Observations on a recent address by IASB Chair Hans Hoogervorst
I’m sure Hans Hoogervorst is a capable Chair of the IASB in most respects, but his speeches – at least as published on the website – are consistently awful. A recent example delivered in Tokyo, titled “Defining Profit or Loss and OCI… can it be done?”, illustrates perfectly what I mean. First of all, I don’t think it would be a disservice to the historical record if the written version of the speech eliminated the obligatory “jokes” and witty asides – perhaps his delivery at the podium transfers them into gems, but on paper they make you shudder (example: “I promise that I will use the lower exchange rate of the yen to stimulate the local economy during my stay!” – it’s perhaps the exclamation mark that seals the hokiness).
Selling the lease standard
Hoogervorst is fond of anecdotes and isolated findings that he intends to illustrate some broader point, in the same way that politicians will cite the real-life experience of a constituent to illustrate their case (an eighty-year-old woman whose premiums rose 700% due to Obamacare, that kind of thing). As often as not in the political realm, subsequent investigation reveals such stories to be unrepresentative of the bigger picture, if not downright misleading on their own terms, and similar doubts arise often when listening to Hoogervorst. For example, defending the ongoing leasing project, he says this: “When we brought the pension liability to the balance sheet many years ago, there were quite a few executives who for the first time realized the full extent of their pension obligations. Similarly, I expect that more than a few executives are not fully aware of the implicit leverage caused by leases. The leases standard will help them to make better-reasoned decisions between purchasing and leasing.” There’s no way of knowing the relative magnitude of such weaselly measures as “quite a few” or “more than a few,” but whatever it might be, it seems to acknowledge that there are also quite a few occasions (presumably a much bigger “quite a few”) where this benefit won’t apply. Anyway, the IFRS conceptual framework in its current state points out that management needn’t rely on general purpose financial reports because it’s able to obtain the financial information it needs internally, so if Hoogervorst wants to do his bit to promote “better-reasoned decisions” by executives, pushing a big new complicated standard for external reporting on them seems like a poor way of tackling it.
For another example, he says the IASB has “found out that many investors, while making their adjustments to balance sheets actually exaggerate the implicit leverage in leases. So paradoxically, the leases standard will make many companies look better in the eyes of investors!” The “paradox”, as he puts it, seems to be that we should regard it as an exclamation-mark-worthy surprise if a new standard doesn’t consistently make things look worse to investors from every possible perspective. Time and again, Hoogervorst seems more comfortable with tossing out such fragments than in making a coherent case for or against something (on this occasion, his basic argument for the leasing standard consists of little more than that users “simply want to see leases on the balance sheet”).
Defining other comprehensive income
As for the speech’s headline topic, on whether profit or loss and other comprehensive income can be defined, the best answer one can extract from his remarks is “uh, probably not.” I’ve written before that I don’t think there’s much more to the concept of OCI than a source of deal-making compromise, whereby “you know it when you see it,” and Hoogervorst reports that respondents including the Canadian Accounting Standards Board have expressed the view “that we should not even deal with OCI on a conceptual level since they find it unlikely that a sound conceptual basis can be found.” He says these respondents “may have a point” (an odd phrase, since if so this would be not merely “a point” but “the point”), but nevertheless says “we are in urgent need for some guidance around this issue.” In the meantime, he says OCI “should only be used as an instrument of last resort,” which seems somewhat hilarious given that major projects such as IFRS 9 are littered with applications of it.
Anyway, he’s already obliterated his “last resort” argument by stating earlier in the speech: “Some aspects of the problem are pretty non-controversial, such as the use of OCI for the fair valuation of Own Credit. This prevents very counter-intuitive results in profit or loss. Likewise, few will challenge the use of OCI as a parking spot for cash flow hedging instruments or foreign currency translation.” It seems to me this cedes too much ground right at the outset: if one is as concerned with “the integrity of profit or loss” as he claims, the first step ought to be to conclusively demonstrate why “intuition” is a sufficient basis for carving out this parking spot, as opposed to defining profit or loss as a truly comprehensive measure and letting issuers dissect it further in their MD&A or elsewhere (as they do now anyway). Time and again, listening to Hoogervorst, one wonders how rigorously he challenges his own instincts on such matters, which can’t be good. And I had to stop myself from adding an exclamation mark there..
The opinions expressed are solely those of the author