Accounting Standards

FRS 101
First-time Adoption of Financial Reporting Standards

Implementation Guidance

First-time Adoption of Financial Reporting Standards

INTRODUCTION

IG1 This implementation guidance:

1. explains how the requirements of the FRS interact with the requirements of some other FRSs (paragraphs IG2-IG62). This explanation addresses those FRSs that are most likely to involve questions that are specific to first-time adopters.

2. includes an illustrative example to show how a first-time adopter might disclose how the transition to FRSs affected its reported financial position, financial performance and cash flows, as required by paragraphs 39(a) and (b), 40 and 41 of the FRS (paragraph IG63).

FRS 10 Events After the Balance Sheet Date

IG2 Except as described in paragraph IG3, an entity applies FRS 10 in determining whether:

1. its opening FRS balance sheet reflects an event that occurred after the date of transition to FRSs; and

2. comparative balance sheet amounts in its first FRS financial statements reflect an event that occurred after the end of that comparative period.

IG3 Paragraphs 31-34 of the FRS require some modifications to the principles in FRS 10 when a first-time adopter determines whether changes in estimates are adjusting or non-adjusting events at the date of transition to FRSs (or, when applicable, the end of the comparative period). Cases 1 and 2 below illustrate those modifications. In case 3 below, paragraphs 31-34 of the FRS do not require modifications to the principles in FRS 10.

1. Case 1 - Previous GAAP required estimates of similar items for the date of transition to FRSs, using an accounting policy that is consistent with FRSs. In this case, the estimates under FRSs need to be consistent with estimates made for that date under previous GAAP, unless there is objective evidence that those estimates were in error (see FRS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies). The entity reports later revisions to those estimates as events of the period in which it makes the revisions, rather than as adjusting events resulting from the receipt of further evidence about conditions that existed at the date of transition to FRSs.

2. Case 2 - Previous GAAP required estimates of similar items for the date of transition to FRSs, but the entity made those estimates using accounting policies that are not consistent with its accounting policies under FRSs. In this case, the estimates under FRSs need to be consistent with the estimates required under previous GAAP for that date (unless there is objective evidence that those estimates were in error), after adjusting for the difference in accounting policies. The opening FRS balance sheet reflects those adjustments for the difference in accounting policies. As in case 1, the entity reports later revisions to those estimates as events of the period in which it makes the revisions.
   For example, previous GAAP may have required an entity to recognise and measure provisions on a basis consistent with FRS 37 Provisions, Contingent Liabilities and Contingent Assets, except that the previous GAAP measurement was on an undiscounted basis. In this example, the entity uses the estimates under previous GAAP as inputs in making the discounted measurement required by FRS 37.

3. Case 3 - Previous GAAP did not require estimates of similar items for the date of transition to FRSs. Estimates under FRSs for that date reflect conditions existing at that date. In particular, estimates of market prices, interest rates or foreign exchange rates at the date of transition to FRSs reflect market conditions at that date. This is consistent with the distinction in FRS 10 between adjusting events after the balance sheet date and non-adjusting events after the balance sheet date.

IG4 Paragraphs 31-34 of the FRS do not override requirements in other FRSs that base classifications or measurements on circumstances existing at a particular date. Examples include:

1. the distinction between finance leases and operating leases (see FRS 17 Leases);
   

2. the restrictions in FRS 38 Intangible Assets that prohibit capitalisation of expenditure on an internally generated intangible asset if the asset did not qualify for recognition when the expenditure was incurred; and
   

3. the distinction between financial liabilities and equity instruments (see FRS 32 Financial Instruments: Disclosure and Presentation).

FRS 12 Income Taxes

IG5 An entity applies FRS 12 to temporary differences between the carrying amount of the assets and liabilities in its opening FRS balance sheet and their tax bases.

IG6 Under FRS 12, the measurement of current and deferred tax reflects tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. An entity accounts for the effect of changes in tax rates and tax laws when those changes are enacted or substantively enacted.

