Accounting Standards

FRS 101
First-time Adoption of Financial Reporting Standards

Implementation Guidance

First-time Adoption of Financial Reporting Standards

INTRODUCTION

Reasons for issuing the FRS

IN1 The FRS replaces INT FRS-8 First-time Application of FRSs as the Primary Basis of Accounting. The CCDG issued this FRS to address concerns that:

1. some aspects of INT FRS-8's requirement for full retrospective application caused costs that exceeded the likely benefits for users of financial statements. Moreover, although INT FRS-8 did not require retrospective application when this would be impracticable, it did not explain whether a first-time adopter should interpret impracticability as a high hurdle or a low hurdle and it did not specify any particular treatment in cases of impracticability.

2. INT FRS-8 could require a first-time adopter to apply two different versions of a Standard if a new version were introduced during the periods covered by its first financial statements prepared under FRSs and the new version prohibited retrospective application.

3. INT FRS-8 did not state clearly whether a first-time adopter should use hindsight in applying recognition and measurement decisions retrospectively.

4. there was some doubt about how INT FRS-8 interacted with specific transitional provisions in individual Standards.

Main features of the FRS

IN2 The FRS applies when an entity adopts FRSs for the first time by an explicit and unreserved statement of compliance with FRSs.

IN3 In general, the FRS requires an entity to comply with each FRS effective at the reporting date for its first FRS financial statements. In particular, the FRS requires an entity to do the following in the opening FRS balance sheet that it prepares as a starting point for its accounting under FRSs:

1. recognise all assets and liabilities whose recognition is required by FRSs;

2. not recognise items as assets or liabilities if FRSs do not permit such recognition;

3. reclassify items that it recognised under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under FRSs; and

4. apply FRSs in measuring all recognised assets and liabilities.

IN4 The FRS grants limited exemptions from these requirements in specified areas where the cost of complying with them would be likely to exceed the benefits to users of financial statements. The FRS also prohibits retrospective application of FRSs in some areas, particularly where retrospective application would require judgements by management about past conditions after the outcome of a particular transaction is already known.

IN5 The FRS requires disclosures that explain how the transition from previous GAAP to FRSs affected the entity's reported financial position, financial performance and cash flows.

IN6 An entity is required to apply the FRS if its first FRS financial statements are for a period beginning on or after 1 January 2004. Earlier application is encouraged.

Changes from previous requirements

IN7 Like INT FRS-8, the FRS requires retrospective application in most areas. Unlike INT FRS-8, the FRS:

1. includes targeted exemptions to avoid costs that would be likely to exceed the benefits to users of financial statements, and a small number of other exceptions for practical reasons.

2. clarifies that an entity applies the latest version of FRSs.

3. clarifies how a first-time adopter's estimates under FRSs relate to the estimates it made for the same date under previous GAAP.

4. specifies that the transitional provisions in other FRSs do not apply to a first-time adopter.

5. requires enhanced disclosure about the transition to FRSs.

OBJECTIVE

1 The objective of this FRS is to ensure that an entity's first FRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:

1. is transparent for users and comparable over all periods presented;

2. provides a suitable starting point for accounting under Financial Reporting Standards (FRSs); and

3. can be generated at a cost that does not exceed the benefits to users.

SCOPE

2 An entity shall apply this FRS in:

1. its first FRS financial statements; and

2. each interim financial report, if any, that it presents under FRS 34 Interim Financial Reporting for part of the period covered by its first FRS financial statements.

3 An entity's first FRS financial statements are the first annual financial statements in which the entity adopts FRSs, by an explicit and unreserved statement in those financial statements of compliance with FRSs. Financial statements under FRSs are an entity's first FRS financial statements if, for example, the entity:

1. presented its most recent previous financial statements:

1. under national requirements that are not consistent with FRSs in all respects;

2. in conformity with FRSs in all respects, except that the financial statements did not contain an explicit and unreserved statement that they complied with FRSs;

3. containing an explicit statement of compliance with some, but not all, FRSs;

4. under national requirements inconsistent with FRSs, using some individual FRSs to account for items for which national requirements did not exist; or

5. under national requirements, with a reconciliation of some amounts to the amounts determined under FRSs;

2. prepared financial statements under FRSs for internal use only, without making them available to the entity's owners or any other external users;

3. prepared a reporting package under FRSs for consolidation purposes without preparing a complete set of financial statements as defined in FRS 1 Presentation of Financial Statements; or

4. did not present financial statements for previous periods.

