This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

IASB chairman discusses the dangers of ignoring unrealized income

  • Speech — dark green Image

Sep 03, 2014

At an IFRS Conference today in Tokyo, IASB Chairman Hans Hoogervorst gave a speech titled, "The Dangers of Ignoring Unrealised Income." He discussed the current use of IFRSs around the world and in Japan, focusing on the recently issued Japanese exposure draft "Japan’s Modified International Standards (JMIS): Accounting Standards Comprising IFRSs and the ASBJ Modifications." He connected the Japanese modifications to the IASB's Conceptual Framework project and the dangers of ignoring unrealized gains and losses.

Mr. Hoogervorst commented that the increase of the voluntary use of IFRSs in Japan was especially encouraging, since Japanese companies have the choice of several sets of standards and would only choose to adopt IFRSs if they thought there was a strong business case. He explained that IFRSs are a cost-effective alternative for companies with subsidiaries because they can apply one single financial reporting language for both internal and external reporting. In addition, the use of IFRSs would make it more attractive to foreign investors to invest in Japanese shares because the financial statements would be prepared in a reporting language they understand.

Mr. Hoogervorst pointed out that following a recommendation by Japan's Business Accounting Council (BAC) regarding the use of IFRSs in Japan, a set of "endorsed IFRSs" called JMIS — offering an additional choice of accounting framework to Japanese companies — has been developed and published as an exposure draft (ED) in July 2014. As JMIS essentially consists of most IFRSs as issued by the IASB combined with two major modifications relating to the treatment of goodwill and recycling of some OCI-items, he connected the modifications to the IASB's Conceptual Framework project and especially the meaning of profit or loss and other comprehensive income (OCI).

Mr. Hoogervorst admitted that (1) the IASB has so far not been able to draw a binary distinction between profit or loss and OCI and (2) he struggled with the ASBJ's definition in the JMIS ED that "profit or loss represents an all-inclusive measure of irreversible outcomes of an entity's business activities in a certain period." Although the IASB agrees that profit or loss should be as comprehensive as possible and the Board has made tentative decisions supporting that understanding, the irreversibility criterion seemed to be "fraught with difficulties" to Mr. Hoogervorst. He explained that a systematic relegation of unrealized income items to OCI could result in a lack of faithful presentation, especially because unrealized income does not only consist of gains, but also consists of losses. Mr. Hoogervorst also added that this approach could be detrimental from a stewardship perspective, since many problems would be confronted much earlier on if they are presented in profit or loss; he argued that the postponement of recognition of losses until they have become irreversible has the big disadvantage of actually becoming irreversible. He therefore concluded:

I would conclude that a systematic relegation of unrealised profits or losses to OCI is extremely problematical. Moreover, where OCI is used to capture short-term 'market volatility' of long-term assets or liabilities, the information it contains should not be ignored. While income in OCI may be of a less certain nature than income captured in Profit or Loss, OCI may contain indicators of risk that may materialise sooner than you think. Clearly, ignoring unrealised elements of income may be hazardous to your financial health.

The full text of Mr. Hoogervorst's speech is available on the IASB's Web site.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.