Professional Documents
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enlightened self-interest
Introduction
Good morning and welcome to our main European conference for 2018. It is
always a pleasure to travel to Frankfurt, home of the European Central Bank and
an increasing number of bankers escaping Brexit.
I would like to begin by thanking you all for your interest in our work. I also wish to
thank Andreas Barckow and the members of the Deutschen Rechnungslegungs
Standards Committees (DRSC) for their excellent cooperation. The DRSC has an
influential voice in our standard-setting activities, and does a great job
representing the views of German stakeholders.
We have a fantastic programme for you over the next two days. Around a third of
our Board and most of our senior technical staff are with us during the
conference. That is important, because we’ve got a lot of ground to cover. We
have workshops on recently issued Standards, and we have a lot of discussion
about projects on our work plan.
My job this morning is to set the scene, so let us begin. First, I will provide a brief
update on the spread of IFRS Standards around the world. And then I will talk
about what is occupying the thinking of the Board right now.
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You have probably heard of the familiar curse: ‘may you live in interesting times’.
Although this proverb is usually attributed to ancient China, it is actually nowhere
to be found in Chinese literature. The closest Chinese proverb I have been able to
find dates from the 17 century. It says: 'Better to be a dog in a peaceful time, than
th
Whatever the origin of these words of wisdom, it is clear that both proverbs apply
to current times. The world order as we knew it is evidently under pressure.
Transatlantic relations have never been as rocky as currently is the case. Brexit
was a rough reminder that an ever closer European Union cannot be taken for
granted. While one of the main motivations for Brexit was for Britain to close free
trade deals with the rest of the world, the prospects for such deals are worsening
by the day. We are seeing a strong resurgence of protectionism and the rule
based trade system of the World Trade Organization is in grave danger.
When global standards are under such pressure, it is fair to ask how IFRS
Standards are faring in these difficult times. The answer to this question is:
surprisingly well, but we cannot take our progress for granted.
Let me first say a bit more about the progress we have achieved.
Back in the 1970s, our predecessor body, the IASC, developed the first set of
international accounting standards, known as IAS Standards. Many jurisdictions
based their national standards on IAS Standards, but modified them to reflect
local preferences. Problem was, different jurisdictions made different
modifications to different standards. Like a Hollywood movie ‘based on’ a true
story, national accounting standards often bore only a vague resemblance to the
international accounting standards on which they were based.
Of the 166 jurisdictions surveyed in the last few years, 144 have fully adopted
IFRS Standards. IFRS Standards are now required for use by 95% of the surveyed
African jurisdictions, 98% of European jurisdictions and by 100% of Middle East
jurisdictions. Almost all of the Americas and many Asian countries are now fully on
board. There are many fathers of this success, but it is important to mention
IOSCO, the global organisation of securities regulators and of course the first
movers to IFRS adoption: the European Union, Australia, New Zealand, Hong
Kong and South Africa.
There are still a couple of gaps on the IFRS map of the world. The biggest gap is
the country of US GAAP. While foreign issuers are able to use IFRS Standards on
the American capital markets, American companies are still not able to do so. In
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2011, even before the Trump era, it became clear that the United States would not
be adopting IFRS Standards anytime soon. Fortunately, the rest of the world
reacted just as it does now in the face of the American challenge to the global
trade system: rather than following the United States in retreat, the use of IFRS
Standards continued to spread around the world.
China is using national standards that are very close to full IFRS Standards and is
committed to achieving full convergence over time. China has adopted without
modification all of the new major standards—IFRS 9, 15 and 16—and is in the
process of adopting IFRS 17.
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the efficiency of being able to use the same standards in all subsidiaries around
the world; enhanced comparability and better communications with international
investors. The Japanese IFRS-adopters know that even limited modifications to
IFRS Standards will undo much of these advantages.
India has recently adopted accounting standards that are based on IFRS
Standards. The new Indian standards are a great step forward, but they contain
several modifications of IFRS requirements. India knows that these modifications
mean that it cannot derive all the benefits of IFRS and therefore wants to remove
them over time. A few might disappear through changes in IFRS Standards, but
most will require action by India itself. This will not be easy, because modifications
can be as hard to change as accounting standards themselves. But, as the
Japanese experience suggests, the cost of maintaining them is probably higher
than removing them.
All in all, the picture of IFRS adoption around the world may not be perfect, but
the progress achieved in the past 15 years is nothing short of astounding. This
progress is all the more remarkable given the fact that the IFRS Foundation is not
an international treaty organisation. We are a private body and our Standards are
not binding. We cannot impose anything and the adoption of IFRS Standards is
nothing but the free choice of sovereign jurisdictions.
Given the voluntary nature of IFRS adoption, we like to believe that the adherence
to our Standards is a reflection of the quality and inclusiveness of our work. More
importantly, most of our stakeholders resist the temptation of modifying our
Standards as a consequence of what the Dutch call ‘welbegrepen eigenbelang’. In
English this means literally ‘well-understood self-interest’, but it could also be
translated as ‘enlightened self-interest’.
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Fortunately, the outcome of the two previous consultations was that Europe
should forego making modifications to IFRS Standards. Of course, we hope that
this third time around, Europe will again conclude that it is not in its enlightened
self-interest to go in this direction. Especially in a time when global standards are
under so much pressure, this would be a welcome outcome. The questionnaire of
the Fitness Check is open until 21 July 2018 and we hope you will find an interest
in participating.
The objective of the PFS project is to provide better formatting and structure in
IFRS Financial Statements, especially in the income statement. Currently the IFRS
income statement is relatively form-free. We define Revenue and Profit or Loss
but not all that much in between, while both preparers and investors like to use
subtotals to better explain and understand performance.
The PFS project will also help as more and more of this financial information is
produced and consumed digitally. The greater the amount of data consumed by
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investors, the more important that data is properly structured, consistently defined
and tagged.
IFRS 17
Now that I have explained the success of Warren Buffett, let me move to his
favourite investment, which is the insurance business.
We issued IFRS 17 one year ago, and it comes into effect in 2021. The standard
has already been endorsed in Australia, Canada, Hong Kong, Malaysia, New
Zealand Singapore, South Africa and Switzerland, and it is very close to
endorsement in China and South Korea (and who knows when North Korea may
follow!).
The TRG is a public forum for discussions among preparers, auditors and
regulators. It is a great concept, having everyone round the table and working
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through the practical challenges of implementing the new Standard. It is also a
great way to help educate other implementing the Standard. The discussions are
also useful for us at the IASB to see if any action is to assist with education, to
address unforeseen issues of inconsistencies, lack of clarity or unforeseen
complexities when implementing the new Standard.
The experience with the previous Revenue Recognition TRG has made clear that
sometimes it can be necessary for the IASB to consider amendments to address
questions and indeed we have considered some for IFRS 17 last week. Of course
we hope to keep the number of amendments as limited as possible so that we do
not disrupt implementation, but we stand ready to act if necessary.
Any organisation need to remain focused on its core competencies, and for us
that is financial reporting for capital market actors. So while we recognise the
importance of these other forms of reporting, many of them fall outside of our
competence.
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All of these topics, and much more, will be discussed in the next two days. I hope
you will find your participation in this conference rewarding and wish you two
enjoyable days.