FRS 16 Property, Plant and Equipment

IG7 If an entity's depreciation methods and rates under previous GAAP are acceptable under FRSs, it accounts for any change in estimated useful life or depreciation pattern prospectively from when it makes that change in estimate (paragraphs 31 and 32 of the FRS and paragraph 52 of FRS 16). However, in some cases, an entity's depreciation methods and rates under previous GAAP may differ from those that would be acceptable under FRSs (for example, if they were adopted solely for tax purposes and do not reflect a reasonable estimate of the asset's useful life). If those differences have a material effect on the financial statements, the entity adjusts accumulated depreciation in its opening FRS balance sheet retrospectively so that it complies with FRSs.

IG8 An entity may elect to use one of the following amounts as the deemed cost of an item of property, plant and equipment:

1. fair value at the date of transition to FRSs (paragraph 16 of the FRS), in which case the entity gives the disclosures required by paragraph 44 of the FRS;
   

2. a revaluation under previous GAAP that meets the criteria in paragraph 17 of the FRS; or
   

3. fair value at the date of an event such as a privatisation or initial public offering (paragraph 19 of the FRS).

IG9 Subsequent depreciation is based on that deemed cost and starts from the date for which the entity established the fair value measurement or revaluation.

IG10 If an entity adopts the allowed alternative treatment in FRS 16 for some or all classes of property, plant and equipment, it presents the cumulative revaluation surplus as a separate component of equity. The revaluation surplus at the date of transition to FRSs is based on a comparison of the carrying amount of the asset at that date with its cost or deemed cost. If the deemed cost is the fair value at the date of transition to FRSs, the entity gives the disclosures required by paragraph 44 of the FRS.

IG11 If revaluations under previous GAAP did not satisfy the criteria in paragraph 17 or 19 of the FRS, an entity measures the revalued assets in its opening balance sheet on one of the following bases:

1. cost (or deemed cost) less any accumulated depreciation and any accumulated impairment losses under the FRS 16 benchmark treatment;
   

2. deemed cost, being the fair value at the date of transition to FRSs (paragraph 16 of the FRS); or
   

3. revalued amount, if the entity adopts the FRS 16 allowed alternative treatment as its accounting policy under FRSs for all assets in the same class.

IG12 Some assets are made up of components that have different useful lives or provide benefits to the entity in different patterns. Under FRS 16, the entity accounts for these components as separate assets (see FRS 16, paragraphs 12 and 27, and INT FRS-23 Property, Plant and Equipment-Major Inspection or Overhaul Costs).

IG13 In some cases, the construction or commissioning of an asset results in an obligation for an entity to dismantle or remove the asset and restore the site on which the asset stands. An entity applies FRS 37 Provisions, Contingent Liabilities and Contingent Assets in recognising and measuring any resulting provision. The entity applies FRS 16 in determining the resulting amount included in the cost of the asset, before depreciation and impairment losses. Items such as depreciation and, when applicable, impairment losses cause differences between the carrying amount of the provision and the amount included in the carrying amount of the asset.

FRS 17 Leases

IG14 At the date of transition to FRSs, a lessee or lessor classifies leases as operating leases or finance leases on the basis of circumstances existing at the inception of the lease (FRS 17, paragraph 10). In some cases, the lessee and the lessor may agree to change the provisions of the lease, other than by renewing the lease, in a manner that would have resulted in a different classification under FRS 17 had the changed terms been in effect at the inception of the lease. If so, the revised agreement is considered as a new agreement over its term. However, changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased property) or changes in circumstances (for example, default by the lessee) do not give rise to a new classification of a lease.

IG15 When the predecessor of FRS 17(SAS 15) was revised in 1999, the net cash investment method for recognising finance income of lessors was eliminated. FRS 17 permits finance lessors to eliminate this method prospectively. However, the transitional provisions in FRS 17 do not apply to an entity's opening FRS balance sheet (paragraph 9 of the FRS). Therefore, a finance lessor measures finance lease receivables in its opening FRS balance sheet as if the net cash investment method had never been permitted.

