IFRS update summer 2006 – lost in translation

ifrs special

In association with PwC

Interpreting can be a highly complex art. If got wrong, as US president Jimmy
Carter discovered in 1977 when he made a speech in Poland telling the country he
‘desired the Poles carnally’, the potential for offence, or worse still
catastrophe, is exceptionally high.

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History provides us with myriad other examples of misunderstanding. But when
it comes to matters of state and business, translation should be left to the
experts. With this in mind, the International Accounting Standards Board created
the International Financial Reporting Interpretations Committee, as the sole
body that would ‘interpret’ the accounting standards produced by the board.

Although in existence since 2001, IFRIC has, since late 2004, had little to
interpret. The current interpretations, all mandatory for IFRS reporters, only
affect a small number of companies in particular sectors, and many of them won’t
take effect until the end of this year. But from now on people will begin to
hear a lot more from IFRIC and pay greater heed to its pronouncements.

If they get it wrong, companies could feel the full force of the UK’s
regulators, in particular, the Financial Reporting Review Panel. If a
misinterpretation is particularly off centre, the panel could impose a penalty
on the offending company.

The reputational damage associated with a slap on the wrist by the panel is
significant, but much worse for any company would be a drop in share price, also
a possibility if the FRRP is looking into the accounts.

In a recent study the issue of interpretations came out as one of the most
challenging areas in the application of the new set of global accounting
standards. Regulators identified the interpretation of the same standards in
different jurisdictions, requiring international cooperation and co-ordination
of a degree never before necessary as one of the most significant challenges.

Michael Hughes, partner in KPMG, says the dangers of standards being
interpreted differently in different regimes is a ‘central issue at the heart of
the IFRS project’.

‘Regulators have started to get involved in interpreting standards. The only
people who set accounting standards should be standards setters, and not
auditors or regulators,’ he says.

Sir David Tweedie has persistently slammed people for requesting
interpretations on accounting standards arguing that more judgment should be

But Jon Symonds, CFO of pharmaceuticals company AstraZeneca has hit back
saying: ‘Because there is no body of GAAP and no body of support, his colleagues
in the financial services industry are finding it difficult to interpret them’.

Symonds agrees, in part, with Tweedie, blaming the audit firms for some of
the extra work. ‘The profession has been slow in interpreting the standards and
has pushed everything up to IFRIC. The more people want interpretation, the more
rules will appear. The IASB needs to resist the many things being pushed up to

Nevertheless, it’s important to recognise that interpretations carry the same
authority as standards, and although IFRIC develops them it is ultimately the
board that publishes them with its seal of approval.

Indeed, as Peter Hogarth, accounting technical director at
PricewaterhouseCoopers says, IFRIC’s decisions on what it chooses not to
interpret carry as much weight as those areas on which it publishes guidance
(see below).

‘It means that any company adopting a different treatment might face issues
if challenged by an organisation like the FRRP,’ said Hogarth.

Indeed, it is advisable, where possible, says Hogarth to appoint a dedicated
person to scrutinise IFRIC’s work and decisions. ‘CFOs are aware of the
development of standards and amendments to standards, but I wonder how many are
reading the [IFRIC] updates.

‘It would be wise for CFOs to have someone keep abreast of what’s going on,’
he says.

A quick scan of the IFRIC discussions agenda is enough to confirm the
importance of its role for the future.

‘There are issues that are controversial. For UK companies, for example, one
of the drafts on SAYE plans has caused controversy,’ said Hogarth.

Service arrangements, otherwise known as PFI contracts, is another area with
explosive potential. The topic has already attracted quite a lot of attention
and it’s not resolved yet. Business combinations, leases, consolidation and
revenue recognition, particularly in the field of how to account for customer
loyalty points, are also areas that IFRIC is grappling with.

So far, intervention hasn’t materialised. Regulators, especially at the SEC
and the EU’s standards advisory body, have, however, been laying the ground work
for potential intervention on the basis of accounting standards contravening
domestic laws. These have only been noises, so far, but those in the business of
setting standards worry that these mumblings could translate into actions.

In private, international standard setters are firm on this point, saying
they encourage debate and discussion from other national standard setting
boards, but ultimately debate needs to be conducted from one central point
otherwise it will lose its authoritative resolution around the world.

This will be the next biggest challenge for the IASB, reigning in meddling
hands and ensuring a strong voice so that implementation and enforcement are
consistent. This year will show if the mechanisms in place really are working.

Tentative decisions
IFRIC receives dozens of requests to interpret standards or practices where no
standards currently exist, or practices have diverged in different
jurisdictions. To ensure its decision making is as transparent as possible, the
committee has adopted a new strategy for explaining why it will not pursue a
particular request.

These have come to be known as agenda decisions. Experts say these are
equally important to be aware of, as they are an indication of areas where the
board won’t accept any deviation from the rules.

To give you a taste of the finer points of IFRIC’s work in March, the
committee recommended it should not take action on:

IFRS 2 Share-based Payment ­ Scope of IFRS 2: Share plans
with cash alternatives at the discretion of the entity.

Since the requirements of IFRS 2 are clear IFRIC said the issue is not
expected to create significant divergence in practice.

IFRS 2 Share-based Payment ­ Share plans with cash
alternatives at the discretion of employees: grant date and vesting periods.
IFRIC decided the issues should not be taken onto the agenda.

IFRS 2 Share-based Payment ­ Fair value measurement of a
post-vesting transfer restriction.

IFRIC did not believe the approach mentioned in the request was consistent
with the requirements under IFRS 2. IFRIC said the issue was not expected to
create significant divergence in practice and decided not to take the issue onto
the agenda.

IFRIC’s next meeting is expected to be held in London on 6-7 July 2006. To
find out more about IFRIC’s decision see under ‘IFRIC Meetings’.

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Related reading

Fiona Westwood of Smith and Williamson.