Interpreting IFRS
Understanding the role of the International Financial Reporting Interpretations Committee
With the increasing acceptance of IFRS in the global economy and its possible adoption in the U.S., CPAs are keenly interested in developing a broader understanding of international standards. A major goal of both the International Accounting Standards Board (IASB) and the SEC is for IFRS to be consistently and appropriately interpreted and applied. However, for many in the U.S. it is unclear how consistent interpretation and application can be achieved in the principles-based environment of IFRS.
The reality is that the IASB has a well-established process for developing official interpretations of IFRS. This article introduces the International Financial Reporting Interpretations Committee (IFRIC) and discusses its organization, process and role in the authoritative interpretation of IFRS. The article also explains how IFRIC differs from FASB’s Emerging Issues Task Force (EITF).
Editor’s note: Author Sara York Kenny is a current voting member of IFRIC.
WHAT IS IFRIC AND WHY IS IT IMPORTANT?
IFRIC is the interpretative body of the IASB, the entity that develops, maintains and issues IFRS. IFRIC is designed to help the IASB improve financial reporting through timely identification, discussion and resolution of financial reporting issues within the framework of IFRS. Following a process detailed in the Due Process Handbook for the IFRIC, the committee develops authoritative interpretations of existing IFRS. IFRIC refers its interpretations to the IASB for discussion and approval, and once they are approved by the IASB, the IFRIC interpretations (IFRICs) become part of IFRS. To be in compliance with IFRS, an entity must comply with all aspects of IFRS, including IFRICs.
In the IFRS hierarchy contained in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, interpretations have the same weight as all other IFRS approved by the IASB. IFRS are supported and based upon the Conceptual Framework for IFRS, the second level in the IFRS hierarchy (IAS 8, paragraph 11). Finally, the third level of the IFRS hierarchy includes pronouncements of other accounting standard setters that use a similar conceptual framework, other accounting literature and accepted industry practices—to the extent they do not conflict with IFRS or the Conceptual Framework of IFRS (IAS 8, paragraph 12).
HOW IS IFRIC DIFFERENT FROM THE EITF?
It may be tempting to compare IFRIC to FASB’s EITF. Indeed, there are similarities. Both are standard-setting bodies with 10 to 15 members drawn from a variety of constituencies, including preparers, users and auditors; they have a similar due process where a supermajority vote is required for approval; and each needs its parent body to approve all official pronouncements (FASB must approve all EITFs; the IASB must approve all IFRICs). Once approved by their respective boards, IFRIC and EITF pronouncements become official authoritative accounting guidance.
However, the EITF’s mission is much broader than IFRIC’s. Both IFRIC and the EITF exist to assist the boards in improving financial reporting through the timely identification, discussion and resolution of financial accounting issues within the framework of existing authoritative literature. Both IFRIC and the EITF were designed to promulgate interpretation guidance within the framework of existing authoritative literature to reduce diversity in practice on a timely basis. However, the EITF is also charged with addressing narrow implementation, application or other emerging issues that can be analyzed within existing GAAP.
As a result, the EITF issues a large number of pronouncements addressing narrow interpretation, implementation and application questions. IFRIC, by contrast, deals only with interpretation questions and, therefore, issues far fewer pronouncements.
WHAT ARE THE RESPONSIBILITIES OF IFRIC AND THE SCOPE OF ITS WORK?
According to the Due Process Handbook of the IFRIC (paragraph 5), “IFRIC reviews newly identified financial reporting issues not specifically addressed in IFRSs or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop in the absence of authoritative guidance, with a view to reaching a consensus on the appropriate treatment.” IFRIC is not charged with creating rules, application guidance or implementation guidance, nor does it act as an urgent issues group.
It is not IFRIC’s role to create new IFRS, but rather, to interpret existing IFRS. IFRIC provides interpretative guidance by applying a principles-based approach founded on the IFRS Conceptual Framework and as established in relevant IFRS. IFRIC cannot issue an interpretation that changes or conflicts with IFRS or the Framework. If, as a result of its deliberations, IFRIC concludes that the requirements of an IFRS differ from the Framework, or that a particular IFRS is deficient or inadequate in a specific area, or that the question IFRIC is addressing should be more fully addressed by the Board, IFRIC will refer the issue to the IASB for resolution. IFRIC may choose to provide guidance recommendation to the IASB, but it is not responsible for the development of new IFRS guidance.
