IASB Chairman doubts we are ready for the next crisis but sees great improvements in financial reporting

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12 Dec 2018

At the 2018 AICPA Conference on Current SEC and PCAOB Developments, IASB Chairman Hans Hoogervorst gave a thoughtful speech that looked at lessons learned from the global financial crisis, sketched the enormous risks in the global economy and admitted doubt as to whether the financial system as a whole is ready for the next financial crisis.

Mr Hoogervorst began his speech by outlining the global situation financial situation regarding global debt, interest rates and the debt trap as well as the capitalisation of the banking system. Against that backdrop, he analysed whether accounting standards are fit for purpose in a possible new financial crisis.

Mr Hoogervorst first turned to IFRS 9 and the expected loss models the IASB and the FASB have developed. He commented on the fear that IFRS 9 would lead to overreaction as economic expectations might be overly pessimistic during a recession, which might strengthen the downward turn of the economic cycle. However, he believed those fears not to be justified for three reasons:

  • The fact that IFRS 9 leads to a much quicker crystallisation of loan losses should have a preventative effect.
  • Timely loan loss recognition should contribute to limiting imprudent dividend distribution and remuneration policies.
  • Quick loan loss recognition should lead to timely clean-up of banks’ balance sheets, which in turn will contribute to much quicker restoration of credit flows to healthy companies.

Mr Hoogervorst then turned to IFRS 17 and its contributions to financial stability. The slides that supported the speech noted six of these:

  • Insurance liabilities properly measured
  • Transparent costs of options and guarantees
  • Updated information on risk margins
  • Immediate recognition of onerous contracts
  • End of up-front profit taking
  • Less earnings management

Finally, Mr Hoogervorst turned to goodwill and the risk that goodwill just keeps on accumulating over time even when the economics do not justify this. He did not believe that the accounting for goodwill poses a significant risk in terms of triggering a financial crisis, however, he noted that in the next financial crisis, a lot of goodwill that has been building up since the last one would be impaired all at once, which might add to unrest in the capital markets. Mr Hoogervorst pointed out the discussion paper on this topic the IASB plans to publish that will present some new approaches to goodwill. The paper will look at is whether it will be possible to improve disclosures that will help investors to judge whether an acquisition has been successful, will consider a disclosure that shows what a company’s balance sheet will look like without goodwill, and include a discussion on the reintroduction of amortisation of goodwill.

Mr Hoogervorst closed his speech noting that he was not sure whether the financial system as a whole is ready for the next financial crisis. However, he added: "What I am sure of is that the recent improvements in our accounting standards will provide much more transparency that will help investors and regulators identify risks at a much earlier stage. That is the best contribution that accounting can give to financial stability."

Please click for the full text of the speech (with slides embedded) on the IASB website.

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