4 This FRS applies when an entity first adopts FRSs. It does not apply when, for example, an entity:

1. stops presenting financial statements under national requirements, having previously presented them as well as another set of financial statements that contained an explicit and unreserved statement of compliance with FRSs;

2. presented financial statements in the previous year under national requirements and those financial statements contained an explicit and unreserved statement of compliance with FRSs; or

3. presented financial statements in the previous year that contained an explicit and unreserved statement of compliance with FRSs, even if the auditors qualified their audit report on those financial statements.

5 This FRS does not apply to changes in accounting policies made by an entity that already applies FRSs. Such changes are the subject of:

1. requirements on changes in accounting policies in FRS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies; and

2. specific transitional requirements in other FRSs.

RECOGNITION AND MEASUREMENT

Opening FRS balance sheet

6 An entity shall prepare an opening FRS balance sheet at the date of transition to FRSs. This is the starting point for its accounting under FRSs. An entity need not present its opening FRS balance sheet in its first FRS financial statements.

Accounting policies

7 An entity shall use the same accounting policies in its opening FRS balance sheet and throughout all periods presented in its first FRS financial statements. Those accounting policies shall comply with each FRS effective at the reporting date for its first FRS financial statements, except as specified in paragraphs 13-34.

8 An entity shall not apply different versions of FRSs that were effective at earlier dates. An entity may apply a new FRS that is not yet mandatory if it permits early application.

9 The transitional provisions in other FRSs apply to changes in accounting policies made by an entity that already uses FRSs; they do not apply to a first-time adopter's transition to FRSs, except as specified in paragraphs 27-30.

10 Except as described in paragraphs 13-34, an entity shall, in its opening FRS balance sheet:

1. recognise all assets and liabilities whose recognition is required by FRSs;

2. not recognise items as assets or liabilities if FRSs do not permit such recognition;

3. reclassify items that it recognised under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under FRSs; and

4. apply FRSs in measuring all recognised assets and liabilities.

11 The accounting policies that an entity uses in its opening FRS balance sheet may differ from those that it used for the same date using its previous GAAP. The resulting adjustments arise from events and transactions before the date of transition to FRSs. Therefore, an entity shall recognize those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to FRSs.

12 This FRS establishes two categories of exceptions to the principle that an entity's opening FRS balance sheet shall comply with each FRS:

1. paragraphs 13-25 grant exemptions from some requirements of other FRSs.

2. paragraphs 26-34 prohibit retrospective application of some aspects of other FRSs.

Exemptions from other FRSs

13 An entity may elect to use one or more of the following exemptions:

1. business combinations (paragraph 15);

2. fair value or revaluation as deemed cost (paragraphs 16-19);

3. employee benefits (paragraph 20);

4. cumulative translation differences (paragraphs 21 and 22);

5. compound financial instruments (paragraph 23); and

6. assets and liabilities of subsidiaries, associates and joint ventures (paragraphs 24 and 25).

An entity shall not apply these exemptions by analogy to other items.

14 Some exemptions below refer to fair value. FRS 22 Business Combinations explains how to determine the fair values of identifiable assets and liabilities acquired in a business combination. An entity shall apply those explanations in determining fair values under this FRS, unless another FRS contains more specific guidance on the determination of fair values for the asset or liability in question. Those fair values shall reflect conditions that existed at the date for which they were determined.

Business combinations

15 An entity shall apply the requirements in Appendix B to business combinations that the entity recognised before the date of transition to FRSs.

Fair value or revaluation as deemed cost

16 An entity may elect to measure an item of property, plant and equipment at the date of transition to FRSs at its fair value and use that fair value as its deemed cost at that date.

