Week#2 “New IASB Leader Embraces Challenges”

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F I N A N C I A L R E P O R T I N G / I N T E R N A T I O N A L

New IASB Leader Embraces

Challenges A n interview with Chairman Hans Hoogervorst

by Matthew G. Lamoreaux

W ith more than 100 countries already using IFRS, a full stan- dard-setting agenda and the SEC poised to decide in the coming months whether U.S. public companies will report

under intemational standards, Hans Hoogervorst knows his challenges.

But the second chairman of the Interna- tional Accounting Standards Board (IASB) is no stranger to challenging financial lead- ership positions and public service. Most recently he served as chairman of the ex- ecutive board of the Netherlands' Author- ity for the Financial Markets (a regulator comparable to the SEC in the U.S. but with broader authorities) and chaired the Inter- national Organization of Securities Com- missions' (IOSCO) technical committee.

Before taking the reins of the decade- old intemational standard setter in July,

Hoogervorst had extensive involvement with the board as co-chair of its Financial Crisis Advisory Group and chair of the IFRS Foundation Monitoring Board, whose membership is made up of finan- cial market regulators including SFC Chairman Mary Schapiro.

Between 1998 and 2007 he held a number of positions in the Dutch gov- ernment, including minister of finance, minister of health, welfare and sport, and state secretary for social affairs. He also spent three years as a banking officer for

the National Bank of Washington in Washington.

CHALLENGES Despite the adoption of IFRS by dozens of countries (including all members of the European Union), the U.S. and some other key economic powers such as India and Japan have not yet fully adopted interna- tional standards.

"If we get all those countries on board ... then IFRS will be truly a global stan- dard, and 1 think there's a great chance of achieving that in the next couple of years," Hoogervorst said. "What 1 would see as the second and related challenge is to achieve consolidation of all the progress that has been made in the last decade."

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This consolidation of progress, he said, involves strengthening the lASB as an or- ganization and improving its standards. "I think that we need to strengthen the in- frastructure of the organization, the sense of ownership around the world and rela- tionships with other authorities with re- sponsibility for elements of the global financial system."

"If you look at it carefully, I think it is very clear that the SEC is still very much on track for a decision on IFRS later this year, and I believe it will be a positive po- sition, and everything is pointing in that direction."

He also pointed out that the SEC staff's concept of establishing FASB as an en- dorsement body for IASB standards in the

"It is very clear that the SEC is still very much on r̂̂ ^k for n decision on IFRS later this year."

—Hans Hoogervorst

On standard setting, Hoogervorst said, the focus needs to be on reducing com- plexity and improving consistency. "1 think that whatever our future agenda is going to look like, we'll need to work on the con- ceptual framework to improve the consis- tency of the underlying philosophy of our standards."

POLITICAL VERSUS TECHNICAL Although he's not an accountant, Hooger- vorst doesn't plan to shy away from tech- nical issues. "I don't think it is possible to split the policy from the technical," he said. "I cannot lead this organization if I don't get on top of the standards ... and I look forward to that, because I find it intellec- tually very challenging to do."

He does, however, intend to make full use of Vice-Chairman Ian Mackintosh, who also joined the board in July after heading the U.K. Accounting Standards Board.

"We have so much work ahead of us, it is more than one person at the top can do, especially the extent of the global out- reach that we have to do," he said. "So I will share that with Ian, and also the in- ternal management of our organization."

SEC's IFRS TRANSITION FRAMEWORK On the so-called "condorsement" approach to IFRS transition floated by the SEC staff in May (see "Beyond Convergence," Jo/A, Aug. 2011, page 46), Hoogervorst re- sponded positively

U.S. "is not all that different from how other countries adopt IFRS."

Hoogervorst does see potential objec- tions to the approach based on its com- plexity but said "it will work itself out in practice."

US. ADOPTION "OPTION" On U.S. adoption of IFRS, Hoogervorst ac- knowledges that all U.S. public companies may not be ready for it. "I have no inside knowledge, but if 1 was the SEC, I would start with the larger U.S. companies, par- ticularly those who are internationally ori- entated. If that means providing an option for those companies to voluntarily adopt at an earlier stage, I think then we would al- ready have gained a lot. This would provide the necessary momentum for the remaining listed companies to adopt at a later stage."

Hoogervorst made it clear that he be- Heves that most U.S. companies want the SEC to mandate a clear time frame for the bigger companies and the possibility of voluntary adoption. On the question of whether the SEC simply giving U.S. pub- lic companies the option to adopt IFRS without a mandate would be a step in the right direction, he was unequivocal.

"That would be very positive indeed, because we know that a lot of interna- tional-orientated companies would like to have that option, and once they have crossed the bridge, others will follow. It's not sufficient in the medium to long term, but it would be a very good beginning."

PREPARING EOR ADOPTION Hoogervorst said the main lesson learned from other IFRS adoptions around the world is that "everybody can do it." "If you look at the Americas, Argentina, Brazil, Canada, Chile, Ecuador, Mexico are all switching to IERS. These are major trading partners with the United States, and in the case of Brazil one of the major economies now driving global growth. Businesses can deal with the transitional arrangements given sufficient time and a clear and unambiguous decision."

"If you give them clarity, clear dates, a clear commitment, they will get the job done," he said.

