International Financial Reporting Standards (IFRS) are often said to be "principle-based," meaning that they are based on clear-cut principles that can be applied without the need for detailed interpretive guidance. Even so, principle-based standards need a little interpretation once in a while. Enter the IFRS Interpretations Committee.

The IFRS Interpretations Committee (IFRIC or the Committee) assists the International Accounting Standards Board (IASB or the Board), which issues IFRS, in improving financial reporting through the timely identification, discussion, and resolution of financial reporting issues. Its mandate is to interpret the application of IFRS and to provide timely guidance on financial reporting issues not specifically addressed in IFRS. The Committee develops this guidance using a principle-based approach founded in the Conceptual Framework for Financial Reporting. The Due Process Handbook for the IFRS Interpretations Committee makes it clear that in providing interpretative guidance, the Committee should not try to create an extensive rules-oriented environment or act as an urgent issues group.

The Committee meets approximately six times a year and summarizes the results of each meeting in an IFRIC Update, published electronically on the IASB website.

Three-tiered structure of the IFRS Foundation

A little background on the structure of the international standard-setting process may be helpful in understanding the Committee's role in that process. The IFRS Foundation comprises a three-tiered governance structure: the Monitoring Board, the Trustees of the IFRS Foundation, and the IASB. That structure has been established to ensure the transparency, public accountability, and independence of the international standard-setting process.

The Monitoring Board provides a formal link between the Trustees of the IFRS Foundation and public authorities. That link was established to help capital market authorities effectively carry out their mandates relating to investor protection, market integrity, and capital formation. In general, the Monitoring Board, which consists of public capital market authorities, is responsible for approving the appointment of Trustees to the IFRS Foundation and for monitoring the Foundation's activities.

The Trustees of the IFRS Foundation oversee the standard-setting process. The Foundation's mission is to develop a single set of high-quality, understandable, enforceable, and globally accepted financial reporting standards based on clearly articulated principles. The governance of the IFRS Foundation rests with its Trustees. Although the Trustees are not directly responsible for determining the agenda of the IASB or for developing IFRS, they appoint the members of both the IASB and the Committee, and review the IASB's strategy and effectiveness. The Trustees are also responsible for establishing and maintaining appropriate financing arrangements, among other functions. (For more information, see the sidebar, "Trustees review IFRIC operations.")

The IASB, with help from the Committee, develops IFRS. The Board's 15 members have complete responsibility for preparing and issuing drafts and final IFRS, as well as approving and issuing Interpretations developed by the Committee. Meetings of the IASB and the Committee are open to the public for observation.

Trustees review IFRIC operations

The Trustees of the IFRS Foundation have been reviewing the efficiency and effectiveness of IFRIC as part of an ongoing Strategy Review that addresses the need for consistent application of IFRS. The review, which began in October 2010, includes the deliberation of comments received from interested parties and from members of the Committee on its objective, its operating procedures, and its agenda criteria, among other areas.

One of the main areas that drew comments from respondents was the criteria used to determine which issues are added to the Committee's agenda. In general, respondents said that the agenda criteria are vague, require clarification, and are not always applied in a consistent manner. In March 2012, the Committee and the IASB discussed this feedback and tentatively agreed on revised agenda criteria. The proposed criteria are intended to take into consideration respondents' comments and a proposal that the Committee use a broader range of tools to address issues submitted to it. The IASB also suggested that the criteria be supplemented with a statement of the overall objective of the Committee.

The subject of rejection notices is another area that drew significant comments. In general, respondents said that rejection notices are often relied on as "de facto guidance" or "quasi interpretations" when interpretive guidance is not provided. Yet, the due process applied to agenda decisions is considerably less comprehensive than the process used to finalize an Interpretation as new guidance. The IASB discussed respondents' comments on rejection notices at a recent meeting and tentatively agreed that rejection notices do not qualify as IFRS and therefore do not change IFRS requirements. The Committee also tentatively agreed to extend the comment period for tentative rejection notices from 30 days to 60 days, among other tentative decisions.

The IASB discussed these proposed changes with the Trustees at their April 2012 meeting.

Future Focus on IFRS articles will cover changes to the Committee's operations that result from the Trustees' ongoing review.

