Accounting supremo Hans Hoogervorst on new rules and what to expect next
The International Accounting Standard Board aims to be more proactive in helping people implement new standards
Chairperson of the International Accounting Standards Board (IASB), Hans Hoogervorst, who oversees the development and implementation of International Financial Reporting Standards (IFRS) in 140 countries, visited SA this week.
We quizzed him on the effect of new standards that have been introduced, what is still to come and the challenges facing auditors.
From a banking perspective, it appears the adoption of IFRS 9 represents a change for banks in terms of raising provisions for bad debts?
During the financial crisis, the existing standard was based on an incurred loss model. Losses could only be recognised when there was really strong evidence that they had occurred. The feeling was that it gave banks too much leeway to pretend that there were not too many problems on their balance sheets.
Investors felt the banks could postpone inevitable losses for much longer than was acceptable, and they began to lose trust in what was represented on the balance sheet. So we felt we needed a standard that was more forward-looking, and would require banks to recognise losses at a much earlier stage, and that is what IFRS 9 has done. It also has a preventative effect because it makes the bank much more sensitive to its credit systems. So we believe it is a standard that will improve the quality of credit management.
So banks have to be much more pre-emptive in accounting for losses, for example where poor economic conditions prevail?
Exactly. With the old standards you might wait and see a little bit, but in the new standard you will have to recognise the uncomfortable truth much more quickly.
The adoption has been slightly negative on the results reported by South African banks in 2018. Is this the case internationally?
Yes, almost all banks have taken a slight hit to their capital reserves because they immediately had to start recognising more losses than they did under the old standard.
What other significant new standards are to be implemented in the near future?
In 2019 IFRS 16 will become effective, which requires companies to practically put all leases on the balance sheet. That can be very important for airlines that typically lease airplanes. More generally in the retail industry, there are many department stores that lease their buildings over very long periods. All those liabilities will have to be put on the balance sheet. So in industries where leases are very prevalent, this will give a better picture of their balance sheet, not necessarily more pleasant, but a more realistic picture of the balance sheet.
In the future we don’t foresee many new ground-breaking standards that will introduce major change. Companies need a bit of a break!
You have indicated you will look at the presentation of financial statements.
Yes, we want to look specifically at how information in the income statement is presented. We have a project under way in which we are trying to find definitions for things like "operating income", EBIT [earnings before interest and tax], subtotals that are very commonly used in the market but everyone has their own definition because IFRS doesn’t provide one.
This is very important for investors because these terms are frequently used. But there is no comparability because everyone does their own thing. So we are going to focus on these types of questions moving forward, no big change, just rearranging the information going forward which I think will be of benefit to investors.
You have seen some of the problems of implementing standards as is evident from the challenges in the audit industry. What is the relationship between the IASB and the audit profession?
Firstly, implementation of standards can be challenging, especially for the smaller companies. We recognise that. That is why we try and make our standards as clear as possible even if sometimes we don’t always succeed.
Secondly, in the past we would set a new standard and let the practice get on with it in terms of implementation. These days we are much more proactive in helping people implement the new standards, such as IFRS 16, where we have hosted many conferences and webcasts, and provided information through our website. This has helped people with the implementation of the new standard. In comparison with the past, we have put a lot more energy into that.
But obviously there is more going on. We have no role in auditing, but there is a worldwide discussion taking place about how we [can] strengthen the quality of audits and the independence of the auditor, a question which is particularly significant in SA. These are difficult issues with no easy solutions. We should also not forget that independent supervision of auditors [such as the Independent Regulatory Board of Auditors is still a fairly recent phenomenon, and I think that still needs to bear a lot more fruit as it develops.