IG16 INT FRS-15 Operating Leases-Incentives applies to lease terms beginning on or after 1 February 2003. However, a first-time adopter applies INT FRS-15 to all leases, whether they started before or after that date.

FRS 18 Revenue

IG17 If an entity has received amounts that do not yet qualify for recognition as revenue under FRS 18 (for example, the proceeds of a sale that does not qualify for revenue recognition), the entity recognises the amounts received as a liability in its opening FRS balance sheet and measures that liability at the amount received.

FRS 19 Employee Benefits

IG18 At the date of transition to FRSs, an entity applies FRS 19 in measuring net employee benefit assets or liabilities under defined benefit plans, but it may elect to recognise all cumulative actuarial gains or losses from the inception of the plan until the date of transition to FRSs even if its accounting policy under FRS 19 will involve leaving some later actuarial gains and losses unrecognised (paragraph 20 of the FRS). The transitional provisions in FRS 19 do not apply to an entity's opening FRS balance sheet (paragraph 9 of the FRS).

IG19 An entity's actuarial assumptions at the date of transition to FRSs are consistent with actuarial assumptions made for the same date under previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those assumptions were in error (paragraph 31 of the FRS). The impact of any later revisions to those assumptions is an actuarial gain or loss of the period in which the entity makes the revisions.

IG20 An entity may need to make actuarial assumptions at the date of transition to FRSs that were not necessary under its previous GAAP. Such actuarial assumptions do not reflect conditions that arose after the date of transition to FRSs. In particular, discount rates and the fair value of plan assets at the date of transition to FRSs reflect market conditions at that date. Similarly, the entity's actuarial assumptions at the date of transition to FRSs about future employee turnover rates do not reflect a significant increase in estimated employee turnover rates as a result of a curtailment of the pension plan that occurred after the date of transition to FRSs (paragraph 32 of the FRS).

IG21 In many cases, an entity's first FRS financial statements will reflect measurements of employee benefit obligations at three dates: the reporting date, the date of the comparative balance sheet and the date of transition to FRSs. FRS 19 encourages an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. To minimise costs, an entity may request a qualified actuary to carry out a detailed actuarial valuation at one or two of these dates and roll the valuation(s) forward or back to the other date(s). Any such roll forward or roll back reflects any material transactions and other material events (including changes in market prices and interest rates) between those dates (FRS 19, paragraph 57).

FRS 22 Business Combinations

IG22 The following examples illustrate the effect of Appendix B of the FRS, assuming that a first-time adopter uses the exemption.

FRS 23 Borrowing Costs

IG23 On first adopting FRSs, an entity adopts a policy of capitalising borrowing costs (FRS 23 allowed alternative treatment) or not capitalising them (FRS 23 benchmark treatment). The entity applies that policy consistently in its opening FRS balance sheet and in all periods presented in its first FRS financial statements. However, if the entity established a deemed cost for an asset, the entity does not capitalise borrowing costs incurred before the date of the measurement that established the deemed cost.

IG24 Under the allowed alternative treatment, FRS 23 requires disclosure of interest capitalised during the period. Neither FRS 23 nor the FRS requires disclosure of the cumulative amount capitalised.

IG25 FRS 23 contains transitional provisions that encourage retrospective application, but permit an entity that adopts the allowed alternative treatment to capitalise (prospectively) only those borrowing costs incurred after the effective date of FRS 23 that meet the criteria for capitalisation. However, if a first-time adopter adopts the FRS 23 allowed alternative treatment, the FRS requires retrospective application of that treatment, even for periods before the effective date of FRS 23 (paragraph 9 of the FRS).

FRS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries

IG26 A first-time adopter consolidates all subsidiaries that it controls, unless FRS 27 requires otherwise.

