Take a closer look at some recent draft NIFRICs; it might be time to comment

18 August 2014

By Tony de Bell

This week, my guest blogger is Mary Dolson, a Global Accounting Consulting Services partner. She takes a look at some of the IFRS Interpretations Committee's recent agenda rejections.

As ever, do let me know your thoughts on the subject.

The inaugural chairman of the IASB, now retired, was vocal in sharing his view that principles based standards shouldn’t need interpretation and enforcement was the province of regulators and auditors.  The IFRS Interpretations Committee (IFRS IC) emerged from a recent operational review with a mandate to ‘do more’.  

The IC has a number of ways to ‘do something’.  It can produce an interpretation, it can propose narrow scope amendments, it can recommend ‘improvements’ (minor changes) and then there is the ‘agenda rejection’. 

An agenda rejection is known in the standard setting trade as a ‘Not-an-IFRIC’ or a NIFRIC.   A question is submitted to the IC; the staff attempt to establish if the item meets the agenda criteria and start drafting papers.   If the IC concludes it will not take an item on its agenda then a draft rejection is prepared and published; interested parties can comment on the agenda decision for 60 days.  

This is a certain level of due process but many draft NIFRICs attract no comment letters at all.  If there are no substantive comments then the agenda decision is finalised.  NIFRICs have no ‘official’ standing in the hierarchy of IFRS but they are referenced, certainly by regulators.

There are two draft agenda rejections in July IFRIC Update that preparers in particular may want to comment on.   

The first is a draft rejection on the interaction of IAS 21 Foreign Currency and IAS 29 Accounting in Hyperinflation.  A preparer pointed out to the IC that applying IAS 29 and then IAS 21 in consolidated financial statements produces an outcome that can be very different from the underlying economics if exchange rates and exchange activity are strictly controlled by the government.   The rejection says (I summarise severely): ‘We acknowledge your point but the standards are clear and there’s nothing for us to interpret.  Further, it’s a big topic and we can’t touch it with a narrow scope amendment.’  The IC has not suggested any possible remedy or urged the IASB to figure out if there is some way to remediate the problem without fundamentally re-opening IAS 29 or IAS 21. 

Some might wonder if this result undermines the credibility of IFRS. It’s beyond the IC to fix monetary policy consequences in certain economies.  However, this seems like a problem that could be solved or at least given serious consideration by the IASB. 

The second NIFRIC is a draft rejection of a request to interpret IAS 16 ‘Property, plant & equipment’ on what constitutes ‘cost’.  IAS 16.17(e) explains that the costs of testing whether an asset is functioning properly (e.g. facility) are added to the total cost of an asset after deducting the net proceeds of selling the test production. Practice in some industries is that the cost of testing production is added to the cost of the facility, offset by any proceeds from selling test production on an aggregated basis.  This has the attraction of simplicity because it eliminates the need to calculate the net cost or net proceeds of each test unit (or batch) sold. This method also avoids complicated allocations of the other costs of the facility to each unit produced.  Of course, this facility is not yet being depreciated because it’s not yet ready for use. 

The draft rejection says that any net proceeds should go in the income statement; in other words, the simple and what some might say pragmatic approach described above is not appropriate when the proceeds exceed the specific costs of testing.  The IC proposes that entities must determine net proceeds and present them as an income statement item.  Net costs are still capitalised as part of the cost of the facility.

The IC’s view of IAS 16 has conceptual merit and it’s a reading of the standard that might be described as a victory for concepts over established practice and cost/benefit.  But there is no guidance on how to apply the NIFRIC’s suggested approach.  For example, with or without depreciation?

An entity may have several options to maintain current practice. The standard’s requirements don’t apply to immaterial items; test production of a major installation of property plant and equipment may not be material.  In addition, some aspects of activity in the extractive industries may be out of IAS 16’s scope or in the shelter of IFRS 6 for at least the exploration and evaluation phase. 

But should a NIFRIC force a change in practice, introduce additional complexity or encourage the application of materiality or ‘workarounds’? 

Are you affected by either of these draft agenda decisions? If so, consider sharing your views with the IFRS IC. 

Tony de Bell
Read profile | Contact by email | Tel: +44 (0)20 7213 5336

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