IFRIC Interpretations: An Update Michael Bradbury Unitec New Zealand Private Bag 92025 Auckland Michael Bradbury is a member of the Financial Reporting Standards Board (FRSB) of the Institute of Chartered Accountants and the International Financial Reporting Interpretation Committee (IFRIC). The views expressed in this article are those of the author. The official positions of the FRSB and the IFRIC are only determined after due process and deliberation. This Draft: 21 June 2005 Prepared for AFAANZ Comments welcomed Please do not quote without author s permission
IFRIC Interpretations: An Update Introduction In April 2005 the International Accounting Standards Committee (IASC) Foundation issued a Consultative Documents IFRIC Review of Operations. This report is part of the review of the constitution undertaken by the Trustees of the IASC Foundation. This topic was added to the review in response to concerns that the International Financial Reporting Interpretations Committee (IFRIC) was, and would continue to be, unable to cope with the demand for timely interpretations of International Financial Reporting Standards (IFRS). Commentators raised several specific concerns: the capacity to produce interpretations, the machinery for rejecting (and accepting) issues proposed for its agenda, effectiveness of operations and procedures to provide timely guidance, and the involvement of other interpretative bodies. The IFRIC undertook an internal review of its own operations to consider these concerns. The IASC Consultative Document includes the IFRIC s Review of Operations and sought comments from interested parties (due 31 July 2005). This paper describes the role of IFRIC interpretations, the due process involved in producing interpretations and its response to the concerns raised about its operations. What is IFRIC? On the 13 December 2001, the IASC Foundation announced the creation of the IFRIC, which was reconstituted from the Standing Interpretations Committee (SIC). The IFRIC is the interpretive body of the International Accounting Standards Board (IASB). It comprises 12 voting members, a non-voting chairman, two non-voting IASB members and appointed non-
voting observers that are representatives of regulatory organizations. The 12 part time members of the IFRC are appointed by the Foundation Trustees for a three-year term. They include accounting officers, partners from leading accounting firms in the developed and emerging economies, analysts, and an academic. Nine voting members constitute a quorum. Each member has one vote. Members vote in accordance with their own independent views, not as representatives voting according to the views of any firm, organization, or constituency with which they may be associated. Approval of Draft or final Interpretations shall require that not more than three voting members vote against the Draft or final Interpretation. What does IFRIC do? The IFRIC has two main tasks: (1) It reviews accounting issues, within the context of the IASB Framework, with a view to providing timely guidance on: interpretations of the application of IASs and IFRSs, and financial reporting issues not specifically addressed in IASs and IFRSs. (2) It undertakes other tasks at the request of the IASB. Interpretations are part of International GAAP (or IFRS) (see IAS 1, Presentation of Financial Statements, paragraph 11). IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors (paragraph 7) requires accounting policies to apply to items that are within the scope of standards and interpretations. Financial statements may not be described as complying with IFRS unless they comply with all the requirements of each international financial reporting standard, each international accounting standard and each interpretation issued by the IFRIC or the SIC.
The IFRIC Due Process Although the IFRIC is not an urgent issues group, it considers issues on which timely guidance can be provided. The IFRIC reaches its conclusions on the basis of information contained in Issues Summaries, which are prepared under the supervision of IASB staff. An Issues Summary includes: a brief description of the transaction or event to be discussed, the specific issues or questions to be considered by the IFRIC, the key concepts from the Framework that apply, a description of the potential appropriate alternative treatments based on those concepts, with the arguments in favour and against each alternative, a list of the authoritative IASB accounting literature on the issue, as well as pronouncements and views of liaison national standard-setters, identifying any inconsistency between the alternative treatments, the key concepts, or the standards, recommendations on the appropriate accounting treatment. Draft Interpretations (numbered D1, D2, etc) developed by IFRIC are exposed for public comment for a suitable period. In emergencies this may be as short as 30 days. Comments received during the comment period will be considered by the IFRIC before an Interpretation is finalized. If Draft Interpretations are changed in the light of new aspects identified in public comments, re-exposure will be considered. The Interpretation approved by IFRIC is also approved by the IASB. At the Board level, the same vote is required as for a Standard, which is 8 out of 14 members. The Final Interpretation includes: a summary of the issue, the consensus view reached on the most appropriate accounting method, the reasons for that view (i.e., the basis for conclusions), and the application date and transitional provisions. Figure 1 is a graph of the three main outputs of the IFRIC. Draft and final Interpretations are the commonly understood outputs of the IFRIC. From March 2002 to December 2004, the IFRIC has produced 11 Draft Interpretations and 5 final Interpretations (and two SIC). There
have been 56 issues considered by the IFRIC but not added to its agenda. Figure 1 clearly shows that rejected issues are more numerous than issues added to the IFRC agenda! Is the output low? There are several reasons for the perceived low output: In 2005 a further 6 exposure drafts (D11 to D17) have been issued. The IASB is principles-based and hence a large number of interpretations would not be desirable. If clarity is required, then there is a preference to amend wording in IFRS rather than issue interpretations. IASB s staff resources are limited and over the period to December 2004 the focus has been on establishing the 2005 IFRS stable platform. The IFRIC has been able to forward issues to IASB improvement and conversion projects. Service Concessions Contracts (D12, 13 and 14) the IFRIC will try to avoid standard-type projects. The IFRIC seeks to streamline decision-making, by ensuring minority views are documented in the basis for conclusions rather than re-debate issues. Is the perceived output slow? The IFRIC review states the is no current evidence of the IFRIC being overwhelmed by 2005. It anticipates that many of the issues in 2005 will be implementation rather than interpretation problems. Furthermore IFRIC supports retention of a due process rather than becoming an urgent issues group. The report suggests that it will require a minimum of 6 to 8 months to issue an interpretation. The process of rejections and acceptances to the Agenda IFRIC is adopting a more formal approach to make the rejection process more transparent. The recommendations of the Agenda Committee are to be published in the IFRIC update and then considered by IFRC at the next meeting. This will (1) allow constituents to provide additional input and (2) set the appropriate tone for constituents as to the type and level of
issues that IFRIC can expect to address and (3) provide better evidence of the volume of work undertaken by the IFRIC. The relation between IFRC and other interpretation groups This IFRIC does not support the proliferation of sources of interpretation. It is concerned that domestic interpretations will be at a level incompatible with IFRIC or the IASB or will deal with issues that, turn out to be wider than just domestic issues. On the other hand, it supports NSS/NIG bringing issues to the IFRIC and supporting them through due process. Conclusions The IASC Foundation s Consultative Document IFRIC Review of Operations provides an inside view of the workings of IFRIC. Comments on this process are due by 31 July 2005.
Figure 1 IFRIC Output Rejected Draft Interpretations Approved Interpretations 10 8 6 4 2 0 Mar-02 Jun-02 Sept-02 Dec-02 Mar-03 Jun-03 Sept-03 Dec-03 Mar-04 Jun-04 Sept-04 Dec-04