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Hoogervorst: IFRS unstoppable, US to make its choice

The International Accounting Standards Board (IASB) chairman Hans Hoogervorst has said the momentum of IFRS becoming global standards has now become "unstoppable" despite the US's many delays in deciding to adopt the standards or not.

In a lecture at the London School of Economics (LSE), Hoogervorst said jokingly that the IASB would like "this small country between Mexico and Canada" to be part of the IFRS community. He added it is now time for the world's largest economy to make a move on IFRS adoption.

However, on Monday the Financial Stability Board (FSB), a G20 taskforce, recommended the IASB and the Financial Accounting Standards Board (FASB) renew convergence efforts on ongoing projects with the US.

Hoogersvost told The Accountant the IASB will continue to work in close cooperation with the FASB on the remaining convergence projects such as financial instruments, revenue recognition and leases but that once this work is complete "convergence will come to an end".

"I support the FSB's call to complete these remaining projects on a timely basis. Leslie [Seidman, FSB chairman] and I have already said in public that once this work is complete, convergence will come to an end. Instead, we will work with the US on a multilateral basis," Hoogersvost said.

In his speech, Hoogervost also went on to say that in a global economy where capital no longer respects national borders it makes "no sense to maintain national accounting standards" and reminded of the progress made in little more than ten years.

He depicted the European Union as a success story on adopting IFRS after 25 member states switched in 2005 from more than 20 national accounting regimes simultaneously to using IFRS - allowing less than three years for the change.

"Where Europe led, others have followed. Look at an IFRS map of the world and you will see all of South America is now on board, Mexico and Canada in North America, the Caribbean, Australasia, vast swathes of Asia, most of Africa and of course Europe, including non-EU countries such as Russia and Turkey," he remarked.

 

Lease lobbying

Hoogervost said the IASB is working in close cooperation with the FASB to create a new standard on leasing because the majority of lease contracts are still not recorded on balance sheets "even though they usually contain a heavy element of financing".

"If this financing were in the form of a loan to purchase an asset, then it would be recorded. Call it a lease and miraculously it does not show up in your books," he says adding that in his books "if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. So is the case with debt - leasing or otherwise."

According to the IASB chairman, the leasing industry is running a well-funded and well-resourced lobbying campaign for leasing off-balance sheets, particularly in the US.

"A recent report in US claimed that our joint efforts with the FASB to record leases on balance sheet will lead to 190,000 jobs being lost in the US alone. I seem to remember similar claims being made when the IASB and the FASB required stock options to be expensed," Hoogervost remarked.

In response, Leaseurope's Accounting Committee chairman Mark Venus said "Hoogervorst does a disservice to the quality of his international accounting standards. While it may be true that lease structuring can take place under rules-based US accounting standards, it is certainly not the case with IFRS that are applied in Europe and elsewhere. Under IFRS, a lease that looks like a loan for the purchase of an asset is always recorded on the books, just like any other liability".

 

Accusations

Venus is unhappy with the remarks in which he says Hoogervorst implies companies are using leasing to "hide debt".

"His comparison of lease accounting to pension liability accounting is misleading. In reality, it is only those contracts that convey the temporary use of an asset, often in combination with a range of related services, which are currently not recorded as liabilities," he explains.

"This does not mean that companies are hiding debt, it just means they are not borrowing money to purchase assets. They are simply paying a fee to use an asset that belongs to someone else. We are talking about rental contracts for things like cars, IT and office equipment for instance. And let's not forget that companies already provide information to investors on the commitments they have under these contracts."

However, Venus added that in terms of the leasing standard it would be "far more efficient for the US to adopt the principles-based IFRS leases standard than pursuing the development of a new model which is more like conceptual art than a measure of economic reality."

 

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