IG27 If a first-time adopter did not consolidate a subsidiary under previous GAAP, then:

1. in its consolidated financial statements, the first-time adopter measures the subsidiary's assets and liabilities at the same carrying amounts as in the separate FRS financial statements of the subsidiary, after adjusting for consolidation procedures and for the effects of the business combination in which it acquired the subsidiary (paragraph 25 of the FRS). If the subsidiary has not adopted FRSs in its separate financial statements, the carrying amounts described in the previous sentence are those that FRSs would require in those separate financial statements (paragraph B2(j) of the FRS).

2. if the parent acquired the subsidiary in a business combination before the date of transition to FRS, the parent recognises goodwill, as explained in IG Example 6.

3. if the parent did not acquire the subsidiary in a business combination because it created the subsidiary, the parent does not recognise goodwill.

IG28 When a first-time adopter adjusts the carrying amounts of assets and liabilities of its subsidiaries in preparing its opening FRS balance sheet, this may affect minority interests and deferred tax.

IG29 IG Examples 8 and 9 illustrate paragraphs 24 and 25 of the FRS, which address cases where a parent and its subsidiary become first-time adopters at different dates.

IG30 Paragraphs 24 and 25 of the FRS do not override the following requirements:

1. to apply Appendix B of the FRS to assets acquired, and liabilities assumed, in a business combination that occurred before the acquirer's date of transition to FRSs. However, the acquirer applies paragraph 25 to new assets acquired, and liabilities assumed, by the acquiree after that business combination and still held at the acquirer's date of transition to FRSs.
   

2. to apply the rest of the FRS in measuring all assets and liabilities for which paragraphs 24 and 25 are not relevant.
   

3. to give all disclosures required by the FRS as of the first-time adopter's own date of transition to FRSs.

IG31 Paragraph 24 of the FRS applies if a subsidiary becomes a first-time adopter later than its parent, for example if the subsidiary previously prepared a reporting package under FRSs for consolidation purposes but did not present a full set of financial statements under FRSs. This may be relevant not only when a subsidiary's reporting package complies fully with the recognition and measurement requirements of FRSs, but also when it is adjusted centrally for matters such as post-balance sheet events review and central allocation of pension costs. For the disclosure required by paragraph 41 of the FRS, adjustments made centrally to an unpublished reporting package are not corrections of errors. However, paragraph 24 does not permit a subsidiary to ignore misstatements that are immaterial to the consolidated financial statements of its parent but material to its own financial statements.

FRS 29 Financial Reporting in Hyperinflationary Economies

IG32 An entity complies with FRS 21 The Effects of Changes in Foreign Exchange Rates in determining its measurement currency and presentation currency (see INT FRS-19 Reporting Currency-Measurement and Presentation of Financial Statements under FRS 21 and FRS 29). When the entity prepares its opening FRS balance sheet, it applies FRS 29 to any periods during which the economy of the measurement currency or presentation currency was hyperinflationary.

IG33 An entity may elect to use the fair value of an item of property, plant and equipment at the date of transition to FRSs as its deemed cost at that date (paragraph 16 of the FRS), in which case it gives the disclosures required by paragraph 44 of the FRS.

IG34 If an entity elects to use the exemptions in paragraphs 16-19 of the FRS, it applies FRS 29 to periods after the date for which the revalued amount or fair value was determined.

FRS 32 Financial Instruments: Disclosure and Presentation

IG35 In its opening FRS balance sheet, an entity applies the criteria in FRS 32 to classify financial instruments issued (or components of compound instruments issued) as either financial liabilities or equity instruments in accordance with the substance of the contractual arrangement when the instrument first satisfied the recognition criteria in FRS 32 (paragraphs 18 and 26), without considering events after that date (other than changes to the terms of the instruments).

IG36 For compound instruments outstanding at the date of transition to FRSs, an entity determines the initial carrying amounts of the components on the basis of circumstances existing when the instrument was issued (FRS 32, paragraph 26). An entity determines those carrying amounts using the version of FRS 32 effective at the reporting date for its first FRS financial statements. If the liability component is no longer outstanding at the date of transition to FRSs, a first-time adopter need not separate the initial equity component of the instrument from the cumulative interest accreted on the liability component (paragraph 23 of the FRS).

