Hans Hoogervorst Addresses Economic and Monetary Affairs (ECON) Committee of the European Parliament
In a recent address to the ECON Committee of European Parliament, the IASB chairman, Hans Hoogervorst, discussed two main topics: the importance of the IASB's relationship with Europe and his observations on the role of accounting standards and the financial crisis. Mr Hoogervorst noted that Europe's adoption of IFRSs in 2005 has led to the IASB becoming the global standard-setter with many countries having followed Europe's by adopting IFRSs. He noted that he is optimistic for a positive decision by the US Securities and Exchange Commission to incorporate IFRSs into US standards, but a negative decision would not stop the progress of IFRS adoption throughout the world, though it would delay it.
In regards to the relationship between accounting standards and the financial crisis, Mr Hoogervorst noted that "in many cases there was insufficient transparency for investors to be fully aware of the risks they were taking". Mr Hoogervorst noted that the accounting profession will need to improve transparency to contribute to the long-term stability of financial markets, and further stated the following:
Transparency does not always paint a pretty picture. Much of the current economic volatility is deep-rooted. The CEO of Deutsche Bank recently said "volatility is the new normality". The days of 'risk-free assets' are long gone, if ever they existed.
If volatility is indeed the new normality, how should accounting standard-setters respond? Should we artificially shield investors from learning of this underlying economic volatility? Or should accountants try to describe, as accurately as possible and with full transparency, this new normality? Most people I speak with believe that financial reporting should tell it how it is, rather than how we would like it to be. If the emperor really has no clothes, then it is the responsibility of financial reporting to say so, no matter how unpopular the truth may be.
There is however one important caveat to this. Asking accountants to describe economic volatility is one thing, but we should be careful that in doing so financial information does not become the source of economic volatility. For that reason the IASB has always remained pragmatic about which measurement techniques to adopt. We know there is no one right answer and therefore we have always employed a mixed measurement approach, combining historic cost with fair value. That is why we have recently completed the reform of our fair value measurement standard that provides new guidance on illiquid markets. It is why we are proceeding with caution in the reform of financial instruments accounting. Our upcoming hedge accounting rules will prevent artificial accounting volatility to companies who hedge their risks. Accounting should not mask volatility, but neither should it be the source of it.