Speech: Keynote at the IFRS Foundation Virtual Conference

When: 28 September 2020

Chair of the International Accounting Standards Board (Board) Hans Hoogervorst delivered the keynote speech at the IFRS Foundation Virtual Conference. He focused on the impact of the coronavirus pandemic on the Board’s work and described some of the useful information provided to investors during the crisis as a result of some of the new Standards. He also discussed how the principle-based nature of IFRS Standards means companies may already need to reflect climate-related risks in their financial statements, despite the words ‘climate’ and ‘sustainability’ not being mentioned in the Standards.


Welcome to this virtual conference! First, I hope you and your families have been coping well in these challenging times. The pandemic has taken a toll on nearly everybody. Nevertheless, most of us are trying to make the best of it, improvising and innovating where we need and can. That is also the case with the World Standard-setters event and our annual IFRS conference, which this year was due to be held in Madrid.

This year, the pandemic means that we are not able to meet in person—which I really regret since I started my final year as IASB Chair, and I would have loved to see you face-to-face!

But the good news is our team, led by Michelle Sansom, has done a fantastic job in creating an opportunity for us to get together virtually. It is, in fact, a good opportunity to see what good things can come from this new way of interacting with our global audience.

We have a superb programme of speakers, and we are looking to use the full array of digital tools to provide a great experience: audience polls, a chance for you to ask us questions, virtual networking and other forms of digital wizardry.

In my introductory comments I will address two topics. I will begin by talking about covid-19—its relevance to IFRS Standards and our overall response to the pandemic.

I will then switch to one of the hottest topics in corporate reporting—which is sustainability reporting. The growing urgency of climate change has intensified interest in sustainability reporting in recent years. In this speech I will show that financial reporting based on current IFRS Standards can—and perhaps should be—more reflective of sustainability issues than many people realise.

I am convinced that ‘traditional’ financial reporting will make climate-related financial issues more visible in the years to come. I will also make clear that sustainability reporting has important added value to the financial statements.


But let us begin with covid-19. The pandemic has tested us all both personally and in business. Fortunately, the IFRS Foundation made investments in technology in the recent past and already had in place the capabilities for our meetings to be held remotely. While we have missed being able to work with our colleagues and stakeholders in person, we have actually managed to operate pretty well.

This is also true when it comes to IFRS Standards. The last few years have seen the introduction of several major upgrades to key areas of financial reporting. Those innovations are helping to provide investors and others with better insights into companies’ financial positions during these economically stressful times.

For example, the expected credit loss model of IFRS 9 Financial Instruments means investors can get an earlier indication of credit deterioration in a bank’s loan book. IFRS 9’s loan loss recognition approach means that banks are required to adjust loan loss provisions on a more timely basis than was the case under the old accounting standard.

IFRS 16 Leases is another example of where upgrades to accounting standards are providing investors with better information during the pandemic. Some of the hardest hit sectors are those with significant lease obligations—retail, transportation, commercial property. By requiring lease obligations to be fully reported on the balance sheet, investors have better information about the long-term viability of companies operating in these sectors.

We have sought to provide support and to move swiftly where the unprecedented nature of the pandemic has required our attention. Early in the pandemic, we published educational materials to help banks and other financial institutions apply IFRS 9 properly during these exceptional times.

Fortunately, there was little need for actual change of our Standards. In addition to publishing educational materials we took swift action to deal with the accounting challenges resulting from covid-related rent concessions. We moved quickly to amend IFRS 16 to ease operational challenges for lessees while still ensuring useful information was provided to investors.

We have kept time-critical projects on track—such as the amendments to IFRS 17 Insurance Contracts and the final amendments relating to IBOR reform. We managed to achieve this thanks to the dedication of our staff but also the efforts of stakeholders like yourselves who took the time to write to us with thoughtful comments on the IBOR and IFRS 16 amendments.

At the same time, we are aware of the challenges you face at this difficult time, so, where possible, we have provided our stakeholders with more time to comment on our work. So we have extended consultation periods for projects such as Primary Financial Statements and Goodwill and Impairment.

There will be more on the effect of the pandemic on the application of IFRS Standards in a dedicated session later today. But in short, we are here to help and we are ready to move quickly when necessary.

Sustainability reporting

Let me now turn to the topic of sustainability reporting.

The 2015 Paris Agreement set a global goal to reach net zero emissions in the second half of the century, with many governments looking to achieve this goal by 2050. Many stress that the pandemic should be used as a trigger to accelerate progress towards these goals. Governments are talking about ‘building back better’, rebuilding their economies in a way which is environmentally sustainable.

So it is clear the issue of sustainability will remain prominent for years to come and many are asking what role corporate reporting can play in addressing these issues.

At first sight, one might think that financial reporting, as it is, has no relationship with sustainability issues at all. None of our Standards even mention ‘climate change’ or ‘sustainability’. Moreover, financial reporting merely seeks to describe economic reality as it is, giving equity investors and creditors decision-useful information. IFRS Standards do not seek to move those decisions in a particular direction, such as achieving a more sustainable economy. In fact, we very much emphasise the importance of neutrality of information.

However, my fellow Board Member Nick Anderson—inspired by work by the Australian accounting and auditing standards boards—recently published an excellent article which makes crystal clear that this seeming disconnect between IFRS Standards and sustainability issues is deceptive.1

The principle-based approach of IFRS Standards means that issues that relate to, for example, climate change could be captured by our requirements, both in terms of recognition and measurement and disclosure.

