From the IFRS Institute – May 31, 2019
The IFRS Interpretations Committee (IC) is to the IASB what the EITF is to the FASB, at least on the surface. For preparers, one important difference is the issuance of IFRS IC Agenda Decisions. Officially they are nonauthoritative, but usually they contain key interpretive guidance that can result in a change in accounting policy. This is a good time to understand the IFRS standard-setting process, the role of these Agenda Decisions and the related proposals currently on exposure for comment and how to apply them.
The International Accounting Standards Board is the independent standard-setting body for IFRS. The IASB is an independent group of financial reporting experts comprising preparers, auditors, users of financial reports, regulators and academics – selected by considering broad geographical diversity.
The IFRS Interpretations Committee (IFRS IC; previously known as the International Financial Reporting Interpretations Committee or IFRIC) is the interpretive body of the IASB. Its members are selected for their deep technical expertise and diverse international and practical experience in the application of IFRS.
The IFRS IC works to support the consistent application of IFRS. It helps 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 IFRS, the IFRS IC reviews questions from stakeholders on the application of IFRS and decides whether standard setting is needed to address the question – either through an interpretation (an IFRIC) or a narrow-scope amendment to an existing standard.
Once the IFRS IC has finished its deliberations, its proposed interpretation or narrow-scope amendment is referred to the IASB for discussion and approval. Once approved by the IASB following its normal due process – including an exposure draft and redeliberation of comments – it becomes part of IFRS. The last interpretation issued was IFRIC 23 on income tax uncertainties, effective in 2019.
To comply with IFRS, a company must comply with all aspects of IFRS that are material to its financial statements (including disclosures). Compliance includes all interpretations and narrow-scope amendments.
While the IFRS IC and the EITF of the US FASB may appear to be similar, there are important differences in the roles they play in the standard-setting process.
Like the IFRS IC, the EITF exists to assist the FASB in improving financial reporting and reducing diversity in practice. This also happens through the timely identification, discussion and resolution of financial accounting issues within the framework of existing US GAAP or developing narrow-scope amendments to existing guidance.
The EITF is also charged with addressing narrow implementation, application or other emerging issues that may arise within existing US GAAP. As a result, the EITF considers pronouncements addressing narrow interpretation, implementation and application questions. EITF issues become ‘authoritative’ US GAAP following consensus and ratification by the FASB. By contrast, the IFRS IC deals only with interpretation questions, and therefore its work results in fewer pronouncements.
The EITF only discusses issues that the FASB assigns to its agenda. Conversely, the IFRS IC must consider in public meetings all submissions received from its stakeholders. It follows that the IFRS IC needs to officially reject issues it does not believe need standard setting – so-called Agenda Decisions.
If the IFRS IC decides not to add a project to its standard-setting agenda in response to a submitted question, it publishes an Agenda Decision to explain its decision. In many cases, the IFRS IC rejects a submission because it believes IFRS already provides an adequate basis to determine the accounting, or because there is no evidence of a widespread accounting problem.
The IFRS IC first issues proposed Agenda Decisions to consider comments before finalizing Agenda Decisions which are communicated through periodic IFRIC Updates after each IC meeting. See our recent articles covering Agenda Decisions on accounting for Software as a Service (SaaS) cloud computing arrangements and income tax-related interest and penalties.
While officially nonauthoritative, Agenda Decisions are typically followed in practice. Because they are nonauthoritative, there is no transition guidance available for implementing them. But while they do not add or change existing IFRS requirements, they often explain how to apply them to a specific fact pattern and may contradict existing accounting practices.
In a recent article, Reinhard Dotzlaw, KPMG’s current representative on the IFRS IC, emphasized his view on the importance of Agenda Decisions: “‘Agenda decision’ might sound procedural, but scratch the surface and you’ll find a rich source of practical and timely guidance to help resolve some of the thorniest accounting issues of the day.”
It can be unclear how preparers should deal with the potential consequences of Agenda Decisions. For example, if an Agenda Decision is issued in March, do financial statements for a period ending March 31 have to reflect that Agenda Decision? Should any change to the prior financial statements be treated as an error correction?
In December 2018, the IASB addressed1 two important issues that may arise in connection with the issuance of an IFRS IC Agenda Decision:
‘Timely’ means as soon as possible, but the IASB acknowledged that companies need ‘sufficient time’ to implement the changes. If necessary, companies should be able to explain their implementation process and consider if disclosure related to the accounting policy change is required.
The IASB purposely did not explain what ‘sufficient time’ means, but in practice expects2 it to be ”a matter of months rather than years.” The IFRS IC3 notes that an Agenda Decision “might often result in explanatory material that provides new information that was not otherwise available and could not otherwise reasonably have been expected to be obtained.”
Preparers need to apply IAS 84 and assess if a change resulting from an Agenda Decision is an error, or a voluntary change in accounting policy. This may require judgment. While a change in estimate is accounted for prospectively, an error or a change in accounting policy triggers retrospective application, unless impracticable – i.e. comparative periods are restated as if the new policy had always been applied or as if the error had not occurred. Specific disclosures are also required.
The IASB has proposed to update its Due Process Handbook to reflect the above, and the proposed changes are open for comment until July 2019. It is therefore possible that things will continue to evolve in respect of how to implement IFRS IC Agenda Decisions, but we expect there will still be the need to exercise judgment in applying Agenda Decisions.
So, the key message here is that IFRS IC Agenda Decisions matter. Preparers should monitor the IFRS IC process and consider how their own fact patterns relate to any of those discussions in order to identify timely if their accounting practices could be affected, and to anticipate any possible need to change.
Accounting for cloud computing fees and implementation costs may differ under IFRS and US GAAP.
IFRS has specific requirements for government grants that apply to all entities; US GAAP has limited guidance for ‘business entities’.