FRS 34 Interim Financial Reporting

IG37 FRS 34 applies if an entity is required, or elects, to present an interim financial report in accordance with FRSs. Accordingly, neither FRS 34 nor the FRS requires an entity:

1. to present interim financial reports that comply with FRS 34; or

2. to prepare new versions of interim financial reports presented under previous GAAP. However, if an entity does prepare an interim financial report under FRS 34 for part of the period covered by its first FRS financial statements, the entity restates the comparative information presented in that report so that it complies with FRSs.

IG38 An entity applies the FRS in each interim financial report that it presents under FRS 34 for part of the period covered by its first FRS financial statements. In particular, paragraph 45 of the FRS requires an entity to disclose various reconciliations (see IG Example 10).

FRS 36 Impairment of Assets and FRS 37 Provisions, Contingent Liabilities and Contingent Assets

IG39 An entity applies FRS 36 in:

1. determining whether any impairment loss exists at the date of transition to FRSs; and
   

2. measuring any impairment loss that exists at that date, and reversing any impairment loss that no longer exists at that date. An entity's first FRS financial statements include the disclosures that FRS 36 would have required if the entity had recognised those impairment losses or reversals in the period beginning with the date of transition to FRSs (paragraph 39(c) of the FRS).

IG40 The estimates used to determine whether an entity recognises an impairment loss or provision (and to measure any such impairment loss or provision) at the date of transition to FRSs are 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 (paragraphs 31 and 32 of the FRS). The entity reports the impact of any later revisions to those estimates as an event of the period in which it makes the revisions.

IG41 In assessing whether it needs to recognise an impairment loss or provision (and in measuring any such impairment loss or provision) at the date of transition to FRSs, an entity may need to make estimates for that date that were not necessary under its previous GAAP. Such estimates and assumptions do not reflect conditions that arose after the date of transition to FRSs (paragraph 33 of the FRS).

IG42 The transitional provisions in FRS 36 and FRS 37 do not apply to an entity's opening FRS balance sheet (paragraph 9 of the FRS).

IG43 FRS 36 requires the reversal of impairment losses in some cases. If an entity's opening FRS balance sheet reflects impairment losses, the entity recognises any later reversal of those impairment losses in the income statement (except when FRS 36 requires the entity to treat that reversal as a revaluation). This applies to both impairment losses recognised under previous GAAP and additional impairment losses recognised on transition to FRSs.

FRS 38 Intangible Assets

IG44 An entity's opening FRS balance sheet:

1. excludes all intangible assets and other intangible items that do not meet the criteria for recognition under FRS 38 at the date of transition to FRSs; and
   

2. includes all intangible assets that meet the recognition criteria in FRS 38 at that date, except for intangible assets acquired in a business combination that were not recognised in the acquirer's consolidated balance sheet under previous GAAP and also would not qualify for recognition under FRS 38 in the separate balance sheet of the acquiree (see paragraph B2(f) of Appendix B of the FRS).

IG45 The criteria in FRS 38 require an entity to recognise an intangible asset if, and only if:

1. it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and
   

2. the cost of the asset can be measured reliably.

FRS 38 supplements these two criteria with further, more specific, criteria for internally generated intangible assets.

IG46 Under paragraphs 53 and 59 of FRS 38, an entity capitalises the costs of creating internally generated intangible assets prospectively from the date when the recognition criteria are met. FRS 38 does not permit an entity to use hindsight to conclude retrospectively that these recognition criteria are met. Therefore, even if an entity concludes retrospectively that a future inflow of economic benefits from an internally generated intangible asset is probable and the entity is able to reconstruct the costs reliably, FRS 38 prohibits it from capitalising the costs incurred before the date when the entity both:

1. concludes, based on an assessment made and documented at the date of that conclusion, that it is probable that future economic benefits from the asset will flow to the entity; and
   

2. has a reliable system for accumulating the costs of internally generated intangible assets when, or shortly after, they are incurred.

