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Speech by Hans Hoogervorst on profit or loss and OCI

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Feb 05, 2014

At an Accounting Standards Board of Japan (ASBJ) seminar in Tokyo, IASB Chairman Hans Hoogervorst gave a speech entitled "Defining Profit or Loss and OCI... Can It Be Done?" in which he detailed some of the main topics in the IASB's review of the conceptual framework.

Mr. Hoogervorst opened his speech by commenting on the situation in Japan and the relationship between the ASBJ and the IASB. Japanese representatives serve in all levels of the IASB's governance structure and Japan is among the top financial contributors and intellectual contributors to the IASB's work. As before, Mr. Hoogervorst took this as an opportunity to invite Japan to fully embrace IFRSs.

The IASB chairman then turned to the current work program and mentioned that an end is in sight on three major standards many constituents have been waiting for: revenue recognition, leases, and financial instruments. He promised that the new revenue recognition standard would be issued "in the next few months" and that the final standard would be almost identical between IFRSs and U.S. GAAP. Regarding leases, he admitted that the leases standard was controversial and many concerns were being voiced. He added however: "We take these concerns very seriously" and pointed out that the IASB had already made some decisions designed to reduce implementation costs. Lastly, Mr. Hoogervorst noted that the IASB has finalized deliberations on financial instruments classification and measurement impairment.

The main topic of Mr. Hoogervorst's speech was the IASB's work on the conceptual framework. It was very clear from feedback on the IASB's discussion paper published in July 2013 that there is still work to be done on measurement. Although constituents voiced support for the IASB's choice for mixed measurement, they were looking for more in-depth analysis on the different measurement bases and the information they provide.

Turning to the title of his speech, Mr. Hoogervorst admitted that another hotly debated topic in the comment letters was the question of profit or loss versus other comprehensive income (OCI). Many constituents asked the IASB to define profit or loss as an element and to draw a clear distinction with OCI. Yet while many constituents asked for such a definition, very few had suggestions about how that might be achieved. Mr. Hoogervorst pointed to a discussion paper (link to IASB Web site) the ASBJ presented at the meeting of the Accounting Standards Advisory Forum (ASAF) in December 2013. Unfortunately, he indicated, there had been very little consensus among ASAF participants on the details of the paper, yet he described it as "a courageous effort" and "an important contribution to the beginning of the path forward."

The IASB, Mr. Hoogervorst noted, considers profit or loss the "primary source of information about the return an entity has made on its economic resources in a period" and should be as inclusive as possible. He added: "It is absolutely vital that profit or loss contains all information that can be relevant to investors and that nothing of importance gets left out." Yet he also admitted that a broad definition of profit or loss comes at the price of being somewhat rough. As a way out, he suggested accepting that preparers and analysts "may need non-GAAP measures to fine-tune their presentation or assessment of an entity," which he mentioned was acceptable as long as these additional measures build on IFRSs and can be reconciled with the IFRS numbers.

On OCI, Mr. Hoogervorst commented that it was obvious from the comment letters received that many constituents struggled with this subject. It was even suggested that the IASB should not deal with OCI on a conceptual level since it was unlikely that a sound conceptual basis could be found. Stressing that his comments were personal and very preliminary, Mr. Hoogervorst voiced the opinion that profit or loss should be the primary indicator of performance in a time period, and that the IASB should be very disciplined in its use of OCI since resorting to OCI would too easily undermine the credibility of net income; therefore, OCI should only be used as an instrument of last resort. He added the 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."

Please click for the full text of Mr Hoogervorst's speech on the IASB's Web site.

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