03 October 2011

IASB: Hans Hoogervorst addresses ECON Committee of European Parliament

In regards to the IASB's relationship with Europe, Mr Hoogervorst mentioned that the relationship between Europe and the IASB is strategically important. Europe invested a great deal of political and financial capital in its decision to adopt IFRSs in 2005. Europe's decision placed the IASB firmly on the path to becoming a global standard-setter. The Parliament also called for IFRSs to become the globally-accepted language of financial reporting. This call has been heeded by many. More and more countries have chosen to follow Europe's lead and adopt IFRSs. In the Americas, almost all of Latin America and Canada are fully on board. In Asia-Oceania, Australia, New Zealand, Korea, Hong Kong and Singapore are, or will be, full adopters. Japan already permits some domestic companies to report using IFRSs, while China is on the path to convergence. South Africa and Israel are fully on board. In Europe, outside the EU, Turkey has adopted the standards in full, and Russia is in the process of doing so. The majority of the G20 members are IFRS adopters.

The US Securities and Exchange Commission (SEC) will decide shortly whether to incorporate IFRSs into its own financial reporting regime and, if so, how. Mr Hoogervorst is optimistic about the prospects for a positive decision from the SEC. A negative decision would be a tremendous disappointment after so many years of convergence work. Such a decision, however unlikely, would delay progress, but it would not stop it. The momentum behind adoption of IFRSs is now too powerful, and too important to be rolled back.

The IASB has developed strong relationships with EFRAG and the Commission. The IASB consults with European national standard-setting organisations across the Member States, and seeks input from European investor and preparer representative groups and others as part of its standard-setting activities.

The crisis was caused by a collapse of business standards and a failure of macro-economic policies. Failures in regulation allowed the resulting huge risks to grow unnoticed until it was too late. In many cases there was insufficient transparency for investors to be fully aware of the risks they were taking. Transparency is what gets accounting standard-setters out of bed in the morning. The highest levels of transparency allow users of financial statements to peer into the darkest corners of a company's financial position. Transparency is the single biggest contribution the accounting profession can make to the long-term stability of financial markets. It is a necessary precondition to long-term financial stability. Without it, measures to provide financial stability offer little more than a façade, allowing risks to grow unnoticed until it is too late to deal with them.

Transparency does not always paint a pretty picture. Much of the current economic volatility is deep-rooted. The IASB has always remained pragmatic about which measurement techniques to adopt. The IASB knows there is no one right answer, and therefore the IASB has always employed a mixed measurement approach, combining historic cost with fair value. That is why the IASB has recently completed the reform of fair value measurement standard that provides new guidance on illiquid markets. It is why the IASB is proceeding with caution in the reform of financial instruments accounting. The IASB's upcoming hedge accounting rules will prevent artificial accounting volatility to companies who hedge their risks. Accounting should not mask volatility, but neither should it be the source of it.

Mr Hoogervorst concluded by saying that the IASB will continue to work in close cooperation with European stakeholders, including the Commission and the Parliament. The IASB will seek opportunities to deepen its engagement with the European Parliament ECON Committee, and to play its part in reinforcing investor confidence in financial markets.

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