17 A first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant and equipment at, or before, the date of transition to FRSs as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to:

1. fair value; or

2. cost or depreciated cost under FRSs, adjusted to reflect, for example, changes in a general or specific price index.

18 The elections in paragraphs 16 and 17 are also available for:

1. investment property, if an entity elects to use the cost model in FRS 40 Investment Property; and

2. intangible assets that meet:

1. the recognition criteria in FRS 38 Intangible Assets (including reliable measurement of original cost); and

2. the criteria in FRS 38 for revaluation (including the existence of an active market).
   An entity shall not use these elections for other assets or for liabilities.

19 A first-time adopter may have established a deemed cost under previous GAAP for some or all of its assets and liabilities by measuring them at their fair value at one particular date because of an event such as a privatization or initial public offering. It may use such event-driven fair value measurements as deemed cost for FRSs at the date of that measurement.

Employee benefits

20 Under FRS 19 Employee Benefits, an entity may elect to use a 'corridor' approach that leaves some actuarial gains and losses unrecognised. Retrospective application of this approach requires an entity to split the cumulative actuarial gains and losses from the inception of the plan until the date of transition to FRSs into a recognised portion and an unrecognised portion. However, a first-time adopter may elect to recognise all cumulative actuarial gains and losses at the date of transition to FRSs, even if it uses the corridor approach for later actuarial gains and losses. If a first-time adopter uses this election, it shall apply it to all plans.

Cumulative translation differences

21 FRS 21 The Effects of Changes in Foreign Exchange Rates requires an entity:

1. to classify some translation differences as a separate component of equity; and

2. on disposal of a foreign operation, to transfer the cumulative translation difference for that foreign operation (including, if applicable, gains and losses on related hedges) to the income statement as part of the gain or loss on disposal.

22 However, a first-time adopter need not comply with these requirements for cumulative translation differences that existed at the date of transition to FRSs. If a first-time adopter uses this exemption:

1. the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to FRSs; and

2. the gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to FRSs and shall include later translation differences.

Compound financial instruments

23 FRS 32 Financial Instruments: Disclosure and Presentation requires an entity to split a compound financial instrument at inception into separate liability and equity components. If the liability component is no longer outstanding, retrospective application of FRS 32 involves separating two portions of equity. The first portion is in retained earnings and represents the cumulative interest accreted on the liability component. The other portion represents the original equity component. However, under this FRS, a first-time adopter need not separate these two portions if the liability component is no longer outstanding at the date of transition to FRSs.

Assets and liabilities of subsidiaries, associates and joint ventures

24 If a subsidiary becomes a first-time adopter later than its parent, the subsidiary shall, in its separate financial statements, measure its assets and liabilities at either:

1. the carrying amounts that would be included in the parent's consolidated financial statements, based on the parent's date of transition to FRSs, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary; or

2. the carrying amounts required by the rest of this FRS, based on the subsidiary's date of transition to FRSs. These carrying amounts could differ from those described in (a):

1. when the exemptions in this FRS result in measurements that depend on the date of transition to FRSs.

2. when the accounting policies used in the subsidiary's financial statements differ from those in the consolidated financial statements. For example, the subsidiary may use the benchmark treatment in FRS 16 Property, Plant and Equipment, whereas the group may use the allowed alternative treatment.

A similar election is available to an associate or joint venture that becomes a first-time adopter later than an entity that has significant influence or joint control over it.

25 However, if an entity becomes a first-time adopter later than its subsidiary (or associate or joint venture) the entity shall, in its consolidated financial statements, measure the assets and liabilities of the subsidiary (or associate or joint venture) at the same carrying amounts as in the separate financial statements of the subsidiary (or associate or joint venture), after adjusting for consolidation and equity accounting adjustments and for the effects of the business combination in which the entity acquired the subsidiary. Similarly, if a parent becomes a first-time adopter for its separate financial statements earlier or later than for its consolidated financial statements, it shall measure its assets and liabilities at the same amounts in both financial statements, except for consolidation adjustments.

