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Hoogervorst, Watchman, Nooteboom heard in European Parliament on IFRS 9

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13 Jul 2016

The monthly slot for scrutiny of delegated acts and implementing measures of the Committee on Economic and Monetary Affairs (ECON) of the European Parliament today focused on IFRS 9. Experts heard were IASB Chairman Hans Hoogervorst, EFRAG TEG Chairman Andrew Watchman, and Erik Nooteboom, Acting Director Investment and Company reporting, DG FISMA, European Commission.

Each of the experts made an opening statement.

Mr Hoogervorst noted the expected loss model as the key aspect of the new financial instruments standard. He stated that it allowed for a more timely and more continuous recognition of losses and thus avoided major disruptions at a later point of time. He voiced the belief that IFRS 9 will contribute to economic growth. Mr Hoogervorst also commented on the different effective dates of IFRS 9 and the new standard on insurance contracts. He notes that pure insurance companies can defer the application of IFRS 9 while conglomerates have the option of making adjustments to profit and loss. He stated that the IASB wanted to avoid having two standards applied in the same company as this would be too confusing to investors.

Mr Watchman confirmed the EFRAG endorsement advice regarding IFRS 9 noting that meeting the condition for endorsement was always a threshhold and would not necessarily mean that EFRAG agreed with all aspects of the standard. He also pointed at the fact that the endorsement advice included a qualitative impact assessment; for a quantitative impact assessment there were not enough data yet. Mr Watchman noted that the EFRAG endorsement advice was subject to the IASB solving the issue of the different effective dates of IFRS 9 and the new standard on insurance contracts but noted that the IASB was working on a solution that would include most (although not all) of the suggestions EFRAG made.

Mr Nooteboom stressed the major improvements that IFRS 9 would bring compared to IAS 39 and noted the positive ARC vote on 27 June. He also commented on the different effective dates of IFRS 9 and the new standard on insurance contracts and noted that the EU Commission is currently collecting data on the claim that bank insurers would be at a competitive disadvantage as a result of the deferral option not being available below group level. The Commission would come to a conclusion on this and if it found that the claims were true would act at EU level with a complimentary EU solution.

Questions from the ECON members were to a large part measured and solution focused. They especially asked after the claim that IFRS 9 would introduce more fair value measurement that for some is connected with a fear of stronger procyclicality, the effects on long-term investment, better impact assessments, and questions around the complexity of IFRS 9.

The experts replied that although the somewhat different classification in IFRS 9 in comparison to IAS 39 might lead to more assets measured at fair value it was not really a game changer and depended on the business model - some early adopters had actually reported less assets measured at fair value. On the aspect of long-term investment two points were noted: (1) even long-term investors might want to see real time truth and not just effects smoothed over and (2) IFRS 9 would not bring more volatility, rather, it would spread the volatility over time and avoid peaks of volatility as during the financial crisis. All parties agreed that quantitative impact analysis before an accounting standard has been implemented is impossible. However, they also stated that they all would watch the impacts of IFRS 9 adoption closely and (re)act if necessary. Finally, on complexity, the experts stated (1) complexity in the standard had actually reduced in some areas and the area where it was increased was very much worth it (impairment) and (2) complexity stemmed from the transactions dealt with and the economic reality, not from standard-setting itself. Mr Watchman cited Albert Einstein: "Make things as simple as possible, but not simpler."

A recording of the session is already available here on the European Parliament website (scrutiny slot begins at 11:29:00).

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