With more than 100 countries already using IFRS, a full standard-setting agenda and the SEC poised to decide in the coming months whether U.S. public companies will report under international standards, Hans Hoogervorst knows his challenges.
But the second chairman of the International Accounting Standards Board (IASB) is no stranger to challenging financial leadership positions and public service. Most recently he served as chairman of the executive board of the Netherlands’ Authority for the Financial Markets (a regulator comparable to the SEC in the U.S. but with broader authorities) and chaired the International Organization of Securities Commissions’ (IOSCO) technical committee.
Before taking the reins of the decade-old international 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 financial market regulators including SEC Chairman Mary Schapiro.
Between 1998 and 2007 he held a number of positions in the Dutch government, 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.
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 international standards.
“If we get all those countries on board … then IFRS will be truly a global standard, and I think there’s a great chance of achieving that in the next couple of years,” Hoogervorst said. “What I would see as the second and related challenge is to achieve consolidation of all the progress that has been made in the last decade.”
This consolidation of progress, he said, involves strengthening the IASB as an organization and improving its standards. “I think that we need to strengthen the infrastructure of the organization, the sense of ownership around the world and relationships with other authorities with responsibility for elements of the global financial system.”
On standard setting, Hoogervorst said, the focus needs to be on reducing complexity and improving consistency. “I think that whatever our future agenda is going to look like, we’ll need to work on the conceptual framework to improve the consistency of the underlying philosophy of our standards.”
POLITICAL VERSUS TECHNICAL
Although he’s not an accountant, Hoogervorst doesn’t plan to shy away from technical 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 intellectually 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 outreach that we have to do,” he said. “So I will share that with Ian, and also the internal 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,” JofA, Aug. 2011, page 46), Hoogervorst responded positively.
“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 position, and everything is pointing in that direction.”
He also pointed out that the SEC staff’s concept of establishing FASB as an endorsement body for IASB standards in the U.S. “is not all that different from how other countries adopt IFRS.”
Hoogervorst does see potential objections to the approach based on its complexity but said “it will work itself out in practice.”
U.S. ADOPTION “OPTION”
On U.S. adoption of IFRS, Hoogervorst acknowledges that all U.S. public companies may not be ready for it. “I have no inside knowledge, but if I was the SEC, I would start with the larger U.S. companies, particularly those who are internationally orientated. If that means providing an option for those companies to voluntarily adopt at an earlier stage, I think then we would already 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 believes 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. public 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 international- 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 FOR 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 IFRS. 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 expect intuitively,” he added, “is that academic research has demonstrated that yes, indeed, because of increased comparability, increased reliability of accounting standards, 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 surprised. “You know, it is truly hard to imagine,” he said. “What is clear is that there’s only one set of accounting standards that has a chance to become the global language, and that is IFRS.”
He believes an SEC decision this year against incorporating IFRS would simply delay the inevitable and reduce U.S. involvement in the IFRS due process.
“Suppose there was a truly negative decision at the end of the year, it is highly unlikely that we would have the international support for a new convergence program or the very close, almost exclusive relationship we have with the FASB at this moment,” he said. “That would all end.”
“I simply don’t think it’s in the American 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 community for that to happen. … The United States has always been a leader in international 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 effort that has already been put into bringing IFRS and U.S. GAAP into alignment?”
Citing positive feedback from the investor community, Hoogervorst supports the IFRS Foundation’s commitment to advancing 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 standard setting.’ ”
“So our standard setting should not be driven by XBRL, but the other way around. And if we keep that order, then I think it is a very useful technical tool.”
To that end, he said the IFRS Foundation 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 SEC’s electronic filing system.
“ I know it’s still currently not yet possible for the SEC to accept XBRL filings in IFRS, and for that reason, both the XBRL teams at the SEC and our Foundation are in frequent contact to make sure that the IFRS taxonomy does meet SEC expectations,” 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 crisis.
“If you look at how IFRS held up during the financial crisis, I think you can draw two conclusions,” he said. “First of all, in terms of box ticking, I think that the principle-based approach of IFRSs held up well.
“In terms of prudence, I think we learned one lesson from the crisis, which is that the incurred loss model resulted in a cliff effect that discouraged banks to begin impairing when they should have.
“Both the IASB 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 prudent than what we have now. Although I know that the term prudence is a very sensitive term, I believe that, you know, if you cannot be sure, it’s better to be safe.”
Matthew G. Lamoreaux ( email@example.com) is a freelance writer.
To comment on this article or to suggest an idea for another article, contact Kim Nilsen, executive editor, at firstname.lastname@example.org or 919-402-4048.
- “Beyond Convergence,” Aug. 2011, page 46
- “Convergence Milestone,” Aug. 2010, page 26
- “Technology Considerations for Converting 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
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