IG47 If an internally generated intangible asset qualifies for recognition at the date of transition to FRSs, an entity recognises the asset in its opening FRS balance sheet even if it had recognised the related expenditure as an expense under previous GAAP. If the asset does not qualify for recognition under FRS 38 until a later date, its cost is the sum of the expenditure incurred from that later date.

IG48 The criteria discussed in paragraph IG45 also apply to an intangible asset acquired separately. In many cases, contemporaneous documentation prepared to support the decision to acquire the asset will contain an assessment of the future economic benefits. Furthermore, as explained in paragraph 23 of FRS 38, the cost of a separately acquired intangible asset can usually be measured reliably.

IG49 For an intangible asset acquired in a business combination before the date of transition to FRSs, its carrying amount under previous GAAP immediately after the business combination is its deemed cost under FRSs at that date (paragraph B2(e) of the FRS). If that carrying amount was zero, the acquirer does not recognise the intangible asset in its consolidated opening FRS balance sheet, unless it would qualify under FRS 38, applying the criteria discussed in paragraphs IG45-IG48, for recognition at the date of transition to FRSs in the separate balance sheet of the acquiree (paragraph B2(f) of the FRS). If those recognition criteria are met, the acquirer measures the asset on the basis that FRS 38 would require in the separate balance sheet of the acquiree. The resulting adjustment affects goodwill (paragraph B2(g)(i) of the FRS).

IG50 A first-time adopter may elect to use the fair value of an intangible asset at the date of an event such as a privatisation or initial public offering as its deemed cost at the date of that event (paragraph 19 of the FRS), provided that the intangible asset qualifies for recognition under FRS 38 (paragraph 10 of the FRS). In addition, if, and only if, an intangible asset meets both the recognition criteria in FRS 38 (including reliable measurement of original cost) and the criteria in FRS 38 for revaluation (including the existence of an active market), a first-time adopter may elect to use one of the following amounts as its deemed cost (paragraph 18 of the FRS):

1. fair value at the date of transition to FRSs (paragraph 16 of the FRS), in which case the entity gives the disclosures required by paragraph 44 of the FRS; or
   

2. a revaluation under previous GAAP that meets the criteria in paragraph 17 of the FRS.

IG51 If an entity's amortisation methods and rates under previous GAAP would be acceptable under FRSs, the entity does not restate the accumulated amortisation in its opening FRS balance sheet. Instead, the entity accounts for any change in estimated useful life or amortisation pattern prospectively from the period when it makes that change in estimate (paragraph 31 of the FRS and paragraph 94 of FRS 38). However, in some cases, an entity's amortisation methods and rates under previous GAAP may differ from those that would be acceptable under FRSs (for example, if they were adopted solely for tax purposes and do not reflect a reasonable estimate of the asset's useful life). If those differences have a material effect on the financial statements, the entity adjusts the accumulated amortisation in its opening FRS balance sheet retrospectively so that it complies with FRSs (paragraph 31 of the FRS).

FRS 39 Financial Instruments: Recognition and Measurement

IG52 An entity recognises and measures all financial assets and financial liabilities in its opening FRS balance sheet in accordance with FRS 39, except as specified in paragraphs 27-30 of the FRS, which address derecognition and hedge accounting.

Recognition

IG53 An entity recognises all financial assets and financial liabilities (including all derivatives) that qualify for recognition under FRS 39 and have not yet qualified for derecognition under FRS 39, except financial assets or financial liabilities derecognised under previous GAAP in a financial year beginning before 1 January 2005 (see paragraph 27 of the FRS).

IG54 An entity does not recognise financial assets and financial liabilities that do not qualify for recognition under FRS 39, or have already qualified for derecognition under FRS 39.

