01 December 2014

IASB/Hans Hoogervorst: 'Building a credible Capital Markets Union'

Hans Hoogervorst, Chairman of the IASB delivered the opening remarks to the European Parliament Committee for Economic and Monetary Affairs in Brussels on 1 December 2014. 

The financial crisis has made Europe realise that it must reduce its dependence on bank finance. For this reason, the EU wants to create a Capital Markets Union. Through this Capital Markets Union, companies must be given better access to the capital markets.

The capital markets can indeed help in providing more oxygen to credit-starved European businesses. But for capital markets to function well, they need to be properly regulated.

The IASB seeks to bring accountability and transparency to the capital markets. The public interest of the IASB´s job is to help keep markets honest.

In the past, the IASB has fought tough battles to expose hidden costs and liabilities to the sunlight of transparency. Investors now know the full costs of stock options and pension liabilities. Hopefully they will soon have full clarity on the hidden debt behind leases. In all of these cases, vested interests have protested vigorously.

The Commission is currently evaluating the impact of IFRS in the EU. The IASB does not expect this evaluation to say that IFRS is perfect, because it knows it is not. Still, the IASB feels pretty confident that the verdict will be that, overall, IFRS has had a positive impact on the European economy. Mr Hoogervorst explained the grounds of his optimism.

First, IFRS provided the European market in 2005 with a single accounting language. Before the adoption of IFRS, the EU had a myriad of accounting languages. European pension funds and other institutional investors and creditors just had to go and figure it out.

The introduction of IFRS was a game changer in terms of investor protection. IFRS created much needed transparency and comparability for investors in Europe. The national securities regulators, who are now joined in ESMA, could finally start to compare notes and improve enforcement.

The gain for investors was also a gain for companies. They now have a level playing field in accounting. The ability to work with one accounting language throughout Europe is also a big cost saving for companies.

Since the EU set the example of adopting IFRS, most of the rest of the world has followed suit.

114 countries have fully adopted IFRS, while 12 more permit its use. All of Europe, all of Latin America, Canada, and most Asian countries use IFRS.

The use of IFRS is spreading fast among Chinese and Japanese companies. The United States is still holding out, but even there European companies can use IFRS for their listings on the American stock markets.

The spread of IFRS around the world is an enormous benefit for European investors such as pension funds. They need to invest in dynamic emerging markets to generate good returns for their pensioners. Thanks to IFRS they now can understand the financial reporting of Korean, Brazilian and many African companies. For European businesses, IFRS has led to a reduction of costs. It has lowered the cost of capital and has reduced the accounting costs of their foreign subsidiaries.

A large majority of the 114 countries that have adopted IFRS have done so without making any local adaptations. The fact that they have resisted tinkering with IFRS does not mean that they agree with everything the IASB does. But everyone realises that if every country starts making its own adaptations, the benefits of a single set of global standards will simply vanish into thin air.

Except for one, limited, carve-out, Europe has also adopted all of IFRS. This does not mean that the EU has relinquished its sovereignty on accounting standards. Europe does not accept IFRS blindly. Indeed, of all jurisdictions, Europe has by far the most elaborate endorsement procedure, which includes EFRAG, the Commission, the European Council and European Parliament.

Full speech

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