The role of IFRIC

The Committee is the interpretative body of the IFRS Foundation, with 14 members representing a variety of countries and professional backgrounds. The Committee's work is geared to reaching a consensus on the appropriate accounting for a particular issue and providing authoritative guidance on that issue.

Many of the issues that the Committee considers are submitted by financial statement preparers, auditors, and other parties with an interest in financial reporting. In general, issues are referred to the Committee because the submitter believes that diversity in practice exists in accounting for a particular transaction or circumstance, or that there is doubt about the appropriate accounting treatment. However, not all issues brought to the Committee are added to its agenda.

The decision on whether to add an issue to the Committee's agenda is not arbitrary. The Committee assesses each issue that is submitted against specific criteria before deciding whether to add it to its agenda. Not all of the criteria must be satisfied for an issue to be added. If a simple majority of committee members at the meeting agree to add it, the issue makes it onto the agenda. The criteria are as follows:

  • The issue is widespread and has practical relevance.
  • There are significant divergent interpretations regarding the issue.
  • Financial reporting would be improved if the diverse reporting methods are eliminated.
  • The issue can be resolved efficiently under existing IFRS and the Conceptual Framework for Financial Reporting.
  • It is probable that the Committee will be able to reach a consensus on a timely basis.
  • If the issue relates to a current or planned IASB project, there is a pressing need to provide guidance sooner than the IASB will be able to get to it.

Interpretation process

Once an issue is added to the agenda, a proposed (draft) Interpretation is developed. The staff begins this process by preparing papers that describe the issue, including information to help Committee members understand and make decisions about the issue. A consensus on a draft Interpretation is reached when no more than four members vote against the proposal. However, before a draft Interpretation can be released for public comment, it must be approved by the IASB.

An Interpretation that is approved by the IASB is then exposed for public comment. The Committee considers all feedback received during the comment period before finalizing an Interpretation. After redeliberations have been completed, the Committee votes to approve the final Interpretation, which requires a consensus (no more than four members voting against the proposal). Next, the Interpretation is submitted to the IASB to ratify and issue to the public. Once the Board issues an Interpretation, entities that prepare their financial statements in accordance with IFRS are required to apply the new guidance. In other words, the Interpretation becomes part of IFRS.

Rejection notices

When the Committee decides not to add an issue to its agenda, it publishes a rejection notice, which explains the Committee's rationale for rejecting the issue. But stakeholders beware: There may be useful information about the application of IFRS in those rejection notices.

The Committee is required to expose for public comment the reason it tentatively decides not to add an issue to the agenda in the IFRIC Update. The comments received form a part of the deliberations that take place at the next available meeting, when the Committee reconsiders whether to add the issue to its agenda. If the issue is not added to the agenda, the reason is posted on the IASB website as a historical record of the decision.

Rejection notices do not form a part of IFRS; therefore, they are not included in the hierarchy in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. However, in some cases these notices include the Committee's view about the accounting for a particular situation, which may be helpful in understanding how to apply a particular IFRS.

Annual improvements

The Committee is also responsible for the annual improvements process, which is a mechanism for making nonurgent but necessary amendments to IFRS. These amendments may clarify guidance and wording, or communicate relatively minor changes to the standards that address unintended consequences, conflicts, or oversights.

The IASB must approve the exposure draft of proposed improvements as well as the final Improvements to IFRSs.

Future role of the Committee

About 120 countries currently require or permit the use of IFRS, while several others are contemplating IFRS adoption. Preparers, auditors, and users that currently follow IFRS reflect a variety of different cultures, regulatory environments, and predecessor accounting standards—differences that might necessitate interpretive guidance going forward. Consequently, interpretive guidance will be needed to ensure that IFRS are consistently applied among geographically diverse constituents.

In fact, in the Trustees' 2011 Strategy Review, IFRSs as the Global Standards: Setting a Strategy for the Foundation's Second Decade, the Trustees indicated that they expect the Committee to play a more active role in its second decade, in part by identifying emerging areas of divergent practices across borders before they become entrenched. The Trustees also noted that the Committee "should help to ensure consistency in Interpretations, without undermining the commitment to a principle-based approach to standard-setting."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.