Embedded derivatives

IG55 When FRS 39 requires an entity to separate an embedded derivative from a host contract, their initial carrying amounts at the date when the instrument first satisfies the recognition criteria in FRS 39 reflect circumstances at that date (FRS 39, paragraph 23). If the entity cannot determine the initial carrying amounts of the embedded derivative and host contract reliably, it treats the entire combined contract as a financial instrument held for trading (FRS 39, paragraph 26). This results in fair value measurement (except when the entity cannot determine a reliable fair value, see FRS 39, paragraph 67), with changes in fair value recognised in the income statement.

Measurement

IG56 In preparing its opening FRS balance sheet, an entity applies the criteria in FRS 39 to identify those financial assets and financial liabilities that are measured at fair value and those that are measured at amortised cost. In particular:

1. to comply with FRS 39, paragraph 87, classification of financial assets as held-to-maturity investments relies on a designation made by the entity in applying FRS 39 reflecting the entity's intent and ability at the date of transition to FRSs. It follows that sales or transfers of held-to-maturity investments before the date of transition to FRSs do not trigger the 'tainting' rules in FRS 39, paragraph 80.
   

2. to comply with FRS 39, paragraph 10, the category of 'loans and receivables originated by the enterprise' refers to the circumstances at origination.
   

3. under FRS 39, paragraph 10, derivative financial assets and derivative financial liabilities are always deemed held for trading. The result is that an entity measures all derivative financial assets and derivative financial liabilities at fair value.
   

4. to comply with FRS 39, paragraph 104, an entity classifies a non-derivative financial asset or non-derivative financial liability in its opening FRS balance sheet as held for trading if, and only if, the asset or liability was:

1. acquired or incurred principally for the purpose of selling or repurchasing it in the near term; or

2. at the date of transition to FRSs, part of a portfolio of identified financial instruments that were managed together and for which there was evidence of a recent actual pattern of short-term profit-taking.

5. to comply with FRS 39, paragraph 10, available-for-sale financial assets are a residual category of financial assets that do not fall into any of the previous categories.

IG57 For those financial assets and financial liabilities measured at amortised cost in the opening FRS balance sheet, an entity determines their cost on the basis of circumstances existing when the assets and liabilities first satisfied the recognition criteria in FRS 39. However, if the entity acquired those financial assets and financial liabilities in a past business combination, their carrying amount under previous GAAP immediately following the business combination is their deemed cost under FRSs at that date (paragraph B2(e) of the FRS).

IG58 An entity's estimates of loan impairments at the date of transition to FRSs are 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 assumptions were in error (paragraph 31 of the FRS). The entity treats the impact of any later revisions to those estimates as impairment losses (or, if the criteria in FRS 39 are met, reversals of impairment losses) of the period in which it makes the revisions.

IG59 If an entity has adopted an accounting policy that requires it to recognise gains and losses on available-for-sale financial assets in a separate component of equity, rather than in the income statement, it recognises cumulative changes in their fair value at the date of transition to FRSs in that separate component of equity, rather than in retained earnings. On subsequent derecognition or impairment of the available-for-sale financial asset, the entity transfers to the income statement the cumulative gain or loss previously recognised in equity (paragraph 100(b) of FRS 39).

Hedge accounting

IG60 Paragraphs 28-30 of the FRS deal with hedge accounting. Some of the implementation guidance issued by the FRS 39 Implementation Guidance Committee addresses hedge accounting aspects of transition to FRS 39.

FRS 40 Investment Property

IG61 An entity that adopts the fair value model in FRS 40 measures its investment property at fair value at the date of transition to FRSs. The transitional requirements of FRS 40 do not apply (paragraph 9 of the FRS).

IG62 An entity that adopts the cost model in FRS 40 applies paragraphs IG7-IG13 on property, plant and equipment.

Explanation of transition to FRSs

IG63 Paragraphs 39(a) and (b), 40 and 41 of the FRS require a first-time adopter to disclose reconciliations that give sufficient detail to enable users to understand the material adjustments to the balance sheet, income statement and, if applicable, cash flow statement. Paragraph 39(a) and (b) requires specific reconciliations of equity and profit or loss. IG Example 11 shows one way of satisfying these requirements.