Speech by Hans Hoogervorst to FACPCE, Argentina
Hans Hoogervorst, Chairman of the IASB, Addressed the Argentina Federation of Professional Councils in Economic Sciences, or FACPCE, in Buenos Aires, Argentina .
This speech WAS Given in Spanish.
South America has become a great development environment for IFRS. The big economies of the region have accepted IFRS and have become strong supporters of global accounting standards.
You are in very good company. From this year more than two thirds of the members of the G20 require the use of IFRS, while almost half of the 500 companies included in Fortune magazine, now reported under IFRS.
Continuously G20 communiqués (including the G20 meeting in Los Cabos), have called for rapid movement towards global financial reporting standards. With the support and commitment of countries like Argentina, we aimed to achieve this goal.
I would use the time you have very kindly provided this morning to talk about three important points. First, there is light at the end of the tunnel convergence and most major decisions have already been taken. Second, our future agenda has been developed thinking a lot more on the needs of emerging markets. And third, to deliver this new agenda in the most effective, the IASB is redefining our relationship with regulators and standard setters.
I will begin by discussing our current work program.
The convergence project between the IASB and the FASB is possibly one of the most ambitious work programs in the history of the issue of accounting standards. Members of both councils have provided for the renewal of eleven substantial accounting areas in just five years. As worthy of mention, both councils were able to finish this workload with a very high standard.
When I took this job as Chairman of the IASB, I inherited four projects were still being finalized, financial instruments, leases, revenue recognition, insurance contracts.
A year later we are still working hard. But in recent months we have made real progress. Now envision the end of these projects and most of the more substantial decisions have been left behind. In many respects, I am pleased that these projects were not yet finished.
I have always enjoyed to face difficult tasks and these projects represent some of the most important accounting areas and challenging intellectually that I have been involved.
First, the proposed leases. Despite what they have heard, we’ve set out to destroy the leasing industry. Leases are a useful way for companies to manage their cash flow and working capital and does not change to . All we are asking is that the liabilities associated with these activities are adequately disclosed to investors. Some amounts may be very large. For many companies lease liabilities represent the largest source of off-balance sheet financing.
We travel around the world talking with investors and there was a massive support to put the lease liabilities in the statement of financial position. At the same time, we listened carefully to the views of preparers. Any of the solutions they arrived should work in practice.
In recent weeks we have taken some very important decisions. Now that we have reached a general agreement with the FASB on how to proceed, we try to publish an exposure draft set in the second half of 2012 and finalize the standard during 2013.
There is still much resistance to put leases in the statement of financial position and I shall be pleased until the standard is completed and ratified by those involved in financial reporting. However, I am confident we will achieve the job.
With respect to accounting for financial instruments, the draft is almost complete deterioration. All major decisions are taken and we can only speak of the revelations and transition requirements. The tips of the IASB and FASB publish to n an Exposure Draft later this year.
However, it is likely that the U.S. version contains more application guidance than ours as a result of specific regulatory environment.
In connection with classification and measurement, announced earlier this year to consider limited changes to the new standard for financial instruments, IFRS 9. We always said we would review the IFRS 9 once we had clear where we would get the insurance project, and that time has come. At the same time, the United States has increasingly come to our focus on financial instruments.
We have introduced a third category of measurement “fair value recognized in ‘other comprehensive income’ in addition to the two existing categories of amortized cost and fair value. We hope to publish an exposure draft later this year and issue a final standard in 2013.
The third and final draft of convergence is the recognition of revenue. It is often said that the revenue recognition requirements of U.S. GAAP are very detailed, while for IFRS are not sufficiently detailed. The two councils have been working together to achieve a proper balance and once again, we’ve taken more substantive decisions. We have to work a little more on this project and expect to issue a revised Exposure Draft later this year and finalize the standard in early 2013.
