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

http://www.journalofaccountancy.com/Issues/2009/Oct/20091630.htm