IFRS 17 and COVID-19: How IFRS 17 Can Contribute to Stability in IFRS Reporting

We dived back into the archives all the way to 2017 to bring you the IASB Chair’s speech at the IFRS Foundation’s conference in Amsterdam titled: “IFRS 17 and Its Contribution to Financial Stability”. This topic is particularly relevant today given the volatility of the economic environment brought about by COVID-19. Hans Hoogervorst spoke on the role of accounting standards in fostering financial stability. This is the first of a three-part installment. Here is an excerpt from that speech. 

I would first like to discuss the role of accounting in fostering financial stability. 

The International Accounting Standards Board (Board) refers explicitly to financial stability in its Mission Statement. 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. 

Some have raised eyebrows at this part of our mission statement. I understand that, because fostering financial stability is obviously not the primary goal of accounting standards. It is primarily the remit of prudential regulators, whose task it is to safeguard the solvency of the financial system. 

Still, we are convinced that the transparency delivered by accounting standards is a crucial ingredient for achieving financial stability.  Proper accounting shines light on risks that might otherwise go unnoticed—both by companies themselves and by investors. Companies were much better able to manage their pension commitments when IFRS Standards brought pension liabilities to the balance sheet. High-quality accounting gives timely information on onerous contracts, loan losses and the true extent of leverage on the balance sheet. 

High-quality standards also result in better insights into a company’s performance. They should lead to a faithful portrayal of revenue and do not allow for aggressive recognition practices. High-quality accounting should also prevent that a deterioration in profitability is masked by the release of cookie-jar reserves or by the selective sale of profitable financial instruments. Where volatility reflects economic reality, the accounting needs to show it. Fake stability based on smoothing of earnings ultimately leads to much bigger volatility when reality can no longer be masked. Fake stability is therefore just as bad as fake news! 

High-quality accounting is a key underpinning of financial stability because it enables managers to redress problems in a timely fashion. Obviously, it is even more important to investors. Proper financial information prevents investors from pouring good money after bad. The transparency provided by accounting also has a preventative effect. The likelihood of problems being revealed quickly will discourage managers from taking unnecessary risk.  

In sum, high-quality accounting serves like the proverbial famous canary in the coal mine. It provides an early warning system to detect changes in the company’s risks and its performance. 

In recent years, we have done a lot of work to strengthen this early warning system. I already mentioned our work on pension accounting. IFRS 9, our financial instruments Standard, requires companies to provide more forward-looking information about loan losses. IFRS 16, our leases Standard, provides better information about lease obligations that previously remained off-balance sheet. 

Source: ifrs.org 

To view our related Courses – IFRS Training material on the standards discussed above, follow the links before: 

> COVID-19 & IFRS | COVID Impact on Financial Statements | IFRS Training 

> IFRS 9 Financial Instruments in South Africa Updated 2020 2021 | IFRS Training 

> IFRS 16 Leases Updated | 2020 | 2021 | IFRS Training 

> IFRS 17 Insurance Contracts Updated | 2020 | 2021 | IFRS Training 

> IFRS Masterclass Updated | 2020 | 2021 | IFRS Training