IASB Chair Reiterates Intent to Require Subtotals in Income Statements, Gives Update on Other Initiatives

The International Accounting Standards Board is on track to introduce new formatting and structure in IFRS financial statements, especially in the income statement.

Speaking at the IFRS Foundation Conference in Frankfurt in June, IASB Chair Hans Hoogervorst said four or five additional subtotals may be introduced, including those that “come close to Operating Profit and Earnings Before Interest and Tax, or EBIT.”

A large portion of Hoogervorst’s speech was devoted to the continuing adoption of IFRS standards in an environment of rising protectionism. How are IFRS standards faring in these difficult times?

IFRS 17 and other initiatives

Previous experience with the revenue recognition standard “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,” he said.

Hoogervorst also gave an update on IFRS 17: Insurance Contracts, which comes into effect in 2021, and the increasing interest in sustainability reporting, integrated reporting and reporting for public policy interests.

IFRS 17 “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,” he reports.

The IASB chair hinted that IFRS 17 may be amended even before 2021. Previous experience with the revenue recognition standard “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,” he said.

“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,” Hoogervorst added.

On wider corporate reporting, he reiterated that the natural place to consider broader financial information that is currently not adequately captured in financial statements is in the management commentary section. IASB plans to update the non-mandatory guidance on the management commentary it issued in 2010.

The financial information that IASB hopes will be captured in the management commentary includes intangibles, business model, economic environment, and sustainability issues such as climate change. But Hoogervorst said many other forms of reporting fall outside of IASB’s competence, so anything that falls outside of financial reporting for capital market actors will not become part of IASB’s guidance.

Hoogervorst also mentioned the publication of a discussion paper on financial instruments with characteristics of equity, which aims to look for ways to help companies determine whether those instruments should be treated as liabilities or equity. “These are early-stage proposals and we’re looking forward to hearing your views,” he said.

It has become 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”

IFRS in Trump’s world

A large portion of Hoogervorst’s speech was devoted to the continuing adoption of IFRS standards in an environment of rising protectionism, where “the rule based system of the World Trade Organization is in grave danger.” How are IFRS standards faring in these difficult times?

Surprisingly well, said Hoogervorst, who described the progress achieved in the past 15 years as “nothing short of astounding.” Almost all of the Americas and many Asian countries are now fully on board. China has adopted the new major standards – IFRS 9, 15 and 16 – without modification and is in the process of adopting IFRS 17. Japanese companies can choose to use any of four standards, but companies representing 30% of the Tokyo bourse’s market cap has chosen IFRS. “Before long, 50% of the Tokyo market cap could be IFRS-denominated,” Hoogervorst predicted.

And this has been achieved even though the IFRS Foundation is not an international treaty organization, but a private body whose standards are not binding. “We cannot impose anything and the adoption of IFRS Standards is nothing but the free choice of sovereign jurisdictions,” Hoogervorst said.

“But we cannot take our progress for granted,” he warned. Even before Donald Trump came to power, it had become clear that the United States would not be adopting IFRS Standards anytime soon. Foreign issuers on the US capital markets are able to use IFRS, but not American companies.

“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,” said Hoogervorst.