Committees get a bad reputation, with proverbs like ‘a camel is a horse designed by committee’ meaning that having too many people and too many opinions can lead to undesired outcomes, which may be harsh on the poor camel.
The IFRS Interpretations Committee (IFRIC) plays a key role in the maintenance and consistent application of the IFRS Standards and can often be a source of interesting discussions, albeit mainly for financial reporting nerds like us.
In addition to other work requested by the International Accounting Standards Board (IASB), the 14 members of IFRIC receive questions from submitters and debate the potential accounting treatment of the situation raised.
Agenda decisions
These discussions can lead to agenda decisions, which give a conclusion on the specific issue raised. These use the existing principles of the IFRS Standards and explain the correct treatment to be followed. If the issue is deemed to be widespread and diversity in application exists, this decision will come with some explanatory material.
These become part of the IFRS Standards, so future application of the standard must be in line with any agenda decisions made by IFRIC. With these, there is no effective date and it is effectively part of the IFRS Standards as issued.
Some agenda decisions are made with no explanatory material, often when they are deemed not be widespread or there is little diversity in practice. A recent example of this is an agenda decision from April relating to payments contingent on continued employment during handover periods.
In this decision, the situation raised was one where an entity acquires a business and requires the sellers to continue as employees on the acquired basis. The sellers would be compensated for their services at a level comparable to other management executives, with additional payments being contingent upon the performance of the acquired business and the continued employment of the seller.
Questions are raised as the evolving corporate environment throws up new issues
In this scenario, IFRIC decided that these payments would be treated as compensation for post-combination services, rather than as additional consideration for the acquisition. In doing so, it linked back to a previous decision made in 2013.
Questions are also raised as the evolving corporate environment throw up issues that may not be explicitly addressed under the current standard. A recent agenda decision dealt with the interpretation of climate-related commitments under IAS 37, Provisions, Contingent Liabilities and Contingent Assets, which was examined in a previous AB article, ‘Disconnected climate reporting‘. This was one of the most commented-on discussions held by IFRIC.
Another type of query can get into the deeper technical aspects of standards definitions. One such decision recently related to IFRS 8, Operating Segments. In this, the query was raised as to whether all of the individual items covered in paragraph 23 of the standard needed to be disclosed if they were not separately reviewed by the chief operating decision-maker. In this decision, IFRIC noted that if these figures are included in the measure of segment profit or loss that is reviewed, then they must be separately disclosed in accordance with the standard.
There was also a technical discussion on the meaning of materiality. As a result, IFRIC found that there was enough guidance within the current standard for this to be applied and no further standard setting would be necessary.
Amendments
Another outcome could be that the discussion results in narrow-scope amendments to standards. This is where it is possible to come up with an answer within the current text of the standard, but it would be better to come up with a small adjustment to the standard to bring more clarity. These amendments will be recommended by IFRIC, but must be approved by the IASB.
One recent example of this relates to a decision on translating to a hyperinflationary presentation currency. The situation arose where a parent reports in a hyperinflationary currency, but has a subsidiary with a functional currency of a non-inflationary currency. It was decided that rather than provide an agenda decision, a narrow-scope amendment would be proposed to IAS 21, The Effects of Changes in Foreign Exchange Rates, to require all financial statement items to be disclosed at the closing rate in this case. This was fed into the IASB and an exposure draft will be issued in July 2024 to outline this proposed change.
IFRIC may discuss items such as materiality for longer than most of us would deem possible
It is more common to see the volume of questions increase when new standards are issued. While there have been fewer questions raised from IFRS 17, Insurance Contracts, likely due to the specific nature of the standard, it is expected that questions will arise as entities assess how IFRS 18, Presentation and Disclosure in Financial Statements, will affect them.
Overall, IFRIC may discuss items such as materiality for longer than most of us would deem possible, and sometimes it can ask to add the odd, unexpected hump to an existing standard, but that’s what makes a camel beautiful.
Watch and learn
Watch Adam Deller’s series of videos explaining the fundamentals of IFRS Standards
