Newsmaker: IASB’s Hoogervorst Readies for Round Two

By:
Chris Gaetano
Published Date:
Jun 7, 2016

Hans Hoogervorst begins his second term as chair of the International Accounting Standards Board (IASB) in July. When appointed in 2011, he was facing a global economy still recovering from the economic crisis, as well as several major projects with the Financial Accounting Standards Board (FASB). He took the time to talk to the Trusted Professional about his reflections on his first term, as well as his priorities for the future.

Much has changed since we spoke in 2011. How would you say your views have evolved since first being appointed to the board five years ago?

That’s a tough question. What I think has changed is my understanding of the significance of corporate accounting standards in general, and more specifically global ones—that understanding has really deepened over the last couple of years. I try to lay down my thoughts in two documents: mainly our mission statement that we issued about a year ago and, shortly after that, I wrote a piece which is called Working in the Public Interest that really tries to explain how accounting standards, proper accounting standards, contribute to the public interest.

And so, in my mission statement, I basically said there are three contributions to the global economy from IFRS: increasing transparency by improving information and making financial information globally comparable; second, by improving accountability by giving investors and creditors the instruments to hold management to account; and third, by improving [economic] efficiency, global accounting standards have led to better capital allocation by investors. And for preparers, IFRS has had a lot of advantages in terms of reducing accounting costs and making it easier to manage subsidiaries around the world.

Most people, when reading that, will think that makes sense, that it’s not earth-shattering, but five years I’ve been thinking about this and now I developed these thoughts more completely.

What is an issue you've become more pessimistic or cynical about since first assuming the chairmanship? Conversely, what's something you may have been pessimistic or cynical about before that you're actually quite hopeful about now?

Years ago, more generally, few in the world could have foreseen that the decade long convergence efforts between the IASB and FASB would result in such an anticlimax. I think it’s fair to state that, for most of the world, that was truly a disappointment. But I was not naïve when I became chair. I did not expect full adoption of IFRS by the U.S. but that there was not even a controlled experiment with voluntary adoption. That was a disappointment.

On the other hand, what many had feared [was that]… as a result of stagnation [of IFRS] in the U.S., [there would be] a strong reverberation in the rest of the world, but that has not really happened. In a country like Japan, which usually follows the policies of the U.S. very closely, IFRS adoption accelerated to a great extent. Currently there’s a 27 percent market cap for IFRS, and that is much more than I expected five years ago. Also, China and India continue to make progress towards IFRS.

Over the past five years, what has surprised you? What did you not expect when you first assumed the chairmanship?

I came to this job as a relative newcomer to accounting. I have enjoyed the technical part more than I ever anticipated, that’s one. And, you know, in many of my speeches I delved into truly technical or philosophical questions around accounting, and I find that truly interesting and intellectually challenging.

More concretely, when I became chairman, I was--I knew--that acceptance of the lease standard would be very tough and there was a lot of resistance against that. The standard still has to be adopted and endorsed in Europe, so let me not play victory too quickly, but I think we defended that proposal so well that when we issued the standard, the general commentary around the world was very positive and it was clear that most constituents really saw this standard as a big improvement in accounting, so that is something that was gratifying.

If you could go back in time five years and start again, what would you do differently?

I don’t think all that much. It sounds a bit arrogant, but we tried to work as strategically as possible. We have new circumstances. We transformed our working methods from the … relationship with the FASB to a more inclusive relationship with standard setters around the world.... We also got almost all the big standards out of the way: revenue recognition, leases, financial instruments and, finally, insurance--that is almost done, so there’s not much really that went wrong except the disappointments I talked about earlier. And over those we didn’t have much influence.

It appears unlikely that the U.S. will ever be an IFRS country. This is a marked contrast to discourse five years ago, where it seemed full adoption was all but certain. What changed, do you think, in that intervening time?

I think, for a long time, for most of the decade the boards were working together for a single set of global standards, everyone saw it as a very lofty goal. But I think it’s a very simple question of push coming to shove, and people in the U.S. getting nervous about not having complete control over their accounting standards. That’s something we see in many countries, not just in the U.S. but the big different is the U.S. is still, by far, the biggest capital market in the world, still economically very powerful. So the idea of pooling some, even in technical areas, sovereignty does not come naturally to the U.S. And so I don’t think much changed except that, when the moment of choice came closer, I think there was simply no readiness to do so.

Despite this, IFRS retains a sizable footprint in the U.S., which may expand further as the SEC is considering allowing domestic companies to use supplemental IFRS information. Do you see the IASB making an active effort to encourage further IFRS use beyond even this? Or is this where the Rubicon lies?

