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IFRS 1 – FIRST-TIME ADOPTION

INTERNATIONAL FINANCIAL REPORTING STANDARDS. IFRS 1 – FIRST-TIME ADOPTION. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 1. BACKGROUND. Provide high-quality information Transparency Comparability (between reporting periods) Adequate introduction to accounting in IFRS No excessive cost.

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IFRS 1 – FIRST-TIME ADOPTION

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  1. INTERNATIONAL FINANCIAL REPORTING STANDARDS IFRS 1 – FIRST-TIME ADOPTION

  2. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 1. BACKGROUND • Provide high-quality information • Transparency • Comparability (between reporting periods) • Adequate introduction to accounting in IFRS • No excessive cost MAIN OBJECTIVES OF IFRS 1

  3. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 2. GENERAL PRINCIPLES EFFECTIVE DATE • Publication on 19 June 2003 of IFRS 1: First-Time Adoption (FTA) • Effective date: reporting periods from 1 January 2004 • IFRS 1 concerns all companies adopting IFRS for the first time • It will be used by all European companies for transition purposes

  4. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 2. GENERAL PRINCIPLES • Retrospective application mandatory • Except specific exemptions (optional or obligatory) • Recognition of adjustments in the opening IFRS balance sheet (as of 1 January 2004) • General case: equity (in line with IAS 8 on accounting changes) • Limited exceptions: restatement of goodwill (reclassification of intangible assets as goodwill or excluded from goodwill) • Financial information specific to the transition • Reconciliation of main aggregates between the two systems APPLICATION PRINCIPES

  5. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 3. RETROSPECTIVE APPLICATION: EXEMPTIONS • Optional: • Business combinations • Fair value or previous valuation such as historic cost • Employee benefits • Translation differences • Compound financial instruments • Different adoption dates for the parent company and subsidiary • Mandatory: • Derecognition of financial assets and financial liabilities • Recognition of hedging instruments • Estimates

  6. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 4. TRANSITIONAL FINANCIAL INFORMATION • Enable users to understand the impact of the transition on the balance sheet, the income statement and the cash flow statement • Mandatory financial information: • Opening IFRS balance sheet at the date of transition (1/1/2004) • Comparative prior period (2004) • Publication of an interim financial report in 2005 (in addition to the disclosures required by IAS 34)

  7. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 4. TRANSITIONAL FINANCIAL INFORMATION • Detailed reconciliation of equity in IFRS and local GAAP as of 31/12/2003 • Information on the use of fair value as historic cost by the « deemed cost » convention, if exemption is chosen • Information required by IAS 36 if impairment is reversed in the opening IFRS balance sheet INFORMATION IN THE OPENING IFRS BALANCE SHEET (1/1/2004)

  8. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 4. TRANSITIONAL FINANCIAL INFORMATION INFORMATION ON THE COMPARATIVE PRIOR PERIOD (2004) • Detailed reconciliation of equity in IFRS and French GAAP as of 31/12/2004 • Detailed reconciliation of net profit or loss for 2004 in IFRS and French GAAP • Explanations of significant adjustments to the cash flow statement • In theory, no impact on cash flow, but possible impact on items in the cash flow statement

  9. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 4. TRANSITIONAL FINANCIAL INFORMATION INFORMATION ON AN INTERIM FINANCIAL REPORT IN 2005 • Detailed reconciliation of IFRS / local GAAP for each period presented: • Equity at the end of the interim comparative period (ex: 30/03/2004 for the first quarter financial report in 2005) • Net profit or loss for the comparative interim period and cumulative period (ex: income statements for 3 and 6 months as of 30/06/2004 for the second quarter financial report in 2005)

  10. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS • Recognise all assets and liabilities in accordance with the IFRS framework • Derecognise all assets and liabilities that do not qualify under IFRS • Reclassify some acquired intangible assets as goodwill • Extract identifiable intangible assets from goodwill • Perform impairment tests • Reclassify certain balance sheet or income statement items • Modify certain values • Modify the presentation of the financial statements • Prepare financial information in conformity with IFRS S U M M A R Y

  11. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS RECOGNISE ALL ASSETS AND LIABILITIES IN ACCORDANCE WITH IFRS For instance: • Recognise previously expensed development costs as assets, if they qualify • Recognise derivative financial instruments at fair value • Recognise stock options

  12. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS Derecognition of: • Research costs previously recorded as assets • Start-up and pre-operating costs • Reclassify treasury shares reported as marketable securities as a component of equity. DERECOGNISE ALL ASSETS AND LIABILITIES THAT DO NOT QUALIFY FOR RECOGNITION UNDER IFRS

  13. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS RECLASSIFY SOME ACQUIRED INTANGIBLE ASSETS AS GOODWILL • If they do not meet IFRS criteria • Which include: • Resource controlled by the company • From which future economic benefits flow • Which can be measured reliably General criteria for assets • Identifiable as separate items or • Legally protected Specific criteria for intangible assets • Goodwill not transferable separately • Market share • Unprotected lists or files of customers • ... Assumed to include

  14. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS EXTRACT QUALIFYING INTANGIBLE ASSETS FROM GOODWILL • Under IAS 38 - In practice • Intangible assets not recognised under previous standards must be recognised as assets • It is necessary to determine whether the assets have an infinite or finite useful life • If the useful life is finite: retroactive application of amortisation + impairment testing if appropriate (indications of impairment) • If useful life is indefinite: impairment testing is obligatory • Example • Development costs of an acquired enterprise are expensed

  15. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS • Systematic testing of goodwill • Including the opening balance sheet for first-time adoption • In compliance with IAS 36 (currently being revised) • Impact on equity PERFORM IMPAIRMENT TESTS

  16. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS RECLASSIFY SOME BALANCE SHEET AND INCOME STATEMENT ITEMS • For example • Reclassify subsidies recorded in equity, under either deferred income or as a reduction of assets • Include rehabilitation expenses in the price of the asset and recognise the corresponding provision • For hybrid financial instruments, identify the individual components

  17. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS • Classification changes leading to changes in value: • Classification of a building as investment property at fair value • Financial instruments at fair value • Applying IFRS provisions without classification changes: • modification of amortisation period and method (if previous periods were not based on economic criteria) • Change in asset’s net value • Discounting effects • Recognition of amortised cost MODIFY CERTAIN VALUES

  18. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS MODIFY THE PRESENTATION OF THE FINANCIAL STATEMENTS • Examples • Balance Sheet: • Separate current/non-current balance sheet items • Similar concept to ST/LT • Current item: from the operating cycle • Record receivables and tax liabilities on specific lines and separate deferred taxes (not current) from current taxes • Reclassify minority interests as a separate equity item • Income Statement: • Present the result of discontinued operations separately • Reclassify some financial income as operating income • Present a full breakdown of exceptional income

  19. IFRS 1 - FIRST-TIME ADOPTION OF IFRS 5. CHALLENGES OF FIRST-TIME ADOPTION OF IFRS DISCLOSE ALL FINANCIAL INFORMATION REQUIRED • As required by all current standards: • both throughout the main text of the standards • and in the paragraphs on "disclosures" • And particularly the « transitional» financial information required by IFRS 1

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