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The revisions to IAS 32 and IAS 39 published in December 2003 include consequential amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards. John McDonnell looks at the implications of the amendments.
NNew optional exemption 1: non-restatement of comparatives for IAS 32 and IAS 39
A new optional exemption has been introduced that allows entities to present comparatives that do not comply with IAS 32 and IAS 39. An entity using this exemption must apply its previous GAAP, Irish GAAP, to account for transactions in the scope of IAS 32 and IAS 39 for the comparatives.

Use of this exemption may affect measurement of the information for the first IFRS reporting period.
The transition date for IAS 32 and IAS 39 purposes will be the start of the first IFRS reporting period rather than the beginning of the earliest period for which full comparative information is presented. For example, the IFRS transition date for a company preparing its first IFRS financial statements to 31 December 2005 with one year of comparatives is 1 January 2004, but its ‘IAS 32/39 transition date’ is 1 January 2005.

Any adjustments required in order to reconcile the closing balance sheet for the comparative period (31 December 2004) to the opening balance sheet of the first IFRS reporting period (1 January 2005) are treated as a change in accounting policy.

An entity that takes this exemption must provide certain additional disclosures regarding this exemption. This exemption is only available to entities that adopt IFRS before 2006 and that apply the revised versions of IAS 32 and IAS 39.

New optional exemption 2: designation of previously recognised financial instruments. Revised IAS 39 allows an entity to designate a financial asset or a financial liability as ‘a financial asset or financial liability at fair value through profit or loss’ or as ‘available for sale’ on initial recognition. The second new optional exemption allows a first-time adopter to make this designation at the ‘IAS32/39 transition date’ in respect of any financial assets and financial liabilities that it had already recognised under Irish GAAP.

Change in date of application of the IAS 39 derecognition requirements
IFRS 1 did not allow an entity to rerecognise financial assets and financial liabilities that had been derecognised under Irish GAAP before 1 January 2001, unless a later transaction or event required recognition. This exception did not apply to derivatives and other interests retained, such as servicing rights or servicing liabilities; nor did it apply to special purpose entities controlled by the entity, which must always be consolidated. The amendments to IFRS 1 change this date from 1 January 2001 to 1 January 2004.

However, entities may choose to apply the IAS 39 recognition requirements from any earlier date if they gathered the information to apply the requirements when initially accounting for those transactions. This prevents the use of hindsight.

Transactions derecognised under Irish GAAP during 2004 that do not meet the IAS 39 derecognition criteria must be recognised in the 2004 comparatives if the entity chooses to restate its comparatives. The same transactions will be rerecognised at 1 January 2005 if the entity does not restate its comparatives.

Unwinding of Irish GAAP hedge accounting positions
The revisions to IFRS 1 provide guidance on how Irish GAAP hedge accounting should be treated at the ‘IAS 32/39 transition date’. The guidance relates to:
- Recognition of the hedging relationship in the opening balance sheet at the ‘IAS32/39 transition date’; and
- Unwinding of the opening position where the relationship does not qualify for hedge accounting under IAS 39.

The guidance is detailed and is provided separately for fair value hedges and cash flow hedges. It prescribes how an entity should reflect a fair value hedge relationship in its ‘IAS 32/39 transition date’ opening balance sheet by adjusting the carrying amount of the hedged item. It also prescribes how the entity should reflect a cash flow hedge relationship in the ‘IAS 32/39 transition date’ opening balance sheet by adjusting equity.

The entity should then apply the general guidance in IAS 39 for the discontinuance to hedge accounting for those hedging relationships that do not qualify for hedge accounting under IAS 39.
The new guidance is best illustrated in a graphical format – see figure 1.

Given the timeframe for the introduction of IFRS in Ireland, and the scarcity of specialists available to support large complex conversion projects, Irish companies should already be examining and planning for first time adoption. If not, the time to take action is now as the impacts of IFRS conversion on your reported profitability, information systems and business processes will be significant.

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