Nick’s article gives quite a few examples. IAS 16—the Property, Plant and Equipment Standard—requires companies to estimate how long it expects an asset to be useful. Based on that estimate, it determines how much the asset will be depreciated or amortised every year. Climate change might shorten an asset’s useful life and could force a company to accelerate depreciation.

Climate change might lead an oil company to the conclusion that it does not expect to recover the cost of some of its exploration assets. IAS 36 will then require it to impair those assets.

A bank whose loan portfolio is heavily exposed to carbon-intensive industries might run increasing credit risks when more stringent regulations to reduce emissions come into place. When that results in an increase in expected credit losses IFRS 9 would require the bank to reflect that in its provisioning.

A mining company might be forced by climate change to adjust its estimates of future decommissioning liabilities and increase its level of provisioning. IAS 37 will come into play.

And the list goes on.

Some of these developments are already happening, but they might remain buried in the financial statements because the company in question might not separately disclose the impact of climate change. Nick’s article, however, makes crystal clear that separate disclosures on the effects of climate change might be required based on our materiality requirements.

Clearly, investors are increasingly interested in the effects of sustainability issues on a company’s present and future results, so we could expect disclosures on climate-change related issues to become much more prevalent than currently is the case.

The potential interplay of IFRS requirements with sustainability issues is quite far reaching. The more urgent sustainability issues become and the more stringent public policy towards a zero-emission future becomes, the more financial statements will be affected by these developments.

Recently published financial statements by several major oil companies gave a clear indication that this trend is already well under way. In the last couple of months several big oil companies announced major impairments to exploration-related assets.

These impairments, running into the tens of billions, were triggered by a considerable downward adjustment of estimates of oil prices in the next decades. The reasons for these lowered oil price projections were not just the pandemic, but also the growing realisation that the transition to a low or net zero-emission economy will have its consequences for the price of oil. So, the growing realisation by oil companies that some of their assets may become stranded as a result of this transition definitely played a role in these impairments.

To me, these very sizeable impairments were an eye-opener. They are further evidence that over the coming years, we can expect sustainability issues to be reflected in IFRS financial statements to a much greater extent than ever before.

In summary, ‘traditional’ financial reporting can reflect sustainability issues more than many of us realised until recently. As sustainability issues become more pressing and governments become more ambitious in tackling them, our principle-based standards will require the financial statements to reflect these issues as they become more pervasive.

So, having established that IFRS reporting and sustainability issues are closely intertwined; does that mean that there is no additional need for separate sustainability reporting?

Not at all.

Sustainability reporting as it is developing now can have substantial added value to financial reporting. The fact is that the scope of sustainability issues is very broad. It is not just about climate change, it can also be many other issues, such as the investments in a company’s workforce and the durability of its business model.

Moreover, many sustainability issues are very uncertain and have a very long-time horizon. This poses tremendous recognition and measurement challenges which often make it impossible to capture them in the financial statements. For that reason, sustainability standards often use non-financial Key Performance Indicators (KPIs). These KPIs describe trends which may only translate into financial outcomes much later. They basically provide pre-financial information. However uncertain this information may be, it can very well be material to investors. If it cannot be captured in the financial statements, it can best be provided in the narrative that accompanies the financial statements.

This is of course the reason why in the past the IASB has developed the Management Commentary Practice Statement. This Practice Statement basically provides high level guidance on how to write the narrative section of the annual report. As you know, the IASB is now working on an updated version of this Practice Statement. One of the reasons why we started this project was the intensified interest in sustainability reporting.

While the Management Commentary is a logical place for sustainability reporting, the existing Practice Statement is completely silent on the issue. Upcoming revisions to this Practice Statement will help fill this gap by improving the guidance to prompt companies to identify issues such as climate risk that may be material to their investors. I encourage you all to respond to the Exposure Draft that is due out in the first half of next year. There will be more about Management Commentary both later today and in a breakout session tomorrow.

Another benefit of sustainability reporting is that it may serve to make a company aware of the financial consequences of such issues much earlier. It might lead to the effects of sustainability issues being reflected in the financial statements earlier than may have been the case in the past. For example, it might be that the scenario analyses suggested by the Taskforce on Climate-related Financial Disclosures (TCFD) [and other initiatives] have heightened the awareness of oil companies to the long-term financial risks of energy transition.

As a separate piece of work that is complimentary to the requirements in IFRS Standards and the IASB’s work on Management Commentary, the Trustees of the IFRS Foundation are currently considering sustainability reporting. They are responsible for the strategic direction of the Foundation and are in the process of preparing for their next five-yearly strategy review. A working group of Trustees, a Task Force, has done research into this area and the Trustees plan to build on that work by consulting more broadly shortly, and I encourage you to take note of that consultation and to respond.

I hope I have succeeded in convincing you that IFRS reporting has an important role to play in improving transparency around sustainability issues. The strength of our Standards is their principle-based nature which allows new economic phenomena to be addressed as it comes along. Clearly, sustainability is increasingly becoming an economic issue.

My hope is that in the future financial reporting and sustainability reporting will come even closer together. Much of that will depend on governments truly addressing the negative externalities of the most polluting economic activities. Proper pricing of externalities would mean that regular financial reporting would become more reflective of sustainable business activities. An adequate kerosene tax could cause the financial reports of the aviation industry to reflect the true costs of flying. A realistic carbon tax would cause the financial results of smokestack industries to reflect the true costs of their products. Financial reporting would come very close to sustainability reporting…


The next session of the conference programme is a recorded presentation by Sue Lloyd, IASB Vice-Chair; and Nili Shah, IASB Executive Technical Director, who will give you an update on IASB and Interpretations Committee work.

I hope you enjoy and get a lot out of this two-day conference.