The fourth project, insurance contracts, is one in which the councils are working, but not a formal convergence project. Each council is starting from a different position and are at different points in our process emission standards. We do not have an insurance accounting standard that is appropriate, while the United States if they have it. These differences and the circumstances explain why we have not fully converged in the area of insurance. However, IFRS will have to order a high quality response to the insurance industry and in many ways our approach will be similar to the United States.
As you can see, we’ve made real progress in each of these four projects. There is light at the end of the tunnel convergence. Many of the most difficult and substantial decisions have been resolved and we can start to see in front of what follows.
This brings me to the second topic I wanted to cover and this is our future agenda. So far the IASB’s agenda has been determined by external events. During the first five years update the International Accounting Standards (IAS) inherited from the IASC in time for the adoption of IFRS by the European Union in 2005. Then, our priority was to work with the FASB and unify international accounting rules.
More recently, the councils have had to face the negative consequences of the financial crisis.
As mentioned earlier, we have already completed much of this work. In 2010 we launched a substantial public consultation on the future agenda of the IASB. We ask:
“That’s what’s broken”?
and “that’s what needs fixing”?
and how we prioritize the work. It remains that the consultation is over, but there are common themes that are easily identifiable.
The most common request is a requirement for a period of stability. I do not think we get it but we understand this request. Ten years ago few economies reporting under IFRS. Now, more than 100 economies using IFRS. Also, many of our rules have been rewritten.
This means it has been ten years of unprecedented change. Not surprisingly, our friends around the world want a little more time to “stop and touch down.”
It is for this reason that the future agenda of the IASB will select the most important areas that will require a change. We must amend amend whatever it takes and no more. What this means for our work program, after convergence? Well, many of these areas arising from the comments we received during our public consultation.
First, there is almost universal support for completing the revision of our conceptual framework. This framework serves as a reference to the decision making process of the IASB. When the alternatives are not clear, the framework helps the IASB to make decisions that are consistent for all standards. The framework is also an important reference for entities when applying principles-based standards.
We already have a conceptual framework that works reasonably well. However, areas such as measurement of the items are less perfect. It is easy to see why. After all, measurement is the part of accounting that requires more judgment and is the most difficult and most politicized. We need more rigor and clarity here, but it will be extremely arduous task that will require much intellect and courage.
Secondly, it is becoming clearer that we suffer from an excess of revelations. This is not entirely due to the financial reporting requirements. The fact is that businesses have become more complex. This is the work of financial reporting, describe this complexity, rather than obscuring it.
Not all disclosures provide useful information to investors. The revelations are rather standard to meet the requirements to help investors understand really is happening.
This is a task that we must tackle together preparers, auditors, regulators and standard setters.
Something that can be confusing for an investor, it may be valuable to another investor. Delete information is never easy. However the feedback we have received indicate that this is an important area for many. Particularly for small listed companies, many of whom believe that excessive disclosures falls on his shoulders disproportionately.
Then we must decide what we do with the departure of ‘other comprehensive income’ or ‘ORI’. That means this game? That should go there? As it relates to the results? We allow recycling? To answer these questions we must first be very clear in defining its conceptual foundations.
It is important that investors know what gains or losses are settled in the statement of financial position, although they have not been performed. Control the volatility in the balance is a key task gerenciadores financial institutions, the ORI may in fact be a very important indicator of performance.
By providing a clearer conceptual definition of ORI will also address the controversial issue of recycling. Globally, there are many advocates of recycling. They make much of the profit or loss and they want the result is ultimately equal to the total amount of cash flows.
The IASB has never been much enthusiasm for recycling. One of the main reasons for our reticence on this subject is that the timing of recycling can result in a manipulation of the result. For that reason, investors often require the result before the effect of recycling in places where this practice is allowed. They know that recycling has the potential to obscure the true performance of the entity.
I am sure we will have many interesting discussions and ferocious about this in the coming years. And I have really wanted to start working on that project.
Apart from these ‘big issues’ we will probably incorporate some specific projects. To do this, we have been listening very carefully to the needs of emerging economies. Topics related to agriculture, business combinations under common control and the application of equity method in the separate financial statements are very relevant in the countries of Asia and South America. I’m pretty sure we will reconsider IAS 41 on ‘Agriculture’.
