Julia Irvine 30 Jun 2017 12:13pm

High quality accounting "like canary in the coal mine"

Such accounting provides an early warning system for companies just like “the proverbial famous canary in the coal mine”, according to International Accounting Standards Board chairman Hans Hoogervorst

As such, it plays an important role in fostering financial stability, he told his audience at the IFRS Foundation’s annual European conference in Amsterdam.

“Our primary goal is to develop IFRS standards that bring transparency, accountability and efficiency to financial markets around the world.

“Yet we believe that in doing so, we foster not only trust and growth, but also support the long-term financial stability of the global economy.”

Hoogervorst said that the crucial ingredient that IFRS offers is transparency. “Proper accounting shines light on risks that might otherwise go unnoticed – both by companies themselves and by investors.”

IFRS also results in better insights into a company’s performance and enables management to redress problems in a timely fashion.

He pointed to the work the IASB has been doing in recent years to strengthen “this early warning system” – standards on pension accounting, financial instruments and loan losses, leases and most recently IFRS 17 on insurance contracts.

“I am convinced,” he said, that IFRS 17 will contribute to prudence and financial stability. The standard will provide much more insight in the risks to which an insurance company is exposed.”

He defended some of the more controversial aspects of the new standard including banning unfettered averaging between different generations of contracts which, in the past, has sometimes led to accelerated or delayed earnings recognition and made it harder for investors to discern earnings trends.

“Some insurers do not like these restrictions in IFRS 17. In their current business models, they often compensate for relatively unprofitable contracts with newer generations of more profitable contracts…,” he said.

“…Earnings trends are often an early warning system of problems to come. If we want accounting to perform, its function as the proverbial canary in the coal mine, it is important to avoid excessive averaging, even in a business where averaging of risks is an essential part of the business model.”

With IFRS 17, most of the gaps in the suite of standards have been filled, Hoogervorst added. So now the board intends to spend the next couple of years improving communication in financial reporting.

It intends to look at primary financial statements – performance reporting – with a view to increasing comparability and making it easier for regulators to enforce discipline around the presentation of non-GAAP measures.