First Time Application (FTA)

1. First Time Application (FTA) 1 1

2. Overview • Background • Definitions • Scope • Transition to IFRSs • Selection of accounting policies • Opening IFRS balance sheet • Presentation and disclosure • Final standard and effective date 2

3. Background • New First-Time Application standard • Replaces SIC-8 (which required entities to go back to the beginning of time) • Intends to reduce the cost of first-time application • Addresses the problems such as: • No longer requires application of old IAS to comparative periods • Provides special exemptions when information is not available • Intended to improve historical comparability of financial statements of the entity, but reduces comparability between IFRS reporting entities 3

4. Definitions 4

5. Example of European listed company Presentation of two years comparative figures (2005 and 2004) Date of transition to IFRS Opening IFRS balance sheet Reporting date 31 December 2005 31 December 2004 31 December 2003 31 December 2002 Periods covered by the first IFRS financial statements Presentation of three years comparative figures (2005,2004 and 2003) Date of transition to IFRS Opening IFRS balance sheet Reporting date 31 December 2005 31 December 2002 Periods covered by the first IFRS financial statements 31 December 2003 31 December 2004 5

6. Scope – When • An entity shall apply the new standard in: • Its first IFRS financial statements; and • Each interim financial report presented under IAS 34 Interim Financial Reporting. • Subsidiaries of groups already reporting under IFRS are treated as first-time adopters. However, to avoid restatement of IFRS numbers already reported they are not first-time adopters for recognition and measurement purposes when: • The group published IFRS financial statements in the previous period; and • The subsidiary is wholly-owned or minority shareholders unanimously agree that they subsidiary is not a first-time adopter for recognition and measurement purposes. 6

7. Scope – Who • The FTA standard should be applied by entities which: • Did not present their most recent previous financial statements under IFRS; • Prepared financial statements under IFRS for internal use only, without making them available to the entity’s owners or other external users; or • Did not present financial statements for previous periods. 7

8. Scope – Who • An entity cannot apply the FTA standard when it previously presented a set of financial statements: • Under IFRS; • That complied with both previous GAAP and IFRS; or • Under IFRS, but the auditors qualified their audit report on those financial statements. 8

9. Scope – Accounting changes • Entities already applying IFRS cannot use the FTA standard when making accounting changes that are the subject of: • Requirements on changes in accounting policies in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors; and • Specific transitional requirements in other IFRS. 9

10. Transition to IFRS • Transition to IFRS involves the following: • Selection of accounting policies; • Preparation of an opening IFRS balance sheet; • Presentation and disclosure in an entity’s first IFRS financial statements and interim financial reports 10

11. Selection of accounting policies • The same accounting policies shall be applied throughout all periods presented and in the opening IFRS balance sheet; • Those accounting policies shall comply with each IFRS operative at the reporting date for the First IFRS financial statements; • An entity shall not apply different versions of standards or interpretations that were operative at earlier dates; • An entity shall apply IFRS and SIC in its first financial statements as if they had always been in effect, unless they provide specific guidance on FTA • An entity shall apply IFRIC interpretations in its first financial statements as if they had always been in effect, unless the interpretation provides specific guidance on FTA 11

12. Opening IFRS balance sheet • An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRS. • Recognition • The entity shall in its opening balance sheet: • Recognise all assets and liabilities whose recognition is required by IFRS; • Not recognise items as assets or liabilities if IFRS do not permit such recognition; and • Reclassify items that the entity recognised under previous GAAP in accordance with IFRS. 12

13. Opening IFRS balance sheet Measurement • In its opening IFRS balance sheet, an entity shall apply IFRS in measuring all recognised assets and liabilities, except: • When undue cost or effort would be required to determine: • Historical cost of property, plant and equipment • Cumulative translation adjustment re. foreign operations • For certain specific items: • Employee benefit assets or liabilities under defined benefit plans • Business combinations • Event-driven fair values (e.g. privatisation or IPO related) may be used as deemed cost • Retrospective hedge designation is not permitted but certain exemptions exist for financial instruments • Any adjustments to amounts previously reported should be recognised in equity rather than in income. 13

14. Opening IFRS balance sheet • General rule : full retrospective application of all IFRS effective at the reporting date but entities have an option : • To use all limited exemptions authorized by the FTA IFRS to the extent these exemptions are applicable, OR • Not to use the limited exemptions authorized by the FTA IFRS but shall then apply the IFRS which were effective in each period 14

15. Undue cost or effort • If an entity is unable to determine amounts in accordance with IFRS without undue cost or effort then the following rules apply: • Property, plant and equipment • Valuation at fair value at the date of transition for: • Property, plant and equipment; and • Investment property accounted for under the IAS 40 cost method 15

16. Undue cost or effort • Cumulative translation adjustment • The cumulative translation difference re. foreign operation at the date of transition to IFRSs is deemed to be equal to the amount determined under local GAAP. 16

17. Employee benefits • An entity shall measure net employee benefit assets or liabilities under defined benefit plans in accordance with IAS 19 Employee Benefits, except that no actuarial gains or losses shall remain unrecognised. 17

