Domain: Accounting
Question:
We are preparing the Group's first IFRS-compliant consolidated financial statements under IFRS 1, following a controlling (>50%) acquisition of a publicly listed engineering firm executed prior to full accounting policy harmonization across subsidiaries. Subsequent forensic audits revealed falsified asset documentation, materially overstated inventories, non-existent or improperly classified capital projects, and receivables linked to void or non-binding sales contracts. These events occurred after the acquisition date but before financial statement authorization under IAS 10. 1. In a scenario where the Group is applying IFRS 1 for the first time and has completed a business combination while accounting policies across subsidiaries remain misaligned how should the Group distinguish between adjustments arising from the reassessment of provisional values under IFRS 3 and those that qualify as prior period errors under IAS 8 when both inventory and capital asset valuations are materially misstated and the acquisition occurred before harmonization was implemented does IFRS 1 permit bifurcated treatment of adjustments within the same transaction and how should this be disclosed in the first IFRS financial statements. 2. When the acquired entity has capitalized construction in progress based on falsified documentation and there is no reliable cost data or observable market information available must the Group derecognize these assets entirely under IAS 16 or is it permissible to estimate recoverable amount using unobservable inputs and retain the assets subject to impairment under IAS 36 and how should the Group proceed if ownership or physical verification cannot be established and external evidence is inconclusive. 3. If executory or partially fulfilled customer contracts have been discovered post-acquisition and the associated receivables were initially recognized based on non-enforceable rights or fictitious delivery confirmations must the Group fully derecognize these receivables under IFRS 9 or apply expected credit loss provisioning to retain them if legal claims for recovery exist but have uncertain outcome can these positions be classified as contingent assets under IAS 37 or must they be excluded from the financial statements entirely due to lack of probable inflow.

Expected points in a correct answer:
Identify IFRS 1 as the governing standard for first-time adoption.
Explain that IFRS 1 adjustments are recognized in opening equity.
Conclude fictitious CIP must be derecognized entirely.
State impairment is appropriate under IAS 36 if the asset exists and was previously recognized validly
State that IFRS 3 and IAS 8 fall under the retrospective restatement principle of IFRS 1
Require explicit IFRS 1 reconciliation of equity at transition date.
Require disclosure of fraud-related restatements distinctly from policy changes.
State that contingent assets are disclosed but not recognized.
Conclude receivables from void contracts fail initial recognition.
State the Group must determine whether misstatements qualify as measurement period adjustments under IFRS 3
State the alternative qualification as prior-period errors under IAS 8 which refers to the impracticability exemption or the distinction from changes in accounting estimates
Identify accounting policy harmonization as required under IFRS 1.
Confirm control threshold exceeds 50% ownership.
Classify non-existent capital projects as prior period errors.
Classify falsified inventory quantities as prior period errors.
Identify receivables from void contracts as recognition errors.
Identify IAS 8 as governing prior period errors.
Require reconciliation of profit or loss from previous GAAP to IFRS.
Require disclosure of judgments applied in classification decisions.
Require disclosure of nature of claims.
State that recoverable amount requires observable inputs where possible.
Require disclosure of timing of claims.
State that IFRS 1 overrides IAS 8 retrospective restatement mechanics.
State that evidence of conditions existing at reporting date is adjusting.
Require separate disclosure of transition adjustments vs error corrections.
Require disclosure of uncertainty of claims.
Identify IAS 16 as governing CIP recognition.
Explain that IAS 10 governs events after the reporting period.
State that errors arise from unreliable or fraudulent information.
Identify acquisition as occurring before IFRS transition date.
Identify IAS 16 as governing PPE recognition
Identify IAS 36 as governing impairment testing.
Identify IFRS 9 as governing receivable recognition.
Require consistency of treatment across all subsidiaries.
Require narrative explanation of material adjustments.
Identify IAS 37 as governing contingent assets.
Prohibit netting contingent assets against derecognized receivables.
Require explicit statement that no optional IFRS 1 exemptions were applied (if true).
Distinguish IFRS 3 business combination accounting from IFRS 1 transition adjustments.
Distinguish accounting policy changes from error corrections under IAS 8.
Distinguish adjusting vs non-adjusting events under IAS 10.
State derecognition precedes impairment testing when asset fails recognition.
State that IFRS transition date precedes first IFRS reporting period.
State that enforceable contractual rights are required for recognition.
State that contingent assets require probable inflow (>50%).
State that assets lacking control or existence fail IAS 16 recognition.
Classify post-acquisition forensic findings as adjusting if conditions pre-existed.
Explain that ECL cannot be applied to non-recognizable assets.
Conclude unobservable inputs alone are insufficient when asset existence is doubtful.
Conclude uncertain legal claims do not meet probable threshold.
Identify inventory overstatement as existing condition at acquisition date.
Identify capitalized CIP without evidence as existing condition.
Require auditor-visible linkage between forensic findings and accounting entries.
State that IFRS 1 requires retrospective application unless impracticable
List the required disclosures under IFRS 1 as it relates to purchase combination adjustments; fact of election, reconciliation of equity & profit or loss, goodwill information, adjustments for "deemed cost" elections, and non-controlling interests (NCI)