Not to miss an opportunity to promote the benefits of IFRS, "what you would ex- pect intuitively," he added, "is that aca- demic research has demonstrated that yes, indeed, because of increased comparabil- ity, increased reliability of accounting stan- dards, the cost of capital has come down in countries adopting IFRS, and that even goes for advanced economies with well- developed accounting standards, such as the United Kingdom."

RISK OF NONCOMMITTAL U.S. When asked what would happen if the U.S. did not commit to using IFRS, Hoogervorst appeared genuinely sur- prised. "You know, it is truly hard to imag- ine," he said. "What is clear is that there's only one set of accounting standards that has a chance to become the global lan- guage, and that is IFRS."

He believes an SEC decision this year against incorporating IFRS would simply delay the inevitable and reduce U.S. in- volvement in the IFRS due process.

"Suppose there was a truly negative de- cision at the end of the year, it is highly un- likely that we would have the international support for a new convergence program or the very close, almost exclusive relation- ship we have with the FASB at this mo- ment," he said. "That would all end."

"I simply don't think it's in the Ameri- can interest for that to happen. It's not in the interest of FASB for that to happen. It's not in the interest of the U.S. business

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community for that to happen. ... The United States has always been a leader in intemational financial reporting. For decades, U.S. GAAP was the gold standard of financial reporting. For the last decade, the U.S. has been highly influential in the development of IFRS. Why would the U.S. choose to give up this leadership position, especially given the nine years' worth of ef- fort that has already been put into bdng- ing IFRS and U.S. GAAP into alignment?"

XBRL Citing positive feedback from the investor community, Hoogervorst supports the IFRS Foundation's commitment to ad- vancing XBRL technology, but he cautions that XBRL needs to be kept in perspective as a technical tool.

"Investors say, 'Yes, it is a very useful tool. Please go on with your activities in this respect. But please make sure that it remains a technical tool and that it does not determine the direction of your stan- dard setting.' "

"So our standard setting should not be ddven by XBRL, but the other way around.

tion is working to improve the IFRS XBRL taxonomy so that it's easier to use and also eventually will allow XBRL filings of IFRS financial statements via the SEG's elec- tronic filing system.

"I know it's still currently not yet pos- sible for the SFG to accept XBRL filings in IFRS, and for that reason, both the XBRL

"Both the XBRL teams at the SEC and our Foundation are in frequent contact to make

that the IFRS taxonomy does meet SFC expectation*-̂ "

And if we keep that order, then I think it is a very useful technical tool."

To that end, he said the IFRS Founda-

AICPA RESOURCES

JofA articles • "Beyond Convergence" Aug. 2011, page 46

• "Convergence Milestone," Aug. 2010, page 26 • "Technology Considerations for Convert- ing to IFRS," April 2010, page 26

• "IFRS for SMEs-U.S. GAAP Comparison Tool Available Online," April 2010, page 30

• "Countdown to Convergence," March 2010, page 24

Use journalofaccountancy.com to find past articles. In the search box, click "Open Advanced Search" and then search by title.

JofA videos • "Sir David Tweedie: The Role of the U.S. in IFRS" • "IFRS Update: What the Nevi/ Timeline Means for CPAs"

• "Paul Volcker on the Impact of IFRS Adoption in Global Capital Markets"

Use journalofaccountancy.com to find videos. Click on the "Video" tab, then scroll down the right rail of the video player to find recent videos. To find older videos, click fhe video player's "Archived Videos" tab.

Publication • IFRS Accounting Trends & Techniques (#0099110, paperback; #WIF-XX, online subscription)

CPE self-study

• IFRS Certificate Program (#159770)

Conference

• AICPA/IFRS Foundation Conference on

IFRS: The North American Perspective,

Ocf. 5-7, Boston

For more information or to register or make

a purchase, go to cpa2biz.com or call the Institute at 888-777-7077

On-Site Training

• IFRS Essentials wifh GAAP Comparison: Building a Solid Foundation (#IFRS)

• IFRS Update and Review of Complex

Topics (#IUP)

• Introduction to IFRS: Grasping the Big Picture (#CL4IUSA)

To access courses, go to aicpalearning.org and click on "AICPA On-Sife Training," then

search by "Acronym Index." If you need

assistance, please contact a training

representative at 800-634-6780 (option 1).

Website

• IFRS Resources from the AICPA,

ifrs.com

OTHER RESOURCES

Website • SEC's IFRS Work Plan, tinyurl.com/356rwmn

teams at the SFC and our Foundation are in frequent contact to make sure that the IFRS taxonomy does meet SFC expecta- tions," he said.

RESPONDING TO CRITICS Hoogervorst responded to a U.K. House of Lords report in March that suggested IFRS was conducive to "box ticking" and imprudence during the financial cdsis.

"If you look at how IFRS held up dur- ing the financial crisis, I think you can draw two conclusions," he said. "First of all, in terms of box ticking, 1 think that the principle-based approach of IFRSs held up well.

"In terms of prudence, I think we learned one lesson from the cdsis, which is that the incurred loss model resulted in a cliff effect that discouraged banks to begin impaidng when they should have.

"Both the L^SB and the FASB accept we have to develop an expected loss model which is more forward-looking, and you might want to call that a little bit more pru- dent than what we have now. Although I know that the term prudence is a very sen- sitive term, I believe that, you know, if you cannot be sure, it's better to be safe." •••

Matthew G. Lamoreaux ([email protected])

is a freelance writer.

To comment on this artide or to suggest an idea

for another article, contact Kim Nilsen, executive

editor, at [email protected] or 919-402-4048.

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