In remarks at an Amsterdam
accounting seminar, IASB Chair Hans Hoogervorst described pragmatism as practiced by the Board
to be looking very carefully at any possible undesirable use of IFRS. Whenever the
Board is confronted with a high degree of uncertainty, he averred, it will act
with great caution. For example, if the standards were to provide too much room
for recognition of intangible assets, the potential for mistakes or abuse would
be immense. In such circumstances, he believes that it is better for the
accounting standards to require more qualitative reporting than pseudo-exact
quantitative reporting. The Chair said
that it is nonsense to advise that accounting standards should not be
set from an anti-abuse perspective. If
the IASB sees ample scope for abuse in a standard, he pledged, the Board will
do something about it, adding that there are sufficient temptations and
incentives for creative accounting as it is.
While the P&L is the
traditional performance indicator on which many remuneration and dividend
schemes are based, the meaning of other comprehensive income is unclear. It
started as a vehicle to keep certain effects of foreign currency translation
outside net income and gradually developed into a parking space for unwanted fluctuations
in the balance sheet. There is a vague notion that other comprehensive income
serves for recording unrealized gains or losses, but a clear definition of its
purpose and meaning is lacking.
But that does not make it
meaningless, said the Chair, especially for financial institutions with large
balance sheets. Other comprehensive income can contain very important
information. It can give indications of the quality of the balance sheet. It is
very important for investors to know what gains or losses are sitting in the
balance sheet, even if they have not been realized.
In the future, other
comprehensive income will most certainly be an important source of information
about insurance contracts. Recently, both the FASB and the IASB proposed that
changes in the insurance liability due to fluctuations in the discount rate
would be reported in other comprehensive income. Many of the Boards’
constituents requested them to do so.
Both preparers and users wanted
to prevent underwriting results being snowed under by balance sheet
fluctuations. As a result, other comprehensive income will become bigger and
will contain meaningful information, such as indications of duration mismatches
between assets and liabilities.
This decision for the use of
other comprehensive income was not easy to make. Board member Stephen Cooper
showed in what the Chair called a
``razor-sharp analysis’’ that in this presentation, both net income and other
comprehensive income, if seen in isolation, might give confusing information.
The IASB Chair said that the
Board will try to tackle some of these problems with presentational improvements,
but added that a full picture of an insurer’s performance can only be gained by
considering all components of total comprehensive income. The Board will point this out
explicitly in the Basis for Conclusions of the new standard.
More fundamentally, the Board will look at the distinction between net income and other comprehensive income during the upcoming revision of the Conceptual Framework. Board constituents have asked the IASB to provide a firm theoretical underpinning for the meaning of other comprehensive income and the Board will try to do so. For now, while it may not always be clear how important other comprehensive income exactly is, net income is not a very precise performance indicator either. Both need to be used with judgment, especially in the financial industry.
Finally, the Chair said that
the Board will take another look at goodwill in the context of the
post-implementation review of IFRS 3 Business
Combinations. Although the accounting standards do not permit the
recognition of internally generated goodwill, he noted, the standards do
require companies to record the premium they pay in a business acquisition as
goodwill. This goodwill is a mix of many things, including the internally
generated goodwill of the acquired company and the synergy that is expected
from the business combination.
Most elements of goodwill are
highly uncertain and subjective, observed the Chair, and they often turn out to
be illusory. The acquired goodwill is subsequently subject to an annual
impairment test. In his view, these impairment tests are not always done with
sufficient rigor. Often, share prices reflect the impairment before the company
records it on the balance sheet, he cautioned, which means that the impairment
test comes too late.