Speaking at the Accountancy Europe conference in Brussels, IASB chairman Hans Hoogervorst launched a robust defence of International Financial Reporting Standards and called for a rethink of financial reporting as it faces increasing pressure from investors and key stakeholders to provide more non-financial information, mainly on environmental, social and governance (ESG) issues, as well as intangibles reporting.

Hoogervorst said: ‘Ever since going public in 2010, the car manufacturer Tesla has been losing money, burning through $7bn of cash. Investors experienced a dilution of their shares, yet their market value reached $50bn. Tesla overtook the market value of General Motors, even though GM sells more than 100 times as many cars as Tesla and does so profitably.

‘These remarkable data demonstrate that investors do not just look at the reported profit and the balance sheet to guide their investment decisions. Clearly, investors nurture very high hopes for the future of Tesla.

‘They base their hopes on the company’s intangibles: its technological prowess and its business model that combines the production of electrical cars and batteries.

‘These intangibles are not captured in the balance sheet, so in the case of Tesla, the numbers in the financial statements probably play a limited role in the current market valuation of the company.

‘Tesla may be an extreme case, but it highlights a trend towards a widening gap between book values and market values of companies.

Hoogervoorst stressed that financial reporting will still be a vital tranche of corporate reporting and tried to allay any future concerns. He said: ‘These developments create opportunities, but they also cause confusion and anxiety.’

 ‘My first answer to all these questions is that we should keep calm and carry on. I am not at all concerned that the relevance of financial reporting is under threat.’

He sets out his views on how financial reporting should ‘continue to provide a vital anchor for investors in their evaluation of a company’. He argues that ‘the more information that becomes available, the more need there is for comparability, standardisation and quality control - and that accounting standards aim to achieve this, based on sound economic principles’.

Future of financial reporting

‘The first thing the IASB needs to do is to strengthen the relevance of financial reporting itself, Hoogervoorst said. ‘The central theme of our current agenda is “Better Communication in Financial Reporting”.

‘The Better Communication agenda aims to improve the communication effectiveness of the financial statements. We are continuing our work on disclosures, providing guidance on making materiality judgements and developing general principles for disclosure. This should help companies to remove clutter and make their disclosures more meaningful.

‘The central part will be to take a fresh look at the Primary Financial Statements - what we call performance reporting.

‘Investors want more disaggregation, additional line items and possibly subtotals that tell more about the performance of a company. We will have to provide more and better structure to the income statement and the cash flow statement. The result should be better-formatted primary statements that provide better information without investors having to dig into endless pages of notes disclosures.’

At the same time, Hoogervorst said that financial reporting and the work of the IASB will need to evolve, to ensure that IFRS Standards continue to meet the needs of market participants. He identified three priority areas to strengthen the relevance of financial reporting itselfs

•             improving the communications effectiveness of financial statements by providing better disclosures and formatting;

•             improving the accessibility and quality of digital financial information by continuing to develop the IFRS Taxonomy and build upon its use around the world; and

•             giving preparers more guidance on how to provide context to their financial statements, thus helping companies to better explain their strategy for long-term value creation.   

Hans Hoogervoorst, IASB chairman’s speech can be found here