IFRS 1 in the IFRS 18 Era: Rethinking First-time Adoption
Entering a changing IFRS framework
IFRS 1 governs how an entity moves from its previous accounting framework to IFRS for the first time.
The basic mechanics of that transition have not fundamentally changed. But the IFRS reporting framework that first-time adopters are entering is changing.
IFRS 18 is already available for early application and becomes mandatory for annual reporting periods beginning on or after 1 January 2027. For companies beginning an IFRS implementation now, IAS 1 is therefore no longer the obvious presentation framework around which to design their first IFRS reporting process.
This makes it a useful time to revisit IFRS 1 — why it was created, how retrospective application works, and what first-time adoption means as IFRS 18 replaces IAS 1.
1. Why IFRS needed a transition standard
Most IFRS Accounting Standards assume that an entity is already reporting under IFRS.
IAS 16 tells an entity how to account for property, plant and equipment. IFRS 9 deals with financial instruments. IAS 21 deals with foreign currencies.
A first-time adopter faces a different problem:
What happens to the accounting history created before IFRS was adopted?
In theory, the answer is straightforward: apply IFRS retrospectively.
In practice, historical data may no longer exist. Systems may have changed. Information now required by IFRS may never have been collected at the time. Historical estimates also cannot simply be reconstructed using knowledge of what happened later.
The predecessor to IFRS 1 was SIC-8, First-time Application of IASs as the Primary Basis of Accounting. IFRS 1 replaced SIC-8 in 2003, shortly before IFRS adoption expanded significantly across jurisdictions.
The standard addressed a practical question that other IFRS Accounting Standards generally did not:
How should an entity with an existing accounting history move into IFRS for the first time?
That is the role IFRS 1 was designed to perform.
2. How IFRS 1 works
IFRS 1 is not primarily about individual transactions. It is about establishing the point from which a company can begin operating under IFRS.
That point is the date of transition to IFRSs.
At that date, the company establishes its opening IFRS statement of financial position. Importantly, this is a balance-sheet starting point. There is no transition-date income statement or cash flow statement. The comparative period begins from this opening position.
The practical task is therefore to convert the company's existing accounting position into one that can function under IFRS.
That means answering three basic questions:
What belongs on the IFRS balance sheet?
Some items carried under the previous GAAP may no longer qualify, while IFRS may require other assets or liabilities to be recognised.
Where does each item belong?
Even where an asset or liability continues to exist, its classification under IFRS may be different.
What is it worth under IFRS?
The same underlying asset or liability may enter the IFRS reporting period with a different carrying amount.
The differences created by this conversion are part of establishing the opening IFRS equity position. They are not simply treated as gains or losses arising during the comparative period.
From there, the timeline becomes much easier to understand:
Previous GAAP
→ Opening IFRS statement of financial position
→ IFRS comparative period
→ First IFRS financial statements
This is an important feature of IFRS 1. The standard does not ask a company simply to produce an IFRS-compliant set of financial statements at the end of the process. It requires the company to establish an IFRS starting point from which the comparative period — and subsequent IFRS reporting — can actually be built.
3. Retrospective application — and its limits
Retrospective application is the basic principle of IFRS 1.
But the past cannot always be reconstructed perfectly.
There are two broad reasons for this.
First, retrospective reconstruction may sometimes be inappropriate.
An estimate made several years ago, for example, cannot simply be recreated using information that became available later. IFRS 1 therefore restricts retrospective application in specified areas, including its requirements concerning historical estimates.
Second, retrospective reconstruction may be theoretically possible but excessively difficult or costly in practice.
This leads to an important distinction within IFRS 1:
Mandatory exceptions | Optional exemptions | |
|---|---|---|
Purpose | Restrict retrospective application | Provide specified relief from retrospective application |
Choice | No | Yes, where permitted |
Practical meaning | Do not reconstruct the past this way | You do not have to reconstruct the past this way |
Seen this way, the exceptions and exemptions are not simply a collection of special rules.
They are part of the mechanism that makes the principle of retrospective application workable in real companies.
Mandatory exceptions — where IFRS 1 limits retrospective reconstruction
IFRS 1 generally starts from retrospective application, but it does not allow first-time adopters to reconstruct every aspect of the past freely. The mandatory exceptions identify areas where transition must instead follow specified boundaries.
