Hoogervorst reflects on IFRS growth as term nears end at IASB

International Accounting Standards Board chair Hans Hoogervorst is looking back at the growth of International Financial Reporting Standards as his decade running the IASB is set to end this month.

Hoogervorst, a former finance minister from the Netherlands, will be stepping down on June 30 and will be succeeded on July 1 by Andreas Barckow, an accounting professor who has been president of the Accounting Standards Committee of Germany since 2015 (see story). Hoogervorst, who became IASB chair on July 1, 2011, spoke at an IFRS Foundation virtual conference Thursday about how the IASB has strengthened financial reporting requirements by introducing several new IFRS standards — including for revenue recognition, loan losses, leases and insurance contracts — as well as consolidated the ways that companies report around the world. IFRS standards are now required in more than 140 jurisdictions.

“The excitement around IFRS that greeted me 10 years ago has largely dissipated,” said Hoogervorst. “But in this case, the fact that we have become a bit boring is a positive thing. It means that IFRS has firmly established itself as the leading global accounting language. The dream of a single set of global standards has not yet been achieved. But the degree of consolidation that has been achieved is nothing short of astonishing, especially in this time of skepticism about globalization.”

IASB chairman Hans Hoogervorst speaking at an IFRS Foundation conference in Frankfurt, Germany

Courtesy of IFRS Foundation

When Hoogervorst began his term, the IASB and the Financial Accounting Standards Board were in the midst of converging IFRS with U.S.GAAP, but the convergence effort ultimately fell short.

“In the course of 2011 and 2012 the dream of a single-set of global accounting standards gradually faded as the U.S. Securities and Exchange Commission became increasingly hesitant about IFRS-adoption,” he said. “Following the Great Financial Crisis companies were under a lot of pressure everywhere and the SEC felt it could not push through a reform that would generate considerable cost in the short run. The Japanese Minister of Finance also became more cautious after the terrible tsunami of 2011.”

Outside the U.S., however, IFRS has spread widely. “Yet the much-feared dissolution of the world of IFRS did not happen,” said Hoogervorst. “One by one, the IFRS family was joined by individual jurisdictions in Asia and Africa, ultimately reaching a total of more than 140. In Japan, the number of individual companies adopting IFRS Standards grew steadily and before long, more than 50% of the Japanese stock-market will be denominated in IFRS. China has stayed very close, incorporating all the new standards and many Chinese companies are able to state full compliance with IFRS. Importantly, the European Union, which made the dream of IFRS a reality in 2005, was thus far able to resist the temptation of adding carve-ins to our standards.”

Hoogervorst referred to himself as an “accidental accountant” who came to the field from outside. “I am not an accountant by training and many were surprised when I became chair of the International Accounting Standards Board,” he said. “Yet when I was asked in late 2010 if I would be interested in succeeding David Tweedie, I really did not have to think long. The Great Financial Crisis of 2008 had impressed on me the vital interest of solid international economic standards. As chair of the IASB I had a great opportunity to contribute to the infrastructure of the global economy.”

He noted that during his tenure, the IASB has succeeded in improving many accounting standards. “IFRS 9 has improved accounting for loan losses, making it more responsive to changes in the economy,” he said. “IFRS 15 has made revenue recognition more robust and more comparable globally. The quality of the balance sheet has greatly improved with IFRS 16 recognising all lease liabilities.”

He is also looking forward to the new insurance accounting standards that will be taking effect in 2023. “If anyone still needs convincing as to how essential proper global accounting standards are, just look at insurance accounting,” said Hoogervorst. “Currently, there is widespread diversity in income recognition, with some national standards counting even investment deposits as revenue. In many countries, insurance liabilities are still measured using historical interest rates which are no longer relevant in the current low interest rate environment. After 2023, when IFRS 17 will be effective, income recognition will be internationally comparable and much more reliable. The insurance liability will everywhere be measured at current interest rates, reflecting economic reality much more closely.”

He warned about the risks of inflation in the future after all the government stimulus measures around the world over the past year to fend off the economic impact of the COVID-19 pandemic. “Incessant stimulus also has a pernicious influence on economic behavior,” said Hoogervorst. “A generation of investors has grown up expecting authorities to step in whenever markets throw a tantrum. Excessively leveraged business models get bailed out time and again. And I think back to my time as Minister of Finance. My story about not having a money tree might no longer be so convincing when central banks are buying up 50% or more of debt issues. Even in the frugal Netherlands, budget discipline is now under severe pressure.”

Hoogervorst similarly cautioned against accounting gimmicks. “Historical cost accounting, despite its reputation for reliability, is full of subjective estimates, such as the measurement of value in use or the useful life of an asset. Intangible assets, which are increasingly important as value drivers for companies, largely escape the financial statements,” he said. “We cannot explain precisely what Other Comprehensive Income is. While accrual accounting is vastly superior to cash accounting, it can also be vulnerable to earnings management, which is at the root of many accounting scandals.”

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