How Hollywood enhances our understanding of IFRS!

Here’s an extract from a recent speech by IASB Chair Hans Hoogervorst:

• “Many investors ask us to start by providing a definition of performance. However, I believe that trying to do so is as illusory as trying to define beauty. Beauty is a multifaceted quality which to a large extent is in the eyes of the beholder. Giving the term a 100 per cent objective definition is therefore next to impossible.
• At the same time, most people recognize beauty when they see it. Let me give you the example of George Clooney. Personally, I fail to see why his athletic build, full head of hair and chiselled chin necessarily make him into a handsome devil. Yet, one has to accept begrudgingly that at least half of mankind seem to find Clooney simply irresistible.
• Financial performance is not that different. It is multifaceted, to some degree subjective, but at the same time most people recognize it when they see it.”

There’s little point in trying to disentangle the sheer weirdness of this comparison (while the exact nature of the weirdness is to some degree subjective, I think most people will recognize it when they see it). I know I should have moved on, but instead I did a little digging, and to my surprise I uncovered other lesser-known past Hoogervorst utterances in the same vein. I’m sure you’ll find this all as strange as I did:

On neutrality: Some argue there should be a systematic conservative bias in accounting. But such a bias will inevitably lead to hidden reserves. In practice, these hidden reserves will be used to mask a poor performance of companies in bad economic times. This was normal practice in the past and we should never want to return to it. Systemic conservatism always leads to imprudence in the end.

Let me give you the example of Tom Cruise. Personally, I was never the greatest fan of such films as Top Gun and Cocktail. However, one must begrudgingly concede his devilish charisma during those years. The residue of that youthful stardom has imprudently masked Cruise’s poor performance in the films of his many indifferent subsequent years.

On leases Clearly, the accounting today does not reflect economic reality. Despite operating leases being off balance sheet, there can be no doubt that they create real liabilities. Moreover, the current accounting for leases leads to a lack of comparability. An airline that leases most of its aircraft fleet looks very different from its competitor that bought most of its fleet, even when in reality their financing obligations may be very similar. There is no level playing field between these companies.

Let me give you the examples of Angelina Jolie and Dame Maggie Smith. One actress, with her lustrous hair and beguiling features, triggers great excitement and passion, whereas the other at this point incites only a polite yawn. However, there should be no doubt that each provides comparably superb elevation to any film in which she appears. The superficial differences in our responses to these wondrous women allow no level playing field between their films.

On revenue This is an important standard because it is about the top line and it affects every entity’s financial statements. That is the reason why I call it the jewel in the crown of convergence. It replaces American standards that contain thousands of pages of application guidance and IFRS Standards that provide too little guidance.

Let me give you the example of Brad Pitt. Whenever that handsome devil, with his even features and sparkling demeanour, appears in a film, it constitutes the top line of anyone’s reaction to it. He brings to a film as much presence as thousands of lesser actors in the aggregate, while making even the most insignificant role seem larger. That is the reason why I call him the jewel in the crown of Hollywood.

On fair value The IASB is aware that fair value measurement can involve a high degree of subjectivity when there is no active market and the entity has to resort to mark-to-model valuations. However, in some situations fair value may still be the only measurement basis that can provide faithful representation. Although it leads to volatility in the income statement, for assets that are actively traded this volatility is an accurate representation of economic reality.

Let me give you the example of Adam Sandler. Placed in an unsuitable film, his behaviour would constitute inane buffoonery, providing no relevant information. However, when viewed in the context of his magnificent comic masterpieces, his delightful antics generate an artistic excitement that provides an accurate window on human reality. Although our response to Sandler, that wonderful imp, involves some subjectivity, we still recognize that he is often the only actor who can faithfully represent the experience of life as we know it.

And that, as they say, is a wrap. Come back next time for insights into IFRS 9, or maybe into Denzel Washington, damned if I can tell the difference…