05 February 2014

IASB/Hoogervorst: 'Defining profit or loss and OCI... can it be done?'

"First, we expect to publish our new revenue recognition standard in the next few months. I call this project the ‘jewel in the convergence crown’ as the final standard will be almost identical between IFRS and US GAAP.

The second standard I would like to make some comments about is the leases standard. The leases standard is controversial for several reasons. It is intellectually complex; many companies would like to keep their leases off-balance sheet or they are concerned about implementation costs. Some of these problems we can fix, others will be more challenging.

The third standard that we will shortly finish is financial instruments, IFRS 9. We have already published the chapter on general hedge accounting. Last month we finalised our deliberations on classification and measurement. We have also finished our deliberations on impairment, which will result in the incurred loss model being replaced by a much more forward looking expected loss model.”

Hoogervorst also addressed some of the main topics in IASB´s review of the conceptual framework: “If we accept that Profit or Loss is the primary indicator of performance in a time period, we should be very disciplined in our use of OCI. If we resort to OCI too easily, this would ultimately undermine the credibility of net income and that is something we should avoid at all costs.

From the comment letters it is pretty clear that OCI is another subject that people struggle with. Some aspects of the problem are pretty non-controversial, such as the use of OCI for the fair valuation of Own Credit. This prevents very counter-intuitive results in profit or loss. Likewise, few will challenge the use of OCI as a parking spot for cash flow hedging instruments or foreign currency translation.

But other uses of OCI are much less straightforward. In IFRS9, value changes in strategic equity investments go through OCI. US GAAP will require value changes in all equity investments to go through Profit or Loss. Our OCI-proposals for our upcoming insurance standard are welcomed by many, but insurers in Australia, the UK, Scandinavia and South Africa see it as a step backwards in accounting.

Some respondents, such as the Canadian Accounting Standards Board, told us that we should not even deal with OCI on a conceptual level since they find it unlikely that a sound conceptual basis can be found. These respondents may have a point, but I believe the examples I just gave mean that we are in urgent need for some guidance around this issue. I also hope that a future financial presentation project may produce better ways of presenting income of a more uncertain nature, without having to resort to the use of OCI."

Hoogervorst summed up: "Profit or Loss is an extremely important indicator of financial performance in a time period. To provide sufficient rigour, it should be as inclusive as possible. For that reason, Profit or Loss is necessarily a bit rough around the edges. To protect the integrity of Profit or Loss, we have to be very cautious with OCI, which should only be used as an instrument of last resort. If our ultimate conclusion were to be that OCI is more of an exception than a rule, finding a conceptual basis for it will be very difficult. Obviously, these are personal and very preliminary thoughts, given the fact that the Board still needs to digest the very rich feedback we have received thus far.“

Press release

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