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The Bruce Column — Looking to the future

07 Mar 2012

IASB Chairman, Hans Hoogervorst used a speech in Mexico City as an opportunity to set out the next stages of IFRS development. Robert Bruce, our regular resident columnist, reports on what is likely to happen next.

Clearing the decks, spring cleaning, using a new broom, call it what you like, it is always a gratifying task to undertake. There is a pleasant feeling of having taken an overview, assessed what really needs to be done, and then set about the task with gusto. And this appears to be what Hans Hoogervorst was doing in what was billed as an important speech in Mexico City in early March. He ran through the issues of the moment and indicated that they were all going reasonably well. Then he looked at two specific issues: the way the IASB’s future agenda would look, and the need to look at formalising the IASB’s relationship with standard-setters, regulators and the accounting profession.

First the calm part of the process. He praised Mexico for being a model IFRS citizen. ‘Mexico has become the destination of choice for multinational companies looking to tap into a business-friendly environment, with a highly skilled workforce’, he said and pointed out the value of adopting IFRSs in full and without modification. ‘Business is more efficient when recognised industry standards are adopted’, he said. ‘The same is true of financial reporting’. Mexico will ‘become fully compliant with financial reporting norms used by more than 100 countries, including two-thirds of G20 members’.

Then he started the tidying up process. Convergence projects would be completed ‘in relatively short order’. The work priorities of the first decade of the IASB were largely complete. ‘For the first time in the history of the IASB, we will have a relatively clean slate’, he said. This meant that the new agenda could be planned. Apart from the post-implementation reviews which would have to be carried out ‘everything else is up for grabs’. Hence the emphasis on enhanced consultation and, in particular, with investors. Recognising that this had been difficult in the past extra efforts had been made and ‘as a direct result of this work we received more investor feedback on the agenda consultation than on any other IASB activity to date’.

And what did they want? No surprises here. ‘The most common feedback is a request for a period of stability’, he said. People do want to get used to this new world without always having to change it. ‘Now we have most of the world on board’, he said, ‘even a small change to a standard can be like dropping a pebble into still water. The changes will ripple out and affect tens of thousands of preparers. Investors must become familiar with the new rules. Auditors must learn how to audit them and regulators will need to enforce them’. And he could have added the word ‘consistently’ there.

So in the immediate future it is a case, as Hoogervorst said, of ‘Let’s fix what needs fixing, and no more’. This is sensible. As we all know the idea of perfection in financial reporting will always be an illusion.

So while the future work programme will remain uncertain, it is likely that the IASB will be working on the conceptual framework and sorting out disclosure overload, and, of course, deciding what to do with Other Comprehensive Income, (OCI). From the outset, last July, Hoogervorst made it clear that this was one of his pet projects. And it is clear that he still thinks so. ‘OCI is increasingly used as a home for income of a less than certain nature’, he said. ‘It is true that income reported in OCI should come with a health warning, yet investors ignore OCI at their peril’. There were no easy answers but providing a clearer conceptual definition would help.

That leaves the really big issue for the future – dealing with recommendations from the Trustees’ Strategy Review and the Governance Review of the Monitoring Board. And for Hoogervorst the largest and most important point raised in the context of the IASB was: ‘The need for the IASB to strengthen and formalise its relationships with standard-setters, regulators and the accounting profession’.

The development of IFRS, he suggested, had involved close cooperation with national and regional standard-setters, endorsement of standards around the world, auditors checking the work, and regulators enforcing their use. And up until now all this had been carried out through pretty much an informal dialogue with everyone in this supply chain. But IFRS is now, by virtue of the critical mass of its work and its global reach, in need of something more. ‘It is now time to move from this loose affiliation to a more integrated supply chain based on strengthened and more formalised relationships’, he said.

There are benefits here. The formalisation of this network will, as Hoogervorst made clear, ‘greatly assist our global standard-setting activities by binding-in national and regional standard-setting bodies more closely and earlier on in the standard-setting process’ and ‘it will also provide a more formal mechanism for this input to feed into our standard-setting process’. This, the IASB hopes, will share the burden. Research, field-testing and outreach activities could be shared. Duplication of effort and confusions over endorsement could be mitigated. And, above all, Hoogervorst hopes it would encourage greater consistency in the implementation of IFRS. More communication would mean greater understanding.

But in the end it is the single set of global standards which is the key. And this move to formalising the network would be, as Hoogervorst suggested, ‘the missing piece of the jigsaw of global accounting standards’. ‘This network will provide a forum for securities and audit regulators, the profession and the IASB to discuss ways to improve consistency, and to address areas of divergence’, he said.

It will be interesting to see how the form of this great global network will emerge. There is a downside. It will create a greater reliance on process. The network organisations will inevitably move from advice to a more overtly political function. And the way that the network is organised will further complicate things. Hoogervorst pointed out, for example, that some existing organisations around the world were fully independent bodies while others were simply extensions of the ministry of finance.

But those are problems of detail for the future. Hoogervorst has cleared the decks. ‘I am convinced that establishing this fully integrated supply chain of financial reporting is essential if the promise of global financial reporting standards is to be achieved’, he said. Every project starts with a design. And here is Hoogervorst laying out his design to build his IASB for the future.

 

Robert Bruce
March 2012

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