Exceptions to retrospective application of other FRSs

26 This FRS prohibits retrospective application of some aspects of other FRSs relating to:

1. derecognition of financial assets and financial liabilities (paragraph 27);

2. hedge accounting (paragraphs 28-30); and

3. estimates (paragraphs 31-34).

Derecognition of financial assets and financial liabilities

27 A first-time adopter shall apply the derecognition requirements in FRS 39 Financial Instruments: Recognition and Measurement prospectively from the effective date of FRS 39. In other words, if a first-time adopter derecognised financial assets or financial liabilities under its previous GAAP in a financial year beginning before 1 January 2005, it shall not recognize those assets and liabilities under FRSs (unless they qualify for recognition as a result of a later transaction or event). However, the first-time adopter shall:

1. recognise all derivatives and other interests, such as servicing rights or servicing liabilities, retained after the derecognition transaction and still existing at the date of transition to FRSs; and

2. consolidate all special purpose entities (SPEs) that it controls at the date of transition to FRSs, even if the SPEs existed before the date of transition to FRSs or hold financial assets or financial liabilities that were derecognised under previous GAAP.

Hedge accounting

28 As required by FRS 39 Financial Instruments: Recognition and Measurement, at the date of transition to FRSs, an entity shall:

1. measure all derivatives at fair value; and

2. eliminate all deferred losses and gains arising on derivatives that were reported under previous GAAP as if they were assets or liabilities.

29 An entity shall not reflect in its opening FRS balance sheet a hedging relationship of a type that does not qualify for hedge accounting under FRS 39 (for example, many hedging relationships where the hedging instrument is a cash instrument or written option; where the hedged item is a net position; or where the hedge covers interest risk in a held-to-maturity investment). However, if an entity designated a net position as a hedged item under previous GAAP, it may designate an individual item within that net position as a hedged item under FRSs, provided that it does so no later than the date of transition to FRSs.

30 An entity shall apply the transitional provisions of FRS 39 to all other hedging relationships that existed at the date of transition to FRSs.

Estimates

31 An entity's estimates under FRSs at the date of transition to FRSs shall be consistent with estimates made for the same date under previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error.

32 An entity may receive information after the date of transition to FRSs about estimates that it had made under previous GAAP. Under paragraph 31, an entity shall treat the receipt of that information in the same way as non-adjusting events after the balance sheet date under FRS 10 Events After the Balance Sheet Date. For example, assume that an entity's date of transition to FRSs is 1 January 2004 and new information on 15 July 2004 requires the revision of an estimate made under previous GAAP at 31 December 2003. The entity shall not reflect that new information in its opening FRS balance sheet (unless the estimates need adjustment for any differences in accounting policies or there is objective evidence that the estimates were in error). Instead, the entity shall reflect that new information in its income statement (or, if appropriate, other changes in equity) for the year ended 31 December 2004.

33 An entity may need to make estimates under FRSs at the date of transition to FRSs that were not required at that date under previous GAAP. To achieve consistency with FRS 10, those estimates under FRSs shall reflect conditions that existed at the date of transition to FRSs. In particular, estimates at the date of transition to FRSs of market prices, interest rates or foreign exchange rates shall reflect market conditions at that date.

34 Paragraphs 31-33 apply to the opening FRS balance sheet. They also apply to a comparative period presented in an entity's first FRS financial statements, in which case the references to the date of transition to FRSs are replaced by references to the end of that comparative period.

PRESENTATION AND DISCLOSURE

35 This FRS does not provide exemptions from the presentation and disclosure requirements in other FRSs.

Comparative information

36 To comply with FRS 1 Presentation of Financial Statements, an entity's first FRS financial statements shall include at least one year of comparative information under FRSs.

37 Some entities present historical summaries of selected data for periods before the first period for which they present full comparative information under FRSs. This FRS does not require such summaries to comply with the recognition and measurement requirements of FRSs. Furthermore, some entities present comparative information under previous GAAP as well as the comparative information required by FRS 1. In any financial statements containing historical summaries or comparative information under previous GAAP, an entity shall:

1. label the previous GAAP information prominently as not being prepared under FRSs; and

2. disclose the nature of the main adjustments that would make it comply with FRSs. An entity need not quantify those adjustments.

