International Financial Reporting Standard No. (1): First Adoption of International Standards
Introduction
International Financial Reporting Standard No. (1) IFRS 1 is one of the most important accounting standards, as it outlines the steps and procedures that companies must follow when adopting a set of International Financial Reporting Standards (IFRS) for the first time.
It aims for the financial statements of companies transitioning to IFRS to be understandable, comparable, reliable, and to reflect their true financial position from the moment of transition.
Objective of the Standard
The primary objective of IFRS 1 is to ensure that the first financial statements published in accordance with international standards are:
of high quality and reliable.
reflecting the true financial position of the company at the date of transition.
providing a stable starting point for future reporting.
and enabling users to compare the company's financial performance before and after the transition.
General Concept and Transition Date
IFRS 1 requires the company to prepare an opening balance sheet in accordance with IFRS at the transition date, which is the beginning of the comparative period presented in the first international financial statements.
For example: If the company's first IFRS financial statements are for the year 2025, the transition date will be January 1, 2024.
On this date, assets, liabilities, and equity are remeasured according to IFRS requirements, as if the standards had been applied from the beginning.
Requirements for First Financial Statements
The first financial statements must include:
the opening balance sheet at the transition date.
the statement of financial position at the end of the current and comparative periods.
the statement of comprehensive income for the current and comparative periods.
the statement of changes in equity.
the statement of cash flows.
detailed notes explaining accounting policies and reconciliations from the old system to IFRS.
Mandatory Exceptions
The standard imposes certain cases where full retrospective application is prohibited, including:
Accounting estimates: They should not be recalculated retrospectively.
Recognition of prior profits or losses resulting from revaluation.
Differences arising from foreign currency translation are only calculated from the date of transition.
Impairment losses cannot be reversed if they were not reversible under the previous system.
Optional Exemptions
To facilitate the transition process and reduce costs, the standard provides a set of optional exemptions that the company can use as needed, the most notable of which are:
Adoption of fair value as deemed cost:
Fair value of fixed assets and properties can be used as a starting point instead of recalculating historical cost.
Business combinations:
The company is not required to recalculate the results of past mergers and can adopt them as they were in the books.
Foreign currency translation differences:
The company can eliminate prior accumulated differences and start from zero at the transition date.
Financial instrument options:
Some instruments can be reclassified upon transition in accordance with IFRS 9.
Required disclosures
IFRS 1 requires clear disclosure of:
New accounting policies.
The transition date and details of comparative statements.
Reconciliation tables showing the differences between figures under the previous system and under IFRS, in:
Opening equity.
Profits and losses for prior periods.
Mention of the exemptions or exceptions that were applied and their impact on the results.
Practical steps for implementing IFRS 1 within the company.
The transformation team includes the finance department, accountants, and external auditors.
Determine the transition date and collect historical accounting data.
Compare local policies with IFRS requirements and identify gaps.
Select appropriate optional exemptions to reduce effort and cost.
Re-measure assets and liabilities according to the new policies.
Prepare opening adjustments and required disclosures.
Review the statements by external auditors.
Key operational challenges
Difficulty in obtaining accurate historical data.
Differences in valuation and measurement methods from the local system.
Need for training accounting staff.
Adjust accounting systems and software to comply with IFRS.
Prepare detailed disclosures that increase the workload in the first year.
Summary
IFRS 1 is considered the cornerstone in the journey to international standards.
Commitment to its accurate application ensures a smooth transition and lends credibility to financial statements before investors and regulatory bodies.
Early planning, careful selection of exemptions, and providing transparency in disclosures are the keys to success in applying IFRS 1.
References
IFRS Foundation — The official text of International Standard No. (1).
Deloitte IFRS in Focus: First-time Adoption.
PWC — Guide to First-time Adoption of IFRS.
EY — IFRS 1: Practical Implementation Guide.
IAS Plus — Summaries and Insights on IFRS 1