapter has been concerned with the procedures necessary in the introduction of IFRS for the first time.
This chapter has covered: the objectives and scope of IFRS 1;
the key recognition and measurement criteria in IFRS 1; and the key disclosure and presentation issues in adopting IFRS for the first time.
Chapter 36 – First Time Adoption Page 470
7 Self Test Questions
Chapter 36
1. An entity that presents its first IFRS financial statements is known as
A
an originating entity
B a provisional presenter
C a first-time adopter
D
an initial reporter
2. An entitys statement of financial position published or unpublished at the
date of transition to IFRSs is best described as the select one answer
A
provisional IFRS statement of financial position
B closing GAAP statement of financial position
C
opening IFRS statement of financial position
D
originating IFRS statement of financial position
3. Which of the following statements best describes the date of transition to
IFRSs?
A The beginning of the latest period presented in the entitys most recent
annual financial statements under previous GAAP
B The end of the latest period presented in the entitys most recent
annual financial statements under previous GAAP
C
The beginning of the earliest period for which an entity presents full comparative information under IFRSs in its first IFRS financial
statements
D
The end of the earliest period for which an entity presents full comparative information under IFRSs in its first IFRS financial
statements
Chapter 36 – First Time Adoption Page 471
4. The Marshbird Company is preparing financial statements to 30 June each
year. It has decided to adopt IFRS and its first fully compliant financial statements will be for the year ending 30 June 20X9.
According to IFRS1 First-time adoption of international financial reporting standards, which IFRSs should be used when preparing the opening IFRS
statement of financial position and the comparative figures for the year ended 30 June 20X8?
A
Those IFRSs in existence at 30 June 20X7
B
Those IFRSs in existence at 30 June 20X9
C For the opening IFRS statement of financial position, the IFRSs in
existence at 30 June 20X7 and for the year ended 30 June 20X8, the IFRSs in existence at 30 June 20X8
D Those IFRSs in existence at 30 June 20X8
5. The Monkman Company has prepared the following:
20X5 Financial statements for the year ended 30 September 20X5, which
comply with all IFRSs in existence at that date, except that where local GAAP has differing standards the local standards have been
used.
20X6 Financial statements for the year ended 30 September 20X6, which
comply with some, but not all, IFRSs in existence at that date. 20X7
Financial statements for the year ended 30 September 20X7, which comply with all IFRSs in existence at that date. It includes an explicit
statement that it has applied all IFRSs. The comparatives are what was shown in the previous years financial statements.
20X8 Financial statements for the year ended 30 September 20X8 and the
comparatives for the previous year which comply with all IFRSs in existence at 30 September 20X8. It includes an explicit statement
that it has applied all IFRSs.
According to IFRS1 First-time adoption of international financial reporting standards, statements for which year are considered to be Monkmans first
IFRS financial statements?
A 20X5
B 20X6
C 20X7
D 20X8
