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07 March 2019

IASB/Hoogervorst: The Primary Financial Statements project—a game changer in financial reporting?

Mr Hoogervorst described the global nature of IFRS Standards, the recently issued major Standards and the IASB's work on improving the formatting and structure in IFRS financial statements through its Primary Financial Statements project.

Big four standards—IFRS 9, 15, 16 and 17—are all issued. With the exception of IFRS 17, they are now being used in the market. It’s too early to say with any certainty how the new standards are performing.

IFRS 9 is the first of these Standards. The transition for banks has been challenging but seems to have gone OK. Overall, provisions have increased, but not unduly so—perhaps due to the benign economic conditions in much of the world. The IASB is also starting to see the benefits of a forward-looking loan loss provisioning model that requires banks to consider future events. A good example of this is Brexit in the UK, where many banks are now disclosing loan loss provisions against the risk of a disorderly Brexit. Thanks to IFRS 9, the IASB can also see which banks are choosing not to provision against Brexit, which is itself an interesting piece of information.

Next on the roster is IFRS 15 Revenue from Contracts with Customers. Most people felt the old IFRS requirements on revenue recognition lacked sufficient detail, while revenue recognition under various US GAAP standards was too detailed and conflicting in certain areas. That’s why the IASB worked with the FASB to develop an entirely new, converged standard.

The good news is that IFRS 15 seems to be working well.

Next is IFRS 16. The old leases standard had a somewhat arbitrary distinction between finance leases recorded on the balance sheet, and operating leases that were not. At the time we issued IFRS 16, listed companies around the world were estimated to have around 3.3 trillion US dollars of lease liabilities, with around 85% of those being operating leases and therefore not recorded on the balance sheet.

Finally, IFRS 17—new insurance contracts standard. IFRS 17 fixes the different accounting for the same transactions by requiring all insurance contracts to be accounted for in a consistent manner, benefiting both investors and insurance companies. Insurance obligations will be accounted for using current values—instead of historical cost. The information will be updated regularly, providing more useful information to users of financial statements.

Moreover, IFRS 17 will contribute towards long-term financial stability; for example, by requiring that losses embedded in onerous contracts are recognised immediately, instead of the current practice where contracts with losses can disappear by being bundled together with profitable contracts.

Full speech

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