Explanation of transition to FRSs

38 An entity shall explain how the transition from previous GAAP to FRSs affected its reported financial position, financial performance and cash flows.

Reconciliations

39 To comply with paragraph 38, an entity's first FRS financial statements shall include:

1. reconciliations of its equity reported under previous GAAP to its equity under FRSs for both of the following dates:

1. the date of transition to FRSs; and

2. the end of the latest period presented in the entity's most recent annual financial statements under previous GAAP;

2. a reconciliation of the profit or loss reported under previous GAAP for the latest period in the entity's most recent annual financial statements to its profit or loss under FRSs for the same period; and

3. if the entity recognised or reversed any impairment losses for the first time in preparing its opening FRS balance sheet, the disclosures that FRS 36 Impairment of Assets would have required if the entity had recognised those impairment losses or reversals in the period beginning with the date of transition to FRSs.

40 The reconciliations required by paragraph 39(a) and (b) shall give sufficient detail to enable users to understand the material adjustments to the balance sheet and income statement. If an entity presented a cash flow statement under its previous GAAP, it shall also explain the material adjustments to the cash flow statement.

41 If an entity becomes aware of errors made under previous GAAP, the reconciliations required by paragraph 39(a) and (b) shall distinguish the correction of those errors from changes in accounting policies.

42 FRS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies does not deal with changes in accounting policies that occur when an entity first adopts FRSs. Therefore, FRS 8's requirements for disclosures about changes in accounting policies do not apply in an entity's first FRS financial statements.

43 If an entity did not present financial statements for previous periods, its first FRS financial statements shall disclose that fact.

Use of fair value as deemed cost

44 If an entity uses fair value in its opening FRS balance sheet as deemed cost for an item of property, plant and equipment, an investment property or an intangible asset (see paragraphs 16 and 18), the entity's first FRS financial statements shall disclose, for each line item in the opening FRS balance sheet:

1. the aggregate of those fair values; and

2. the aggregate adjustment to the carrying amounts reported under previous GAAP.

Interim financial reports

45 To comply with paragraph 38, if an entity presents an interim financial report under FRS 34 Interim Financial Reporting for part of the period covered by its first FRS financial statements, the entity shall satisfy the following requirements in addition to the requirements of FRS 34:

1. Each such interim financial report shall, if the entity presented an interim financial report for the comparable interim period of the immediately preceding financial year, include reconciliations of:

1. its equity under previous GAAP at the end of that comparable interim period to its equity under FRSs at that date; and

2. its profit or loss under previous GAAP for that comparable interim period (current and year-to-date) to its profit or loss under FRSs for that period.

2. In addition to the reconciliations required by (a), an entity's first interim financial report under FRS 34 for part of the period covered by its first FRS financial statements shall include the reconciliations described in paragraph 39(a) and (b) (supplemented by the details required by paragraphs 40 and 41) or a cross-reference to another published document that includes these reconciliations.

46 FRS 34 requires minimum disclosures, which are based on the assumption that users of the interim financial report also have access to the most recent annual financial statements. However, FRS 34 also requires an entity to disclose 'any events or transactions that are material to an understanding of the current interim period'. Therefore, if a first-time adopter did not, in its most recent annual financial statements under previous GAAP, disclose information material to an understanding of the current interim period, its interim financial report shall disclose that information or include a cross-reference to another published document that includes it.

EFFECTIVE DATE

47 An entity shall apply this FRS if its first FRS financial statements are for a period beginning on or after 1 January 2004. Earlier application is encouraged. If an entity's first FRS financial statements are for a period beginning before 1 January 2004 and the entity applies this FRS instead of INT FRS-8 First-time Application of FRSs as the Primary Basis of Accounting, it shall disclose that fact.

Appendix A

Defined terms

This appendix is an integral part of the FRS.