Mandatory exception | What this means in practice |
|---|---|
Derecognition of financial assets and liabilities | Past derecognition transactions are generally not reopened simply because IFRS would have produced a different result. The transition rules determine how far back the entity may go. |
Hedge accounting | A company cannot use information available today to create a hedge relationship retrospectively. Hedge accounting at transition must be based on relationships that satisfy the applicable transition requirements. |
Non-controlling interests | Certain IFRS 10 requirements are applied from the transition date forward, rather than rebuilding the entire pre-transition history of NCI transactions and allocations. |
Classification and measurement of financial assets | Some IFRS 9 assessments are anchored to conditions existing at the transition date. The entity does not simply recreate every historical classification decision as though IFRS 9 had always applied. |
Impairment of financial assets | Expected credit losses require a specific transition approach, particularly where reconstructing historical changes in credit risk would depend on information that was not available at the time. |
Embedded derivatives | The transition rules specify when the relevant contractual conditions are assessed, preventing the analysis from being rebuilt freely with hindsight. |
Government loans | Certain IFRS 9 and IAS 20 requirements are generally applied from the transition date, rather than automatically reconstructing the original accounting for an existing government loan. Limited retrospective application may be possible when the required historical information exists. |
Insurance contracts | First-time adoption follows the specific transition framework associated with IFRS 17, rather than applying IFRS 1's general retrospective principle without modification. |
Deferred tax related to leases and decommissioning, restoration and similar liabilities | These transactions follow specific transition requirements for the related deferred tax effects, rather than an unrestricted reconstruction of the historical accounting. |
The common idea is not simply “no retrospective application.”
IFRS 1 uses different boundaries for different problems: some accounting starts from the transition date, some assessments are anchored to information available at a specified date, and some areas follow their own transition rules. The common purpose is to prevent first-time adoption from becoming an unrestricted reconstruction of the past.
Optional exemptions — where IFRS 1 offers relief
Unlike mandatory exceptions, these exemptions are choices. They allow a first-time adopter to avoid reconstructing specified parts of its accounting history where IFRS 1 provides relief.
Example | What the relief avoids |
|---|---|
Business combinations | Reconstructing all past acquisitions under IFRS |
Deemed cost | Rebuilding historical cost records for certain assets |
Cumulative translation differences | Reconstructing the full history of foreign currency translation |
Share-based payments | Reconstructing specified older awards |
Leases | Applying the normal transition approach without the specified first-time-adopter relief |
Borrowing costs | Reconstructing specified borrowing costs from earlier periods |
These are examples, not a complete list. IFRS 1 contains additional exemptions for particular transactions and circumstances.
4. What happens when first-time adoption becomes an implementation project?
So far, this is IFRS 1 as an accounting standard.
Once it becomes an implementation project, however, the problem extends beyond accounting entries.
We discussed a smaller version of this issue in our earlier article on IFRS 8. When the composition of reportable segments changes, comparative segment information may need to be restated to reflect the new structure.
Total revenue or profit may remain unchanged, but historical information still has to be mapped into the new segments and, where necessary, allocated.
Under IFRS 1, a similar problem can extend across the accounting framework.
Historical information may be required for assets acquired years earlier, past transactions, estimates and classifications. That information may no longer be available, or may never have been captured at the level of detail now required.
And the opening IFRS statement of financial position is not simply a one-off conversion entry.
It becomes the starting point for the comparative period and for the IFRS accounting that follows.
The practical question is therefore not only:
Can we calculate the transition adjustment?
It is also:
Can we continue accounting and reporting under IFRS from the opening position we have created?
At this point, first-time adoption becomes an implementation project involving accounting, data, systems, processes and controls.
5. First-time adoption in the IFRS 18 era
First-time adoption now has another dimension.
IFRS 18 replaces IAS 1 and becomes mandatory for annual reporting periods beginning on or after 1 January 2027. Earlier application is permitted.
Before mandatory application, a first-time adopter could still move into IFRS using the presentation requirements of IAS 1 and subsequently transition to IFRS 18.
But IFRS 18 itself requires retrospective application.
Building an IAS 1-based reporting structure shortly before mandatory adoption may therefore mean redesigning that structure soon afterwards and restating comparative information again under IFRS 18.
Early application provides another route:
Previous GAAP
→ Transition under IFRS 1
→ First IFRS reporting structure under IFRS 18
Once IFRS 18 becomes mandatory, this will no longer be an early-adoption choice. New first-time adopters will simply enter an IFRS framework that already includes IFRS 18.
The basic mechanics of IFRS 1 do not fundamentally change.
But for an IFRS implementation beginning now, it increasingly makes sense to consider IFRS 1 with IFRS 18, rather than IAS 1, as the reporting framework being implemented.
This affects more than the face of the financial statements. The initial reporting design also needs to consider the IFRS 18 category and subtotal structure, aggregation and disaggregation requirements and, where applicable, management-defined performance measures (MPMs).
6. Sony Financial Group — applying IFRS 1 and IFRS 18 together
Sony Financial Group provides an interesting real-world example.