WHO SERVES ON IFRIC?
IFRIC’s 14 voting members are “selected for their ability to maintain an awareness of current issues as they arise and the ability to resolve them.” In other words, IFRIC members are expected to have considerable accounting expertise, and they normally include accountants in industry and public practice and users of financial statements with a reasonably broad geographical representation. Members are not paid and are appointed for fixed renewable terms of three years. Nonvoting members include the IFRIC chair, who is generally an IASB member, and official observers from organizations such as the International Organization of Securities Commissions (IOSCO) and the European Commission. The directors of technical and implementation activities of the IASB, various senior IASB staff and various IASB members also attend and participate in IFRIC meetings.
IFRIC is supported by a full-time staff based in London. Similar to the arrangements at FASB, the IASB and IFRIC staffs are often sponsored by various accounting firms and large multinational companies, and they serve at the IASB for fixed terms, returning to their sponsoring firms at the close of the term.
WHAT IFRIC ADDRESSES
Any individual or organization, including IFRIC members, IASB staff members or official IFRIC observers, may recommend agenda items for consideration by IFRIC. In recent years, IFRIC has received requests for interpretation on a variety of topics, including financial instruments, revenue recognition, employee benefits, share-based payments, business combinations, consolidations, intangible assets and income taxes.
In determining which questions might be appropriate for IFRIC to consider, the committee applies specified agenda criteria, as follows:
- Widespread and practical relevance of issue.
- Significant divergence in practice (existing or emerging).
- Improved financial reporting.
- Efficient, cost-effective resolution.
- Probable to reach consensus on a timely basis.
- No current IASB project will be completed before IFRIC could respond.
After applying the agenda criteria to a specific issue, IFRIC may make one of four possible decisions:
- Not to add the issue to the IFRIC agenda, but explain in an agenda decision published in IFRIC Update why the issue was not added to its agenda.
- Develop an IFRIC interpretation.
- Recommend that the IASB change an IFRS.
- Recommend that the IASB include the item in a current IASB project.
Items not added to the IFRIC agenda are rejected generally because IFRIC believed the question was more in the nature of implementation or application guidance instead of interpretative guidance. For example, IFRIC was recently asked to provide guidance on how a discount rate should be determined when fair value is established using a valuation technique. While the question is relevant and important, IFRIC decided not to add the item to its agenda because the standards and existing application guidance already specify the objective of the measurement and the relevant factors to consider. Therefore, any guidance it could issue would be in the nature of implementation guidance.
In other cases, IFRIC may reject a potential project because it believes sufficient guidance exists in the literature, or IFRIC may determine the issue should be addressed by the IASB. For example, recently IFRIC was asked to interpret how the equity method of accounting in IAS 28, Investments in Associates, was affected by revisions in IFRS 3 and IAS 27. While IFRIC staff noted that FASB’s EITF had recently added the issue to its agenda, IFRIC decided not to add the questions to its agenda because IAS 28 provides explicit guidance on two of the issues in question and, therefore, IFRIC did not expect divergence in practice. The IASB will address the remaining two questions as part of its review of the potential impact of IFRS 3.
It is important to note that while IFRIC may not address every question posed to it, no agenda decision is finalized until constituents are given the opportunity to comment on IFRIC’s tentative decision that is published in the IFRIC Update. IFRIC reviews the comment letters before finalizing its agenda decisions. Each agenda decision and IFRIC’s reasons for it are fully disclosed, both in the IFRIC Update and on the IASB Web site in a cumulative list by standard.
IS AN AGENDA DECISION IFRS?
Agenda decisions are not IFRS. IFRIC publishes all agenda decisions with the following commentary:
“The following explanation is published for information only and does not change existing IFRS requirements. IFRIC agenda decisions are not Interpretations. IFRIC Interpretations are determined only after extensive deliberation and due process, including a formal vote. IFRIC Interpretations become final only when approved by nine of the fourteen members of the IASB.”
