The Accounting Standards Board (Board) received an enquiry, where in the Board’s guidance have been sought on the matter of transition from IFRS for Small and Medium-sized Entities (IFRS for SMEs) to International Financial Reporting Standards (IFRS Standards).
The brief facts of the enquiry are summarized below:
▪ This inquiry is with respect to a Private Limited Company which was preparing its financial statements under IFRS for SMEs up to June 30, 2021. Effective July 1, 2021 the Company has become a Large Sized Company (LSC) under requirements of the Third Schedule of the Companies Act, 2017 and consequently, required to prepare its financial statements for the year ended June 30, 2022 under IFRS Standards issued by IASB as applicable in Pakistan.
▪ The Companies Act, 2017 requires companies to prepare statutory financial statements in accordance with the financial reporting standards as notified by the SECP. Amongst the IFRS Standards, IFRS 1 First-time Adoption of International Financial Reporting Standards has not been adopted and notified by the SECP.
▪ The enquirer highlighted that they have revealed that effect on the financials will be required to be incorporated in the financial statements due to first time adoption of IFRS 16 and the change of calculation method of the provision for staff gratuity from the existing simplified basis to actuarial valuation under Projected Unit Credit Method under IAS 19.
The Accounting Standard Board’s summarized comments and conclusion1. A company can prepare statutory financial statements in accordance with the:.
(a) IFRS Standards issued by the IASB; or
(b) IFRS Standards issued by the IASB and notified by the SECP under the Companies Act, 2017.
A company that is transitioning from IFRS for SMEs to IFRS Standards can prepare the statutory financial statements under any of the above frameworks.
2. Under IFRS Standards, IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the requirements and guidance for the first time use of IFRS Standards as the basis for preparing its general-purpose financial statements.
A company that is preparing financial statements in accordance with IFRS Standards issued by the IASB should apply IFRS 1 for transition from IFRS for SMEs to IFRS Standards.
3. Regarding IFRS Standards notified by SECP, IFRS 1 has not been adopted by the SECP under the Companies Act, 2017.
Due to non-adoption of IFRS 1, a company transitioning from IFRS for SMEs to IFRS Standards issued by the IASB and notified by the SECP, has no specific IFRS Standard for the first-time transition to IFRS Standards.
4. In the IFRS Standards, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors specifies that where guidance on the accounting and reporting of transaction or event is not provided in an IFRS Standard, entity shall refer to and consider the applicability of requirements in IFRS Standards dealing with similar and related issues. In context of the enquired fact pattern IFRS 1 deal with the first-time transition to IFRS Standards. IFRS 1 also provides guidance to the situation when an entity is not transitioning to IFRS Standards for the first-time.
5. A company that is first-time transitioning from IFRS for SMEs to IFRS Standards should develop an accounting policy by analogy in accordance with the guidance of IAS 8. The company in light of IAS 8 should develop an accounting policy to apply either:
▪ IFRS 1 as the first-time adopter of IFRS Standards; or
▪ IAS 8 principles related to change in accounting policies
6. IAS 8 paragraph 19 explains how to account for changes in accounting policy:
(a) an entity shall account for change in accounting policy resulting from initial application of an IFRS Standards in accordance with specific transitional provisions, if any, in that IFRS Standard; and
(b) when an entity changes an accounting policy upon initial application of an IFRS Standard that does not include specific transitional provision applying to that change(s), it shall apply the change(s) retrospectively.
7. In the enquired fact pattern, in light of above with regards to first time transition/ adoption of IFRS 16 and IAS 19:
▪ if the entity is applying IFRS 1 as first-time adopter of IFRS Standards, then transition provisions of IFRS 1 would be applicable for transition/ first time adoption of IFRS 16 and IAS 19.
▪ However, if the entity is applying IAS 8 principles for transition to IFRS Standards (i-e principles related to change in accounting policies) then in light of IAS 8 for the first-time application of IFRS 16 and IAS 19 the entity will apply the specific transitional provisions, if any, in those IFRS Standards.
▪ In case, IFRS 16 and IAS 19 do not include specific transitional provisions entity shall apply the change(s) retrospectively.
(Issued in November, 2022)