Preparation of financial statements according to IFRS for the first time

The global economy and globalization has made it necessary to unify accounting principles and the rules relating to the preparation of financial statements. Thus, it became necessary to develop a common template for financial statements that would apply both in the United States and in Europe. Following the development of a uniform reporting model, it was made clear that its main purpose is to provide information on the financial situation of a given entity in order to be able to make the best economic decisions.

Retrospective application of accounting principles in financial statements

Accounting in accordance with the IFRS requires the preparation of an opening balance as of the date of transition to IFRS. For example, if it is January 1, 2010, then it is for this day that the transition balance should be prepared. A properly prepared financial report should contain comparative data for at least the previous financial period. If the financial statements are being prepared for the first time, it is not necessary to prepare the opening balance for the day of transition. In this situation, the principle of retrospectiveness is adopted - the first report is presented as if the entity to which it refers always presented its financial statements in accordance with the IFRS. It should be remembered that the adjustments resulting from the application of these rules are recognized for the first time as an undistributed result from previous years.

Sometimes it is possible to resign from a few of the rules presented by IFRS, but this is only allowed in two cases: an optional or mandatory exclusion from earlier application of IFRS. This solution results from the principle of retrospectiveness, which is applied when preparing financial statements for the first time, because the application of certain standards would be impracticable and the quality and reliability of the presented data would be significantly reduced.

Areas subject to an optional exclusion from the retrospective application of IFRS

In the opening balance sheet, that was prepared in accordance with the IFRS principles, several areas may be excluded. The first of these is the fair value as the production cost. In this case, it means the company's right to measure individual intangible and legal assets as well as investment property at fair value, which will be the basic measure for depreciation write-offs in subsequent years.

Another area that may be exempted is the issue of employee benefits - actuarial gains and losses related to defined benefits are taken into account here. Also allowed, is the possibility of companies not recognizing foreign exchange differences as at the date of transition due to the conversion of financial data of subsidiaries. The area related to share-based payments is also excluded. This means that a company may apply IFRS tp "payments in the form of own shares", but only in a situation where it publicly discloses the fair value of financial instruments in advance as at the date of their valuation.

The area related to the assets and liabilities of related entities may also be excluded. Here, much depends on whether the subsidiary changes to IFRS later or sooner than the parent entity. In the first case, it must adapt to the balance sheet values previously taken into account by the dominant entity in the prepared financial statrements and should evaluate its assets accordingly. If, on the other hand, the reverse situation occurs, then the assets and liabilities of the subsidiary should be included, of course, taking into account consolidation adjustments, according to the carrying amount.

Optional exclusion also applies to transactions regulated by equity instruments - it is necessary to separate from the financial liabilities, capital components that have been defined as share capital. In this case, an example of a liability corresponding to the accrued costs of interest is presented, which is an undivided result from previous years. The next area is the presentation of financial instruments identified before the opening IFRS balance sheet. They can be presented as financial assets or liabilities at fair value, which can be shown in the profit and loss account or presented as available for sale. This type of classification is made at the moment of transition to IFRS.

In the case of an exemption, a simplified method is used to calculate the liability related to the expected costs of restoring the asset to the original location. Using this method, the company is required to take into account the discounted amount of liability for this restoration. The last element related to the optional exemption is the valuation of financial assets and financial liabilities.

Areas subject to mandatory exclusion from the retrospective application of IFRS

In case of mandatory exclusion from the retrospective application of IFRS, it was necessary to create a catalog of mandatory exclusions. This is due to the fact that certain changes can not be be considered reliable if made retrospectively. The first principle on this list is the derecognition of financial assets and liabilities. Companies can not recognize financial assets and liabilities in the opening IFRS balance sheet, if they did not do so in the individual financial statements.

Hedge accounting is another area of mandatory exclusion. It can be used only if all the criteria contained in IAS 39 are met - hedging transactions that do not meet the conditions described in it should not be included in the balance sheet. Excluded are estimates which should be based on the same assumptions on which the calculation in the separate statements was based. It is very important for the company to take into account the information received in the profit and loss account.

The last element that is subject to mandatory exclusion are the assets available for sale. The companies that converted to IFRS in 2006 must reverse the depreciation of long-term assets held for trading for the period from the date when they began to meet the criteria consistent with the assets held for trading.