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In regard to the IASB's future agenda, Mr Hoogervorst said: “First, there is almost universal support for completing revisions to our conceptual framework. This framework serves as a point of reference for the IASB’s decision-making. Where choices are not clear-cut, the framework serves to encourage the IASB to make decisions that are consistent across the standards. The framework is also an important reference for companies when applying principle-based standards. We already have a framework that works reasonably well. However, areas such as Measurement are still less than perfect, to put it mildly. It is easy to understand why this is the case. After all, measurement is the most judgemental, difficult and politicised part of accounting. We need to bring more rigour and clarity here, but it will be an extremely arduous task which will require a lot of brainpower and courage.”
Mr Hoogervorst analysed Other Comprehensive Income (OCI): “In the past year I have witnessed many heated discussions on this subject. It struck me that those who are the biggest fans of the P&L (profit and loss) often want to put as much as possible in OCI. That is, as long as it can be recycled to earnings in due time, of course. It is impossible for me to anticipate at this time what the outcome of these deliberations will be. All I can say at this time is that the juxtaposition of the P&L and OCI often seems counterproductive to me. I do not think it is right to regard OCI as a largely irrelevant number which should preferably be buried in the notes. True, Other Comprehensive Income is often of a less certain nature than Profit or Loss. But that does not make OCI meaningless. Especially for financial institutions with large balance sheets, OCI can contain very important information. It can give indications of the quality of the balance sheet. It is very important for investors to know what gains or losses are sitting in the balance sheet, even if they have not been realised. OCI can give information on duration mismatches between assets and liabilities; it can signal sensitivity to interest rate fluctuations.
"Since controlling the volatility of the balance sheet is a core task of the management of financial institutions, OCI can indeed be a very important performance indicator.
"While providing a clearer conceptual definition of OCI we will also have to tackle the thorny issue of recycling. Around the world there are many supporters of recycling. The main argument for recycling of OCI is that it ensures that the total amount of profit or loss will ultimately be equal to the total amount of cash flows.
It is a pretty powerful argument. Still, the IASB has never been very enthusiastic about recycling. One of the main reasons for our reluctance is the scope for earnings management in the timing of realising gains and losses. That is why investors often demand to see profit or loss before recycling where recycling is permitted. They know recycling has the potential of clouding the true performance of an entity.”