18. Business combinations (1) Restatement of business combinations under the FTA standard: • No reclassification of business combinations; • Only include assets and liabilities that meet IFRS recognition criteria; • If IFRS requires cost-based measurement: carrying amount under previous GAAP shall be deemed cost under IFRS, and shall be the basis for subsequent cost-based depreciation or amortisation. • If IFRS requires measurement not on a cost-basis: Restatement on the basis required by IFRS, any resulting change in the carrying amount shall be recognised in retained earnings. 18

19. Business combinations (2) • The carrying amount of goodwill under previous GAAP shall be adjusted as follows: • Intangible assets that do not meet recognition criteria under IFRS should be added to goodwill; • The entity should perform an impairment test under IAS 36 and reduce the carrying amount of goodwill to the extent that it is impaired; • Any positive goodwill shall be amortised prospectively from the date of transition to IFRS; and • Any negative goodwill shall be recognised in retained earnings at the date of transition to IFRS 19

20. Financial instruments (1) • Recognition • All assets and liabilities should be recognised in accordance with IFRS, even if they were not recognised under previous GAAP • Investments • Retroactive designation of investments permitted (held-to-maturity, available-for-sale, trading and originated loans and receivables) • Recycling of pre-IFRS fair value gains on available-for-sale investments permitted 20

21. Financial instruments (2) Hedging • Hedges that were not designated before application of IFRS cannot be designated retrospectively • Hedges that were designated should be accounted for under IAS 39 prospectively from the date of application of IFRS: • Fair value hedges are accounted for as follows: • Adjust carrying amount of the hedged assets and liabilities at the date of transition to IFRS to reflect the portion of the fair value of the hedging instrument at that date that reflects the risk hedged; • Recognise in retained earnings any net adjustment to the hedged item and hedging instrument; and • If the hedge meets IAS 39 criteria (including documentation on date of transition), account for the hedge under IAS 39 hedge accounting rules. 21

22. Financial instruments (3) Hedges (cont’d) • Cash flow hedges • If the hedged transaction is no longer expected to occur, reclassify deferred gains/losses to retained earnings; • If IAS 39 hedge criteria have been met (including documentation on date of transition) and the transaction is still expected to occur, classify gains/losses as a separate component of equity and recycle when the hedged item affects the income statement; and • Continue to apply IAS 39 hedge accounting after transition to IFRSs if the hedged transaction is still highly probable and other hedge criteria have been met. 22

23. Estimates • Similar estimates required under previous GAAP using a methodology consistent with IFRS: • Estimates consistent with estimates made under previous GAAP, unless it is clearly shown that those estimates were errors. • Similar estimates required under previous GAAP using a methodology not consistent with IFRS: • Estimates consistent with the estimates required under previous GAAP, after adjusting for the difference in methodology. • If similar estimates were not required by previous GAAP: • Estimates shall reflect the information available when the entity prepares its first IFRS financial statements, but shall not reflect conditions that are indicative of conditions that arose after the date of transition to IFRS. 23

24. Presentation and disclosure (1) • Comparative information • IFRS requires at least one year of comparative information • Explanation of transition to IFRS • Equity reconciliation from previous GAAP to IFRS on: • Date of transition to IFRS; and • End of the latest period presented under previous GAAP; • Reconciliation of income for the latest period presented; • The reconciliation shall give sufficient detail to enable users to understand the material adjustments and distinguish between changes in accounting policies, changes of estimates and correction of errors • Disclosure of impairment losses recognised or reversed upon transition to IFRS; • Explain material changes to the cash flow statements. 24

25. Presentation and disclosure (2) • Use of fair value as deemed cost If the entity use fair value as deemed cost for (1) property, plant and equipment or (2) investment property then it shall disclose: • The aggregate of those fair values; • The aggregate adjustments to the carrying amounts reported under previous GAAP; and • Explain why the measurement required by IFRS would involve undue cost or effort. • Historical summaries • IFRS does not require disclosure of historical summaries; • The entity does not need to adjust historical summaries (i.e. no quantitative restatement), but needs to disclose the nature of the adjustments required that would make the data comply with IFRS. 25

26. Presentation and disclosure (3) Interim financial reports • If the entity presents an interim report in accordance with IAS 34 then it shall present: • Its equity under previous GAAP at the end of the comparable interim period to its equity under IFRS at that date; and • Its profit or loss under previous GAAP for that comparable interim period (current and year-to-date) to its profit or loss under IFRS for that period; • The first interim reports should also include the following reconciliation: • Equity reconciliation from previous GAAP to IFRS on: • Date of transition to IFRS; and • End of the latest period presented under previous GAAP; • Reconciliation of income for the latest period presented. 26

27. Final standard and effective date • The IASB plans to finalise the FTA standard in Q2 2003. • It is uncertain whether the IASB will maintain the effective date of 1 January 2003 in the final version of the standard, but the IASB will encourage earlier application. • Entities that want to convert to IFRS before the FTA standard comes into force will have to apply SIC-8. 27

28. End Part II 28