I think you’re right in saying that IFRS is very much important in the U.S.—even though the U.S. has not adopted it, it is an enormous advantage for U.S. preparers with subsidiaries around the world. They can more or less use the same accounting wherever they go. It is a huge advantage for U.S. investors who have a lot money invested in emerging economies and Europe, who can now read financial statements all over the world. So it is a huge American interest, and the SEC has recognized that, and it is for that reason they were very keen to stay an active participant in the system.

But obviously it’s a bit difficult to maneuver for the U.S. in our world when they are not as completely an active participant, so that’s a bit of a difficult situation for American authorities. What can we do? I don’t think there’s much we can do from London, except we will do our best to stay as converged as possible with the FASB. We will do our best to be a reliable partner for American authorities. Ultimately, it’s simply the U.S. that has to make up its mind, and perhaps I don’t see any big change coming in the next couple of years, but you never know. Five years ago, Japan seemed to be going nowhere and now it’s very rapidly adopting IFRS. In a situation where the capital market is no longer 40 percent of the global capital market, [the U.S.] might feel different and maybe if IFRS has consolidated around the world, it might be a different decision for the U.S.

Some convergence projects, such as leases, led to some tensions between the FASB and IASB. Do you feel these differences of opinion were mainly practical in nature, or was there a deeper philosophical difference?

I don’t think there is a deep philosophical difference between the two organizations. I do think when you put a bunch of experts together they will always have differences of mind—I always make the joke that if I were to split my board in two, we’d come to different conclusions too. The difference between the IASB and the FASB is that the FASB is very much influenced by existing American practice in the American markets—for example, the position they took on derivatives where it has been standing practice where derivatives can be netted on the balance sheet. We had a different opinion and at a certain point we converged on the opinion that everything should go on the balance sheet, but it was ultimately American practice that led to the results we achieved. We have a much more diverse set of constituents. We are also, of course, pressured by pressure groups—that happens to all of us—but our constituents are more diverse, so that’s another reason why sometimes the two boards come to different conclusions.

You also sit on the IIRC's governing council. Do you ever anticipate the IASB getting involved in sustainability matters, or do you feel the two realms of financial and sustainability reporting must remain separate?

Well, my hope would be that, in the future, many environmental policies around the world would incorporate it into their financial systems—we’re seeing the beginning of that with what we call pollutant price controls, or emissions trading schemes, and we are in the process of trying to come up with an accounting solution for that. What is practice right now is that often, in the absence of firm policy actions, companies are required to give a lot of disclosures about their environmental policies, and it’s far from a satisfactory situation.

Around financial reporting, we have brought a global standard setter—that’s us—on many issues into convergence with the FASB. In terms of sustainability reporting, there are hundreds of organizations and initiatives working on this, there’s not a beginning of a global sense of direction of a single set of global standards. It’s much more chaotic.

Philosophically you are very much in support of a single set of global standards, as would be expected. Do you feel this same philosophy applies to sustainability reporting as well?

That would be the ideal, but that seems very far away at this moment. It just makes you realize how lucky we are to have achieved what we have achieved with financial reporting. It’s also, of course, much more difficult with sustainability because financial reporting already has a lot of measurement issues, recognition issues; with sustainability, it’s even more difficult! So we try to be a constructive player in this as a member of the IIRC. We talk to the other standards setters to try to come to common conclusions, but there’s still a long way to go.

The IASB is in the middle of analyzing its latest agenda consultation. While stakeholders of all stripes have no doubt weighed in on where the IASB's priorities should lie in the coming years, what do you, yourself, think about this question? Where do you think the IASB should be devoting most of its attention over the next five years?

Well, what is unlikely is that we’ll start another big set of standards changes like leases or revenue that require huge systems changes for preparers. There’s a lot of fatigue among preparers and even investors about all the changes and they want us to take it easy, and I understand that. We think we have covered the main weaknesses in our system, so there’s no immediate urgency for very big projects that turn accounting upside down.

On the other hand, investors tell us that they feel that the financial reporting is often too much of a compliance exercise and that the financial statements tell too little about financial performance, and so they ask us to do more work on that and I think that is where our energy will probably go in the next five years.

So things like presentation, disclosure…

Exactly! That we create a little more order in the income statement, perhaps come up to define ourselves a few more subtotals, so that we don’t leave so much to non-GAAP measures—like, at this point, operating income is a non-GAAP measure. Wouldn’t it be good if IASB came up with a definition? Very hard to do, don’t know if we can, but I think we should make a difference. 

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