Speech: The balancing act of finding the right accounting answer
Hans Hoogervorst, Chair of the International Accounting Standards Board, delivered a
speech at a meeting of the International Accounting Forum for Accounting Standards
Setter (IFASS). He reflected on his 10-year tenure, as it comes to an end in June
2021; how IFRS Standards have evolved during that time; and on the importance of
independent standard-setting. He also reflected on developments in the economy and
praised IFASS for the work it has done during his time as Chair.
Introduction
I am well into my final year as Chair of the International Accounting Standards Board
(IASB). You can tell it is the end of my tenure because I no longer get invited to
give the opening speech, but the closing one!
Joking aside, the good news is that I am planning to leave peacefully. There will be
no armed insurrection. No mobs of angry national standard-setters incited to
overwhelm the IASB’s offices in Canary Wharf. Actually, there would be no point,
because the office has been closed for months due to the pandemic!
So, unlike a former president, I have already called my successor—Andreas Barckow—who
we all know so well, to congratulate him as the new Chair of the IASB. As the former
Chair of the German standard-setter, Andreas really understands what national
standard-setters need from the IASB, so you have now got a person on the inside!
Looking back
The last 10 years have flown by. The IFRS Foundation and I took a great gamble when I
became Chair of the IASB, given that I had little experience with accounting and
most technical accounting issues were Abacadabra to me. For me, at least, it was a
gamble that paid off. I thoroughly enjoyed my adventures in the world of
accounting—I have not regretted my decision one minute.
My background was first in politics and then as Chair of the Dutch securities
regulator.
During the financial crisis, the accounting for financial instruments came under
attack. Some banks and their supervisors were pointing the finger at accounting when
the blame was really much closer to home.
In my role as securities regulator, it was clear to me that the main problem was in
the prudential standards which had allowed bank capital to be hollowed out over the
years. I felt the criticism of accounting was a typical case of shooting the
messenger, so I gave a speech defending IFRS Standards and warning of the dangers of
rash proposals to suspend all fair value accounting.
My speech came to the attention of the IASB, and the rest is history. The moral of
the story—be careful what you say in speeches!
Looking at the last 10 years, I am truly proud of what the IASB has achieved.
Together, we completed reforms following the global financial crisis. We delivered
major improvements to financial instruments accounting, to revenue recognition and
to lease accounting—often in the face of fierce lobbying. I should of course not
forget IFRS 17, which greatly improves accounting for the very important insurance
industry. Many gaps and weaknesses in recognition and measurements have been
addressed. The updated Conceptual Framework for Financial Reporting gives a
more solid foundation for our standard-setting activities.
Improving presentation
In my second term we have focused on delivering improvements to presentation. We have
made progress at making disclosures more relevant and not just a data dump, and we
have improved the IFRS Taxonomy. The Primary Financial Statements project is not
done yet, but I am convinced it will greatly improve the structure of the income
statement, which is extremely important given the growing practice of electronic
consumption of financial information. This project will also greatly improve
transparency and discipline around non-GAAP measures. The upcoming update of the
Management Commentary Practice Statement will help companies provide better
information on value drivers that escape the financial statements, such a business
model, intangibles and sustainability issues.
We have also worked together to ensure our Standards are implemented in full in most
parts of the world. When the United States got cold feet about the adoption of IFRS
Standards in 2011, many predicted the ‘world of IFRS’ would fall apart. I am proud
that the adoption of our Standards has continued apace, especially among the booming
economies in Asia.
More than 140 countries have adopted IFRS Standards and more are knocking on the
door. In the meantime, many prejudices around our Standards—their purported
obsessions with the balance sheet and fair value accounting, and the perception that
application is inconsistent—have largely been laid to rest.
We could not have done the job without national standard-setters, and many of you
have become personal friends. IFASS is a wonderful example of what can be achieved
when highly skilled people from around the globe work together to solve common
challenges. This is even more impressive given the anti-globalisation backdrop of
the last five years.
Independent standard-setting
Promoting and protecting this global endeavour has been one of my main tasks. As a
former politician, I have done my best to keep ‘wheeling and dealing’ at bay and to
keep accounting as apolitical as possible.
The "IFRS model" of global cooperation is built on independent standard-setting,
but we have to earn and maintain the right to that independence—otherwise, we risk
losing it. That means being attuned to the economic and political environment and
being absolutely devoted to quality and to our rigorous due process. But in the end,
it is about trying to find the right accounting solution, rather than the
politically expedient one. It means we need to work hard to bring people along with
us—explaining time and time again the importance of what we do, and the rationale
for the decisions we take.
I think we have been largely successful in this balancing act, but I have to admit
that IFRS 17 is still subject to controversy. The good news is that everybody wants
the Standard to be effective in 2023. But some still plead for a European adaptation
to the insurance Standard to limit the scope of the annual cohorts requirement. When
push comes to shove, I hope they will ask themselves if it is really worth it.
Without annual cohorts, contracts can continue contributing to profits long after
they have expired. Will European insurers really look good if they apply a carve-out
that most investors will view as a short-cut that distorts performance? Is it in the
interests of the industry itself to lose the full benefits of applying the same
Standard across the world?
A bizarre world
I took office in the wake of the financial crisis of 2008. I must admit that the
perilous state of the global economy now makes me feel even more worried than I was
10 years ago. Money has never been cheaper. We live in a bizarre world where
investors have to pay to lend their money to highly indebted governments. Junk bonds
carry very low yields that were once reserved for triple-A rated companies.
As a result, debt has exploded around the world. The latest
figures1
show a worldwide total debt-to-GDP ratio at over 355% and growing. Never in economic
history has so much debt been accumulated. At the same time, free money has driven
asset prices through the roof. In the midst of the severe covid recession and rising
unemployment, stock prices and house prices are still breaking record after record.
The global economy is totally distorted, and I suspect many a central banker wakes
up in a cold sweat at night, thinking about all the risks lurking in plain
sight.
No one really knows exactly how this will end—I doubt it will be pretty. And when the
economic stress that has been building up finally erupts, do not be surprised if
accounting will come under pressure again, as it did in 2008. But that is exactly
the point when proper accounting matters the most. It is in the low tide of a crisis
that you can see who is swimming naked. And it is the job of accounting to tell the
naked truth, no matter how unappealing this might be.
Close
So, accounting has never been more important, and neither has the role of IFASS
members. My ask is for you to give Andreas and his team the same support you have
given me in the last decade. I leave with fond memories of our time together and
wish you all the best. Covid has limited the opportunity for me to say goodbye in
person, but I hope our paths will cross at some point in the future.
Access the IASB video of the speech here