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Home / ... / October 2007 / When is Not an IFRIC Really an IFRIC

Documents issued by the IFRIC are a ‘must read’ for anyone applying International Financial Reporting Standards, explains Fergus Condon.

The International Financial Reporting Interpretations Committee (IFRIC) was established in 2002 to replace the former Standing Interpretations Committee (SIC). The role of the IFRIC is to provide authoritative guidance on issues that are likely to receive divergent or unacceptable treatment, in the absence of such guidance. Whilst the IASB Board is made up of full time personnel who have a standard setting background, the IFRIC members come from both industry and the profession and its constituents aim to bring the views of preparers, auditors and other interested parties to the process. In April of this year, the IFRIC issued a proposed amendment which seeks to increase its voting members from twelve to fourteen. The objective of the increase is to allow the deliberations to benefit from greater diversity of practical experience, an aspiration that can only be commended.

At inception, the IFRIC adopted the existing guidance of the SIC and, since then, has issued fourteen new interpretations on topics ranging from the scope of IFRS 2 – Share Based Payment to accounting for service concession arrangements. Items can be suggested for the agenda by interested parties either by correspondence or via the website, where IFRIC actively seek participation. In the first instance, the suggestions are considered by IASB staff members and then referred to the IFRIC committee. However, those items not taken onto the IFRIC agenda are worth some consideration.

Some criticism has been channelled towards the [IFRIC] members for failing to deal with items causing particular difficulty in terms of implementation.

In 2005, the IFRIC published IFRIC Draft Interpretation D17 – IFRS 2 – Group and Treasury Share Transactions (D17) in an attempt to provide guidance on how to account for share based payment in the context of a group scheme. D17 sought to address the following items: -analysis of transactions as equity-or cash-settled, -intragroup recharges, -accounting by the subsidiary, -accounting by the parent; and -employees transferring between group entities and keeping awards.

Following the consultation period IFRIC 11 IFRS 2 – Group and Treasury Share Transactions was issued. However, the guidance fails to deal with the accounting for intragroup recharges and the accounting to be undertaken by the parent entity. In practice many consider that these are two of the areas where guidance was most needed.

The IFRIC have also failed to deal with certain other items by taking them off the agenda completely. In July 2004 they published IFRIC Draft Interpretation D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions. This draft sought to deal with certain pension plans which had the look of a defined contribution plan but which were more like a defined benefit plan in terms of obligation to the provider. Despite the fact that it remains a problematic area, where accounting practice may well be divergent, the IFRIC withdrew it from the agenda in November 2006 after two years of deliberations. It was decided that some of the aspects of the approach suggested in D9 were not consistent with IAS 19.

The IFRIC 13 Customer Loyalty Programmes was also recently concluded to provide guidance on how an entity should account for the air miles or loyalty points which are awarded to customers when purchases are made. The IFRIC requires that a company split revenue between that related to the goods and services purchased and a portion which should be deferred until the company has satisfied its obligations relating to the loyalty programme. Whilst the consensus of the IFRIC is conceptually sound, little guidance is provided on how a company should go about calculating the fair value attaching to that portion of the revenue which is essentially the price customers implicitly pay for the loyalty award.

Only items of reasonably widespread importance will be taken onto the IFRIC agenda rather than those which affect only a minority of companies. The IFRIC is to be commended on its careful deliberation over the agenda selection; if too many areas are considered and pronounced upon then there is a danger that International GAAP would move to a set of principles-based standards with detailed rules or interpretations. Such a cookbook situation would surely create more complexity for the preparers of financial statements.

However, a by-product of this selective agenda process has arisen and it has become commonly referred to as a NIFRIC.

Where the IFRIC decide not to take an item onto the agenda they may publish the reason for not doing so. The reasons most often cited for not including agenda points include that it is felt that the related IAS or IFRS is quite clear or that practice is unlikely to be divergent. In effect, by not taking an item onto its agenda the IFRIC is signalling that an area might be interpreted in a particular way. Since the start of the year, sixteen such NIFRICs have been published, the majority of which relate to aspects of accounting for financial instruments.

In July the IFRIC committee considered an agenda item relating to the deferred tax arising from unremitted foreign earnings. The issue related to paragraph 39 of IAS 12 Income Taxes whereby deferred tax need not be recognised on non-taxable foreign income arising in a subsidiary, branch, associate or joint venture unless remitted to an entity’s home jurisdiction. The submission noted that IAS 12 does not contain a definition of a branch and asked for guidance on what constituted such an entity.

The IFRIC noted that the Board was considering the recognition of deferred tax liabilities relating to such temporary differences as part of its Income Taxes project and has tentatively decided to eliminate the notion of a branch and amend the wording of the exception for subsidiaries to restrict its application. Hence the IFRIC decided not to add the issue to its agenda. Although not added to the agenda, the proposed amendment could have a significant impact on many multinational organisations operating overseas by means of branches and may result in additional temporary differences giving rise to increased deferred tax balances.

Earlier in the year the IFRIC were asked to provide guidance around the meaning of the term ‘written option’ in the context of paragraph 7 of IAS 39. It appeared that the submission was primarily concerned with energy supply contracts to retail customers. The analyses undertaken suggested that in many situations such contracts were not capable of net cash settlement as laid out in paragraphs 5 and 6 of IAS 39 and hence are outside the scope of the standard. The IFRIC decided not to take the item onto its agenda as it expected little divergence to arise in practice. Despite not going onto the agenda, this may provide some guidance around volume flexibility in end user commodity contracts.

Whilst we will have to wait and see if the addition of two more voting members to the IFRIC will bring greater diversity of experience, what is clear is that monitoring items not getting onto the agenda is equally as important as keeping up to date with the final interpretations issued by the IFRIC. All documents published by the IFRIC are a must read for anyone applying International Financial Reporting Standards.

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