For the year ended 31 March 2026, Sony FG published IFRS reference consolidated financial statements. Sony FG states that these represent its first annual consolidated financial statements prepared in accordance with IFRS Accounting Standards, identifies 1 April 2024 as its date of transition, and applies IFRS 1.
The timeline is therefore:
1 April 2024
Opening IFRS position
↓
Year ended 31 March 2025
IFRS comparative period
↓
Year ended 31 March 2026
First annual IFRS consolidated financial statements
(published as IFRS reference information)
The disclosures illustrate what the transition date means in practice.
Financial instruments at 1 April 2024 are already presented using IFRS measurement categories such as FVPL, FVOCI and amortised cost. Expected credit loss information similarly begins with balances at the transition date and develops from there.
The opening IFRS position is therefore more than a high-level conversion adjustment. It provides the information needed to support the IFRS accounting and disclosures that follow.
Sony FG also early adopted IFRS 18.
Its first annual IFRS reporting structure therefore already incorporates IFRS 18, including the disclosure of Adjusted Net Income as a management-defined performance measure (MPM), reconciled to an IFRS subtotal.
The significance of the case here is not Sony FG's particular presentation.
It is that first-time adoption under IFRS 1 and implementation of IFRS 18 can be designed as part of the same transition.
7. Reading IFRS 1 as a product manager
Finally, let us look at IFRS 1 from a different perspective.
My professional experience includes product management for cloud accounting systems. From that perspective, IFRS 1 looks like more than an accounting standard. In some respects, it resembles the implementation support designed around a product.
When a company implements a new cloud accounting system, providing the new software is not enough.
The customer already has another system. It contains opening balances, transaction histories and master data. Its chart of accounts and data structures may be different from those of the new system.
Implementation therefore requires decisions such as:
When do we switch?
What data do we migrate?
How do we transform it?
How much history do we bring across?
What do we do with information that cannot reasonably be migrated?
Viewed through that lens, the structure of IFRS 1 looks surprisingly familiar.
It establishes a transition date and an opening position. Information produced under the previous accounting framework is recognised, measured and classified under IFRS. Retrospective application is the starting principle, while IFRS 1 defines where full historical reconstruction should not, or need not, be carried through.
The objective is not necessarily to recreate every part of the past perfectly.
It is to establish a reliable starting point from which the new framework can operate on an ongoing basis.
This also makes IFRS 1 somewhat unusual among major accounting frameworks.
US GAAP, for example, does not have a single comprehensive standard directly equivalent to IFRS 1 that governs first-time adoption of US GAAP as a whole. Individual Topics contain transition provisions, and ASC 250 addresses accounting changes and error corrections, but neither performs the same comprehensive gateway function as IFRS 1.
That difference is worth considering.
If companies around the world begin from different accounting standards, different systems and different accounting histories, creating an international accounting framework is only part of the challenge.
You also need to design how companies move into it.
It is difficult to measure how much IFRS 1 itself contributed to the global spread of IFRS. But providing a common transition mechanism for companies coming from different accounting frameworks can be seen as an important piece of infrastructure that made IFRS more scalable internationally.
In product terms, perhaps IFRS 1 is not the product itself.
It is part of the onboarding mechanism that makes the product adoptable.
8. The framework on the other side
The basic architecture of IFRS 1 has remained remarkably durable since the standard was issued in 2003.
What is changing is the reporting framework that first-time adopters are entering.
As IFRS 18 replaces IAS 1, this matters not only after transition, but when the transition itself is being designed.
For companies beginning an IFRS implementation now, the question is increasingly not simply how to apply IFRS 1, but how to apply it with the reporting framework that will follow already in view.
IFRS 1 defines how a company enters IFRS.
IFRS 18 increasingly defines the reporting framework it enters.
Practice Questions
Practice questions based on this article are available on IFRS-OneQ. Reinforce what you've read — one question at a time.
IFRS First-Time Adoption Project Toolkit
First-time adoption does not end with identifying the accounting requirements. Teams still need to assess GAAP differences, make IFRS 1 transition decisions, build the opening IFRS position, prepare comparative information and design the IFRS 18 reporting framework that follows.
The IFRS First-Time Adoption Project Toolkit — US GAAP Edition is an Excel-based workbook designed to structure that work from initial gap assessment through to the first IFRS financial statements.
It combines US GAAP → IFRS gap assessment, IFRS 1 transition actions and IFRS 18 reporting review, together with project planning, progress tracking, governance and issue management.
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Disclaimer: This article is for educational purposes only and reflects the author's interpretation of accounting standards and their history. It does not constitute professional accounting, tax, or financial advice. Readers should consult qualified professionals on specific transactions.