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.
