Hans Hoogervorst: IFRS Standards as enlightened self-interest

Summary

This transcript outlines the global journey of IFRS (International Financial Reporting Standards), its adoption, and the challenges it faces. The speaker discusses the historical shift from modified national standards to unified IFRS, emphasizing its benefits in providing comparability and transparency in financial reporting. Key countries, such as China, Japan, and India, are highlighted for their ongoing adoption efforts. The speaker also touches on the challenges posed by local modifications and the importance of maintaining the integrity of IFRS. Looking ahead, the IFRS Foundation's focus on enhancing financial statements and addressing emerging issues like sustainability reporting is also highlighted.

Takeaways

• 😀 The IASC developed the first international accounting standards, IAS, in the 1970s, which served as a foundation for national standards.
• 😀 Different jurisdictions initially modified IAS to reflect local preferences, causing inconsistencies in global accounting standards.
• 😀 Today, most countries have adopted a single set of globally accepted accounting standards, IFRS, with 144 out of 166 jurisdictions fully adopting it.
• 😀 IFRS is required in 95% of African jurisdictions, 90% of European countries, and 100% of Middle Eastern countries, with many Asian and American countries on board.
• 😀 The United States has not fully adopted IFRS but allows foreign issuers to use it on U.S. capital markets, which remains a significant gap in global adoption.
• 😀 China has adopted national accounting standards that are closely aligned with IFRS and is committed to full convergence, already adopting major IFRS standards.
• 😀 Japan allows companies to choose between multiple accounting standards, but more than 30% of Tokyo Stock Exchange market capitalization now follows full IFRS.
• 😀 India has adopted IFRS-based standards with some modifications, but aims to gradually remove them to fully align with IFRS.
• 😀 The IASB (International Accounting Standards Board) has achieved significant progress in global IFRS adoption, despite being a private body with no legal mandate to enforce standards.
• 😀 The IASB is focused on several key projects, including the Primary Financial Statements project to improve financial statement structure and comparability, and IFRS 17 for insurance to standardize reporting and improve investor understanding.

Q & A

What was the problem with the national modifications of the International Accounting Standards (IAS) in the past?

The problem was that different jurisdictions made different modifications to IAS standards, which often led to national accounting standards that bore only a vague resemblance to the international ones. This created inconsistencies and a lack of comparability across jurisdictions.

How has the global adoption of IFRS standards evolved over the years?

Most of the world has now adopted a single set of globally accepted high-quality standards, IFRS. As of recent surveys, 144 out of 166 jurisdictions have fully adopted IFRS standards, with widespread adoption across Africa, Europe, and the Middle East.

Which regions and countries have been the leaders in adopting IFRS?

Key regions and countries that have led the way in adopting IFRS include Europe, the Middle East, Australia, New Zealand, Hong Kong, South Africa, and countries like China and Japan, which have made significant strides toward convergence.

What challenge does the United States present to the global adoption of IFRS standards?

The United States has not adopted IFRS standards and continues to use its own GAAP (Generally Accepted Accounting Principles). While foreign issuers can use IFRS in U.S. markets, U.S. companies are not allowed to use IFRS, which creates a gap in the global standardization of accounting practices.

What is the significance of China’s approach to IFRS standards?

China has adopted national standards that are very close to IFRS, with significant convergence already achieved, such as adopting IFRS 9, IFRS 15, and IFRS 16 without modification. China is committed to further convergence, and many Chinese companies already produce IFRS financial statements for their listings in Hong Kong.

How has Japan approached the adoption of IFRS, and what is its current status?

Japan offers companies the option to choose between several sets of standards, including Japanese GAAP, U.S. GAAP, full IFRS, and a modified version of IFRS known as J-IFRS. Currently, around 200 large multinational Japanese companies have adopted full IFRS, and it is expected that 50% of the Tokyo Stock Exchange's market capitalization will adopt IFRS in the near future.

Why has India made modifications to IFRS standards, and what are its future plans?

India has adopted IFRS-based standards, but with some modifications. These modifications prevent India from fully benefiting from IFRS. India aims to remove these modifications over time, though this process may take time and effort due to the challenges involved in changing accounting standards.

What is the IFRS Foundation’s role in global financial reporting, and how does it maintain influence?

The IFRS Foundation is a private body that develops accounting standards, and its standards are not legally binding. However, the adoption of IFRS worldwide is a voluntary decision by sovereign jurisdictions. The IFRS Foundation influences global financial reporting by creating high-quality standards and promoting their adoption through education and collaboration.

What is the Primary Financial Statements (PFS) project, and why is it important?

The PFS project aims to improve the formatting and structure of IFRS financial statements, particularly the income statement. It introduces additional subtotals such as operating profit and EBIT to enhance comparability and understanding of financial performance, while providing greater clarity on financing and investing activities.

What are the challenges faced by the insurance industry in adopting IFRS 17, and how is the IFRS Foundation supporting this transition?

The insurance industry faces significant challenges in adopting IFRS 17 due to the complexity of the new standard. The IFRS Foundation is supporting this transition by providing educational resources, investor education sessions, and working through the IFRS 17 Transition Resource Group to address practical implementation challenges.