Unfortunately, we must also learn to recognize our limits. The experience of recent years reminds us of the dangers of trying to do too much at once. We can not simply put to one side for three years issues that are causing problems in different parts of the world.
For that reason we decided to introduce a new ‘research phase’ in our work program. This phase of our research agenda will be a kind of incubator projects before they are candidates for incorporation into the work program of the IASB. Possibly include them as part of our research a project on accounting inflation.
However, we plan to establish a university of IFRS in our offices. We have neither the means nor the ambition to do so. What we can do is define the parameters of the research, but will invite other standard-setters to work with us in the investigation and to inform us of your findings. In turn, this will reduce the development time of a new IFRS in the event that the project incorporates the IASB’s work program, but in a way as not to overburden the Council’s work.
Working with standards setting bodies, national and regional
This brings me to the third and final topic for today, this is our plan to have a more structured dialogue with the community of standard setters and regulators.
The issue of standards has long been a collaborative exercise. The quality and robustness of the rules is in an important step for many organizations and individuals who contribute to our work . Perhaps the best example is the interaction between the IASB and the global community of standard setters.
This interaction occurs in different ways. In the last decade we have worked on a bilateral basis with the FASB and other national standard setters. At the same time, we have seen the emergence of regional organizations with an interest in the issue of standards, such as the European Union EFRAG, the group of Asia-Pacific and more recently AOSSG GLENIF, Latin American group of issuers of financial reporting standards .
These national and regional bodies can contribute much to the activities of the IASB standard issue. As the use of IFRS grows, so does the importance that we work together to ensure that they are given due consideration to the views of all parts of the world.
However, maintaining bilateral agreements with a number of organizations is not practical.
Recognizing this need, the recent review of our strategy, carried out by the Trustees (Trustees) has recommended us to examine new ways of working with these groups. We need to establish more structured and formal relationships with the community of the world standard-setters.
We connect with these organizations at the beginning of the process emission standards. The benefit will be better integration of the global perspective in the process of issuing rules that you could reduce the risk of not adopting a new standard.
We do not know how will this future organization of the issuer community standards. Clearly you have to be compact if it is to be effective. The dialogue between the IASB and national or regional setting bodies will only make sense if the number of people sitting at the discussion table is not too large.
At the same time, the organization of the future will have to be inclusive. This means that most likely a group like GLENIF be included because it represents many jurisdictions. Build this compact and inclusive dialogue while not easy, but I have confidence that we will find the answer to that challenge. This work is in progress and begin to discuss their details in the coming months. As always, your contribution will be extremely important.
Obviously, the goal of having global accounting standards will be an illusion if such standards are not approved and if not enforced consistently globally. This means that all adopt the same set of rules and these rules are applied in the same way.
The IASB is not a securities regulator. We do not have the resources or knowledge to monitor overall adherence to standards. For that reason we have begun discussions with the International Organization of Securities Commissions, IOSCO, to deepen our cooperation in the future.
A more structured and deeper cooperation between the IASB and securities regulatory commissions will be beneficial to both parties. Securities regulators can provide us with information on possible weaknesses of our standards and difficulties in enforcement. On our side, we give the securities regulators insight into the meaning of the rules, which should help them achieve compliance.
Ladies and gentlemen, thank you for your time and attention. I tried to give a comprehensive update on where we are. We are approaching a successful conclusion of the convergence projects. The future agenda of the IASB is being defined and we intend to develop new and innovative ways to deepen our relationships with organizations that support us, as is the case GLENIF. I reiterate what I said: it is possible to see light at end of tunnel convergence, which would end with a word about “hope”.
And to do that, I will refer to the words of one of my favorite Argentine writers Jorge Luis Borges who said: “I come never encouraged to be present at all without first tested and that test is hope. Blessed are you, hope, future memory, whiff of the future. ”
I wish you a great conference and I very pleased to answer your questions. “