IASB's Hoogervorst: IASB Chairman spoke at the 6th Symposium on Accounting Research

13 December 2016

IASB Chairman Hans Hoogervorst cautioned against seductive arguments for greater stability in reported financial performance.

Mr Hoogervorst said: “Let me make clear that the assumption that the IASB believes in the efficient market hypothesis is completely mistaken. We are not market fundamentalists. We are pragmatic! The vast majority of our accounting standards are cost-based, and in our Conceptual Framework, we have made it perfectly clear that we do not see fair value accounting as the default mode. At the same time, I firmly believe that cost-based accounting is inadequate for reflecting the performance of long-term equity investments. Quite the opposite— the longer term an investment, the less relevant its original price becomes. I fail to see how investors would benefit from a balance sheet that shows the original price of an equity investment acquired 20 years ago. Furthermore, cost accounting for equity investments leads to all sorts of problems. The biggest problem is when to recognise losses. Under IAS 39, many preparers recognise losses very late. We know that many companies only recognise losses on equity investments when they lose 40–50 per cent of their value. That does not reflect the true performance of a company and is certainly not prudent!“

Mr Hoogervorst recognised that market-based valuations of equity can lead to more short-term volatility in the information reported in financial statements. But the IASB believes that this volatility reflects the risks associated with such investments. Presenting these equities at cost does not make the volatility go away.

Full speech

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