We are working on the first-time adoption of IFRS in our company. How shall we account for the adoption adjustments?


In line with IFRS 1 First-time Adoption of International Financial Reporting Standards (par.11), all adjustments are debited or credited to opening retained earnings or in another component of equity at the transition date.

In most cases, you would debit or credit retained earnings, but there are situations when you need to recognize a separate component in equity.

For example, when you apply revaluation model to your buildings in line with IAS 16, then any excess of the fair value of buildings over their carrying amount per previous accounting rules is booked to revaluation surplus (not retained earnings).

Let me illustrate:

ABC adopts the IFRS for the first time. It has owned a lot of property, plant and equipment for a very long time and old accounting records are not available. Currently, these assets are still in use, but not recorded in the local financial statements. ABC applies cost model in line with IAS 16.

Therefore, ABC decides to apply the exemption in IFRS 1 and use fair value as deemed cost of its assets.

The fair value of the assets is CU 50 000. The first IFRS financial statements are as of 31 December 20X3.

The journal entry:

  • Debit Property, plant and equipment: CU 50 000

  • Credit Retained earnings in equity: CU 50 000

This adjustment is made on 1 January 20X2 – at the transition date. It is the beginning date of the comparative period.

Then, ABC must assess the useful life of the assets and account for depreciation in both years of 20X2 and 20X3.

Please note that here, ABC credited retained earnings and not revaluation surplus in equity. The reason is that ABC applies cost model and not revaluation model and CU 50 000 is merely recognizing the cost of assets.

You can learn more about making your IFRS financial statements here.