However, several public accounting firms have suggested that the more than 160 IFRIC agenda decisions should be read to properly understand and apply IFRS. Further, the IASB considers agenda decisions to be helpful to users and includes details of agenda decisions in the IASB’s official guide through IFRS that is available at iasb.org.
IFRIC DUE PROCESS
Though IFRIC expends a considerable amount of time and resources on agenda decisions, the determination of the agenda is only one aspect of IFRIC’s due process. IFRIC due process generally parallels that used by the IASB and FASB. Each step is deliberate, and public comment is solicited and encouraged at each step. Currently, IFRIC due process consists of seven stages (see sidebar, “IFRIC’s Due Process,” below).
Further, the structure of IFRIC interpretations is standardized to facilitate ease of use. Each has five distinct components: a summary of the issue, the most appropriate accounting method (IFRIC consensus), the effective date, any transitional provisions and the basis for conclusions.
IFRIC’s Due Process
The IFRIC due process has seven stages:
1. Identification of issues. IFRIC considers all issues submitted to it for consideration.
2. Setting the agenda. IFRIC meets publicly and discusses whether to add the issue to its agenda using the six criteria mentioned in the text. IFRIC exposes its tentative agenda decision for public comment for at least a 30-day period before considering the comments received and making its final decision. A simple majority is needed to add an item to the agenda. If the issue is not added to its agenda, IFRIC publicly states its reasons in a final published and archived agenda decision.
3. IFRIC meetings and voting. IFRIC has public meetings. IFRIC members each have one vote. Members may attend either in person or via telecommunications. Proxy voting is not permitted.
4. Development of a Draft Interpretation (DI). The IFRIC staff prepares agenda papers that describe the accounting issue, alternative accounting treatments, and recommendations on the appropriate accounting treatment. This may include examining relevant IASB pronouncements, national GAAPs, and practice. After IFRIC discussion, the staff prepares a DI. A DI is approved if no more than four IFRIC members object to the consensus.
5. The IASB’s role in the issuance of a DI. The DI is circulated to the Board members after IFRIC reaches its consensus. If fewer than four IASB members object, then a DI is released. If four or more IASB members object, it is added to the agenda of the next IASB meeting.
6. Comment period and deliberation. A DI is exposed for public comment for at least 60 days. Interested parties are invited to send written comment letters. IFRIC typically receives 30 to 55 letters per DI, with a range from 21 to 96. The staff analyzes all comments received and highlights the most pertinent issues. Comment letters are reviewed and discussed by IFRIC and taken into account when drafting the Final Interpretation. If significant changes are deemed necessary, IFRIC considers whether to re-expose a revised DI.
7. The IASB’s role in an Interpretation. The Interpretation receives final approval from IFRIC if no more than four members object. The Interpretation is then sent to the IASB for approval. The IASB issues a Final Interpretation if at least nine IASB members concur.
RELATIONSHIPS WITH NATIONAL STANDARD SETTERS AND NATIONAL INTERPRETATIVE GROUPS
In reaching a consensus, IFRIC also considers the need for international convergence of accounting standards. The IASB staff maintains liaison with national standard setters, including FASB and other national interpretative groups to identify interpretative issues that IFRIC might need to consider. National standard setters in jurisdictions that have adopted IFRS generally submit issues to IFRIC for consideration rather than developing their own interpretations.
For example, in July 2007 IFRIC noted that IAS 18, Revenue, specifies the accounting for agency relationships but acknowledged that no detailed guidance is given in IFRS on identifying agency relationships. IFRIC noted that the EITF in the U.S. had addressed the question of identifying agency relationships in EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. IFRIC considered the EITF guidance and ultimately determined that such guidance might be helpful to preparers as application guidance. Since IFRIC does not issue application guidance, it ultimately decided to refer the question to the IASB with the recommendation that the Board might wish to include guidance in identifying agency relationships in the Appendix to IAS 18. The IASB decided to address this issue and recently issued implementation guidance as part of the Annual Improvements Project for 2009.
