“So we have set out to clarify the materiality concept and how to use it. By adjusting IAS 1 (the standard that sets out the guidelines for presenting financial statements), we have made it much clearer that if something is not material, not only do you not need to include it in the financial statement – it is actually better not to do so.”
The IASB is also working on a materiality “practice statement” to make it easier for preparers to avoid clutter, streamline their financial statements and enhance the effectiveness of their disclosures. “That’s beneficial both for preparers and for investors,” Hoogervorst notes, adding that work to simplify and streamline financial statements will continue as part of Better Communication.
The technical challenge
The next few years will see the IASB focus on achieving a clearer format for income statements, something that will inevitably involve a more proactive approach to technology. Hoogervorst acknowledges that this may be overdue.
“We do recognize that, given the changing nature of the consumption and dispersion of financial information, we have to adjust as well,” he says, pointing out that developments in technology – not only data mining and analytics, but also the coming wave of cognitive computing and artificial intelligence – make accounting standards even more critical.
“I am not worried about the relevance of the IFRS statements; they continue to be the anchor for most investors,” he says. “But you do see concern about disclosure overload and the voluminous nature of financial statements. You also see concern about the proliferation of non-GAAP measures, and you see that a lot of investors think the financial statements do not depict the financial performance of a company sufficiently clearly.”
To illustrate that concern, Hoogervorst recalls a recent speech he delivered in Washington, DC, on the impact of the new insurance standard, which has given rise to the situation where the same company can give wildly differing financial statements depending on which GAAP it uses. “I said that technology is great, but all the artificial intelligence in the world could not figure that out. So the need for solid accounting standards remains essential.”
The insurance standard
Hoogervorst identifies completing work on the insurance standard as the IASB’s most important task in the short term: an effort that (speaking in December 2016) he expected to intensify in the early months of 2017.
“We are close to the finish line,” he says. “Our staff have already written a draft and refined that further. We made some more last-minute refinements in November, but we are ready to finish and publish the standard in the next few months.”
However, Hoogervorst doesn’t expect the hard work to end there. “I’m not sure if the endorsement of the new standard will happen within a year, and I know that it’s going to be a rough ride, because all insurance companies will have to change their accounting; that often means that you also have to adapt your business model a little bit, so there could be last-minute hiccups. But I am optimistic, because the necessity is so obvious that I cannot imagine that, for example, Europe will say: ‘This is too big a change. Let’s leave it as it is.’”
A similar determination has driven the work behind IFRS 16, the leases standard. While many feel the reforms are overdue, it is a project that has caused consternation in certain quarters, with some observers fearing a raft of unintended consequences. Earlier in 2016, reports suggested the new standard would bring US$2.8t back onto corporate balance sheets.
The accounting advantage of leases will disappear (at least in the sense that companies will no longer be allowed to keep leases off the balance sheet), as will the difference between operating leases and finance leases. However, Hoogervorst insists that the intention of the standard is not to dissuade companies from considering leases as a financing option – far from it.
“I think it will lead companies to make better decisions,” he explains. “I don’t think leasing is going to disappear at all, because leases have the huge advantage of removing the risk of ultimate ownership. And you have a lot more flexibility, although it is usually more expensive than simply buying and financing.
“Whereas in the past, people would perhaps go for the more expensive solution simply because the balance sheets would look a little bit better, that advantage will disappear and they will make better economic decisions,” he continues. “It will not mean a huge shift from leases to buying, but there will definitely be some shift.”
Beyond the numbers
Of course, long-term value creation is not entirely confined to financial growth. Nonfinancial measures have gained currency in the past decade as sustainability concerns, risk reporting and scrutiny of corporate governance have risen up the agenda. While some market observers (and preparers) have chosen to cast the issue as an either-or question, Hoogervorst views the integration of nonfinancial measures as a vital part of the bigger picture.
“Nonfinancial information has always been important, and is gaining in importance at the moment, so we do not see that as a problem or as competition,” he says. “In fact, we see that as complementary to the statements and we take a constructive approach.”