Appendix B

Business combinations

This appendix is an integral part of the FRS.

B1 A first-time adopter may elect not to apply FRS 22 Business Combinations retrospectively to past business combinations (business combinations that occurred before the date of transition to FRSs). However, if a first-time adopter restates any business combination to comply with FRS 22, it shall restate all later business combinations. For example, if a first-time adopter elects to restate a business combination that occurred on 30 June 2002, it shall restate all business combinations that occurred between 30 June 2002 and the date of transition to FRSs.

B2 If a first-time adopter does not apply FRS 22 retrospectively to a past business combination, this has the following consequences for that business combination:

1. The first-time adopter shall keep the same classification (as an acquisition by the legal acquirer, a reverse acquisition by the legal acquiree, or a uniting of interests) as in its previous GAAP financial statements.

2. The first-time adopter shall recognise all its assets and liabilities at the date of transition to FRSs that were acquired or assumed in a past business combination, other than:

1. some financial assets and financial liabilities derecognised under previous GAAP (see paragraph 27); and

2. assets, including goodwill, and liabilities that were not recognised in the acquirer's consolidated balance sheet under previous GAAP and also would not qualify for recognition under FRSs in the separate balance sheet of the acquiree (see paragraph B2(f)-B2(i)).
   
   The first-time adopter shall recognise any resulting change by adjusting retained earnings (or, if appropriate, another category of equity), unless the change results from the recognition of an intangible asset that was previously subsumed within goodwill (see paragraph B2(g)(i)).

3. The first-time adopter shall exclude from its opening FRS balance sheet any item recognised under previous GAAP that does not qualify for recognition as an asset or liability under FRSs. The first-time adopter shall account for the resulting change as follows:

1. the first-time adopter may have classified a past business combination as an acquisition and recognised as an intangible asset an item that does not qualify for recognition as an asset under FRS 38 Intangible Assets. It shall reclassify that item (and, if any, the related deferred tax and minority interests) as part of goodwill (unless it deducted goodwill directly from equity under previous GAAP, see paragraph B2(g)(i) and B2(i)).

2. the first-time adopter shall recognise all other resulting changes in retained earnings.*

4. FRSs require subsequent measurement of some assets and liabilities on a basis that is not based on original cost, such as fair value. The first-time adopter shall measure these assets and liabilities on that basis in its opening FRS balance sheet, even if they were acquired or assumed in a past business combination. It shall recognise any resulting change in the carrying amount by adjusting retained earnings (or, if appropriate, another category of equity), rather than goodwill.

5. Immediately after the business combination, the carrying amount under previous GAAP of assets acquired and liabilities assumed in that business combination shall be their deemed cost under FRSs at that date. If FRSs require a cost-based measurement of those assets and liabilities at a later date, that deemed cost shall be the basis for cost-based depreciation or amortisation from the date of the business combination.

6. If an asset acquired, or liability assumed, in a past business combination was not recognised under previous GAAP, it does not have a deemed cost of zero in the opening FRS balance sheet. Instead, the acquirer shall recognise and measure it in its consolidated balance sheet on the basis that FRSs would require in the separate balance sheet of the acquiree. To illustrate: if the acquirer had not, under its previous GAAP, capitalised finance leases acquired in a past business combination, it shall capitalise those leases in its consolidated financial statements, as FRS 17 Leases would require the acquiree to do in its separate FRS balance sheet. Conversely, if an asset or liability was subsumed in goodwill under previous GAAP but would have been recognised separately under FRS 22, that asset or liability remains in goodwill unless FRSs would require its recognition in the separate financial statements of the acquiree.

7. The carrying amount of goodwill in the opening FRS balance sheet shall be its carrying amount under previous GAAP at the date of transition to FRSs, after the following three adjustments:

1. If required by paragraph B2(c)(i) above, the first-time adopter shall increase the carrying amount of goodwill when it reclassifies an item that it recognised as an intangible asset under previous GAAP. Similarly, if paragraph B2(f) requires the first-time adopter to recognise an intangible asset that was subsumed in recognised goodwill under previous GAAP, the first-time adopter shall decrease the carrying amount of goodwill accordingly (and, if applicable, adjust deferred tax and minority interests).