IFRIC Interpretations Currently in Effect
As of May 2009, IFRS consists of eight IFRS, 17 IFRICs, all or part of 29 IASs (which were originally issued by the International Accounting Standards Committee (IASC) and later adopted by the IASB), and 11 SICs (which were originally issued by the IASC’s Standing Interpretations Committee). The Preface to IFRS (paragraph 14) states that all individual standards “should be read in the context of the objective stated in that standard and this Preface.”
| Standard | Title |
| IFRIC 1 | Changes in Decommissioning, Restoration and Similar Liabilities |
| IFRIC 2 | Members’ Shares in Co-operative Entities and Similar Instruments |
| IFRIC 4 | Determining Whether an Arrangement Contains a Lease |
| IFRIC 5 | Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds |
| IFRIC 6 | Liabilities Arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment |
| IFRIC 7 | Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies |
| IFRIC 8 | Scope of IFRS 2 (withdrawn effective Jan. 1, 2010) |
| IFRIC 9 | Reassessment of Embedded Derivatives |
| IFRIC 10 | Interim Financial Reporting and Impairment |
| IFRIC 11 | IFRS 2: Group and Treasury Share Transactions (withdrawn effective Jan. 1, 2010) |
| IFRIC 12 | Service Concession Arrangements |
| IFRIC 13 | Customer Loyalty Programmes |
| IFRIC 14 | IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction |
| IFRIC 15 | Agreements for the Construction of Real Estate |
| IFRIC 16 | Hedges of a Net Investment in a Foreign Operation |
| IFRIC 17 | Distributions of Non-cash Assets to Owners |
| IFRIC 18 | Transfers of Assets from Customers |
IFRIC Draft Interpretation 25, Extinguishing Financial Liabilities with Equity Instruments, was issued Aug. 6. The comment period expires Oct. 5. IFRIC plans to discuss this DI at its meeting Nov. 5–6.
EXECUTIVE SUMMARY
IFRIC due process generally parallels that used by the IASB and FASB. Each step is deliberate, and public comment is solicited. The structure of IFRIC interpretations includes (1) the summary of the issue, (2) the most appropriate accounting method (IFRIC consensus), (3) the effective date, (4) any transitional provisions and (5) the basis for conclusions.
Sara York Kenny (sarakenny@yahoo.com) is a member of the International Financial Reporting Interpretations Committee (IFRIC). Robert K. Larson (robert.larson@notes.udayton.edu) is an associate professor of accounting at the University of Dayton.
To comment on this article or to suggest an idea for another article, contact Matthew G. Lamoreaux, senior editor, at mlamoreaux@aicpa.org or 919-402-4435.
AICPA RESOURCES
JofA articles
- “IFRS: A Preparer’s Point of View,” April 09, page 46
- “IFRS: Beyond the Standards,” Feb. 09, page 34
Use journalofaccountancy.com to find past articles. In the search box, click “Open Advanced Search” and then search by title.
CPE
International Versus U.S. Accounting: What in the World is the Difference?, a CPE selfstudy course (#731667)
For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.
Web site
IFRS Resources, ifrs.com
OTHER RESOURCES
Articles
- “An Anatomy of an IFRIC Interpretation,” by Michael Bradbury, Accounting in Europe, 2007, Vol. 4, No. 2, pages 109–122
- “Constituent Participation and the IASB’s International Financial Reporting Interpretations Committee,” by Robert K. Larson, Accounting in Europe, 2007, Vol. 4, No. 2, pages 207–254
Web sites
- Official information about IFRIC, tinyurl.com/ldlkg2
- IFRIC Interpretations are available for free at www.iasb.org/IFRSs/IFRS.htm
- IFRIC agenda decisions are available for free at tinyurl.com/n3t5kd
Publications
- Due Process Handbook for the IFRIC is available at tinyurl.com/kvhs8l
- Full text of IFRS, including interpretations and agenda decisions: A Guide through International Financial Reporting Standards (IFRS): including the full consolidated text of the Standards and Interpretations and accompanying documents approved for issue by the International Accounting Standards Board at 1 July 2008, with extensive cross-references and other annotations. International Accounting Standards Committee Foundation. ISBN 978-1-905590-68-1. 2,848 pages, $148 (approximate) (plus shipping). Order from iasb.org.