2. A contingency affecting the amount of the purchase consideration for a past business combination may have been resolved before the date of transition to FRSs. If a reliable estimate of the contingent adjustment can be made and its payment is probable, the first-time adopter shall adjust the goodwill by that amount. Similarly, the first-time adopter shall adjust the carrying amount of goodwill if a previously recognised contingent adjustment can no longer be measured reliably or its payment is no longer probable.

3. Regardless of whether there is any indication that the goodwill may be impaired, the first-time adopter shall apply FRS 36 Impairment of Assets in testing the goodwill for impairment at the date of transition to FRSs and in recognising any resulting impairment loss in retained earnings (or, if so required by FRS 36, in revaluation surplus). The impairment test shall be based on conditions at the date of transition to FRSs.

8. (h) No other adjustments shall be made to the carrying amount of goodwill at the date of transition to FRSs. For example, the first-time adopter shall not restate the carrying amount of goodwill:

1. to exclude in-process research and development acquired in that business combination (unless the related intangible asset would qualify for recognition under FRS 38 in the separate balance sheet of the acquiree);

2. to adjust previous amortisation of goodwill;

3. to reverse adjustments to goodwill that FRS 22 would not permit, but were made under previous GAAP because of adjustments to assets and liabilities between the date of the business combination and the date of transition to FRSs.

9. If the first-time adopter recognised goodwill under previous GAAP as a deduction from equity:

1. it shall not recognise that goodwill in its opening FRS balance sheet. Furthermore, it shall not transfer that goodwill to the income statement if it disposes of the subsidiary or if the investment in the subsidiary becomes impaired.

2. adjustments resulting from the subsequent resolution of a contingency affecting the purchase consideration shall be recognised in retained earnings.

10. Under its previous GAAP, the first-time adopter may not have consolidated a subsidiary acquired in a past business combination (for example, because the parent did not regard it as a subsidiary under previous GAAP or did not prepare consolidated financial statements). The first-time adopter shall adjust the carrying amounts of the subsidiary's assets and liabilities to the amounts that FRSs would require in the subsidiary's separate balance sheet. The deemed cost of goodwill equals the difference at the date of transition to FRSs between:

1. the parent's interest in those adjusted carrying amounts; and

2. the cost in the parent's separate financial statements of its investment in the subsidiary.

11. The measurement of minority interests and deferred tax follows from the measurement of other assets and liabilities. Therefore, the above adjustments to recognised assets and liabilities affect minority interests and deferred tax.

B3 The exemption for past business combinations also applies to past acquisitions of investments in associates and of interests in joint ventures. Furthermore, the date selected for paragraph B1 applies equally for all such acquisitions.

* Such changes include reclassifications from or to intangible assets if goodwill was not recognised under previous GAAP as an asset. This arises if, under previous GAAP, the entity (a) deducted goodwill directly from equity or (b) did not treat the business combination as an acquisition.

Appendix C

Amendments to other FRSs

The amendments in this appendix become effective for annual financial statements covering periods beginning on or after 1 January 2004. If an entity applies this FRS for an earlier period, these amendments become effective for that earlier period.

C1 This FRS supersedes INT FRS-8 First-time Application of FRSs as the Primary Basis of Accounting.

C2 This FRS amends paragraph 169(h) of FRS 39 Financial Instruments: Recognition and Measurement to read as follows:

(h) if a securitisation, transfer, or other derecognition transaction was entered into prior to the beginning of the financial year in which this Standard is initially applied, the accounting for that transaction should not be retrospectively changed to conform to the requirements of this Standard. However, this does not exempt a transferor from the requirements:

1. to recognise all derivatives or other interests, such as servicing rights or servicing liabilities, retained after that transaction that qualify for recognition under this Standard or other FRSs; and

2. to consolidate all special purpose entities controlled by the transferor (see INT FRS-12 Consolidation-Special Purpose Entities).