1. What accounting issues have been addressed in the article? Briefly summarise the issues in 2-3 sentences.

2. In terms of the accounting issue being discussed, what did you agree/disagree with in the article? Provide support for your argument. 2-3 paragraphs

3. How does this article relate to theory/theories discussed in the unit? Demonstrate the connection to a theory. 3-4 paragraphs

Please note: A copy of these readings for Part A of the examination will be provided in your examination script. The only resource allowed in the examination is your text book: Deegan, C 2014, Financial accounting theory, 4th edn, McGraw Hill Education (Australia) Pty Ltd. The text book may be annotated and can contain index tabs. Hans Hoogervorst, Chairman, International Accounting Standards Board (IASB), Trust, accountants and the economy, Al Faisaliah Hotel, Riyadh, Saudi Arabia, 7 March 2017 and Hans Hoogervorst, Chairman, International Accounting Standards Board, Safety in numbers, AICPA Conference, Washington, DC, US, 6 December 2016. Please note that copies of these readings are reproduced at the end of the exam paper for reference. AUTUMN/1H 2017 Page 1 of 9 Trust, accountants and the economy Date: 7 March 2017 Speaker: Hans Hoogervorst, Chairman, International Accounting Standards Board Venue: Al Faisaliah Hotel, Riyadh, Saudi Arabia Introduction His Excellency Dr Majid bin Abdullah Al Qasabi, Minister of Commerce and Investment; other honourable current and former ministers of the Kingdom of Saudi Arabia; Dr Ahmad Almeghames, Secretary General of SOCPA; Michael Izza, chief executive of ICAEW; SOCPA and ICAEW members; ladies and gentlemen. This is my first opportunity to visit the Kingdom of Saudi Arabia and I am truly delighted to be here in Riyadh. It is also a great honour to be invited to take part in the celebration of SOCPA's 25th anniversary. The International Accounting Standards Board and the IFRS Foundation cherish our cooperation with SOCPA, which we know as a highly competent, professional and reliable body. Over the years, SOCPA has established an excellent track record in strengthening the accounting profession in Saudi Arabia. Moreover, SOCPA is an important actor in the region - and has also played an important role in providing high quality translation of IFRS Standards into Arabic. We also feel privileged to have Dr Abdulrahman Al-Humaid as one of the IFRS Foundation's Trustees. He has been instrumental in promoting the adoption of IFRS in the Kingdom. The title of the event - building trust - is a topic close to my heart. In my address today, I will talk about the importance of trust and the role of both accountants and accounting in promoting it. First, I will touch upon the accounting profession in a changing world. Second, I will talk about the role accountants and accounting play in serving the public interest. And third, I will look at how important information and trust is for the efficient functioning of capital markets. A changing world We live in a rapidly changing world. The world of business and finance looks very different today compared with 25 years ago, when SOCPA was established. Let me illustrate with just a few examples. 25 years ago - in 1992 - several organisations that we today see as a key part of our business and political landscape didn't exist: the World Trade Organization, the G20, the EU single market. We hadn't yet experienced the crises that have shaped today's regulatory landscape: the Asian financial crisis of the late nineties, Enron's collapse in 2001 and the global financial crisis that unfolded after 2007. Foreign direct investment (FDI) in 1992 stood at $153 billion. Today it is more than $2 trillion. Global trade has expanded tremendously, surpassing GDP growth year by year. A new technological revolution has greatly sped up the dissemination of information around the world. In 1992, the first image was uploaded to the World Wide Web. We now live in a much more inter-connected world where both trade and information-sharing across country-borders are the norm. AUTUMN/1H 2017 Page 2 of 9 Saudi Arabia knows there is more change coming ahead and is determined to help shape that change. The Kingdom's Vision 2030 is an ambitious plan for the future. You are determined to become a global investment powerhouse. You want to use your unique strategic location between key global waterways to make Saudi Arabia a global hub, connecting three continents. The forthcoming Initial Public Offering (IPO) of Aramco -probably the biggest float in history - will be a landmark development. It is part of your strategy of transforming Aramco from an oil producing company into a global industrial conglomerate. The Capital Market Authority's aim to increase the number of companies on the Tadawul and to promote greater foreign ownership of Saudi Arabian companies reflects far-reaching ambitions. So where does the accounting profession come in with regards to fulfilling these ambitions? Accountants can work in many different capacities: as auditors, as external business advisers or in the finance function of all sorts of organisations. Whether they work in the public or the private sector, accountants will have an important role to play in making Vision 2030 come to fruition. They are often on the frontline of introducing and implementing change to the organisations they work for or in. Constant adaptation to the changing world we live in is therefore in the DNA of the profession. Working in the public interest Another integral element of the accounting profession should be to act in the public interest. As stated in SOCPA's vision, mission and values; 'we believe in acting responsibly, in the best interests of our members and the general public'. My organisation, the International Accounting Standards Board, has the public interest as the core focus of its work too. The public interest is embedded in our Constitution. Our Mission Statement says that we exist to develop accounting standards that bring transparency, accountability and efficiency to financial markets around the world. Our standards serve the public interest by fostering trust, growth and long-term financial stability in the global economy. Growth and financial stability is important to us all. And growth depends on how well resources are managed and developed. Again, this is a core area for the profession; accountants play a role in ensuring cost efficiency and optimal capital allocation. The strength of an economy also depends on there being sufficient access to finance. Access to capital is necessary to grow, to develop and to foster change and innovation. This is true for both the public and the private sector. Capital will only be provided on the basis of trust. Banks and investors will only be willing to make funds available if they can trust the information provided by those who will be using these funds. This is also recognised in Vision 2030, which aims to strengthen accountability in your economy. Accountants play a vital role in fostering trust. Their role is to ensure that financial information, the lifeblood of the economy, is solid and trustworthy. Capital markets & information I will now move on to talk about the importance of financial regulation in capital markets. A sound regulatory framework is also fundamental to trust. Especially when market participants engage with each other across country borders. The world's first stock exchange opened in my home country, the Netherlands, in 1602. It was called the Amsterdam Stock Exchange and was established by the Dutch East India Company. Not long after its foundation, the local government started to regulate the activity on the exchange. While these AUTUMN/1H 2017 Page 3 of 9 early attempts at regulation were not always successful, they show how capital market trading and regulation have always gone hand in hand. More than 400 years after the birth of the Amsterdam Stock Exchange, I was honoured to be chair of the Financial Markets Authority, the Dutch securities regulator. I started in 2007 and witnessed the darkest days of the Global Financial Crisis. This crisis, the effects of which are still being felt, taught us many valuable lessons. The main lesson was that a sound financial system needs to be underpinned by high quality standards of corporate governance and a solid regulatory and ethical framework. Only under such conditions can there be sustainable capital market and economic development. The Global Financial Crisis is probably also one of the reasons why we seem to see a backlash to economic globalisation. Both Brexit and the outcome of the elections in the United States have been widely interpreted as a negative reaction to globalisation. History never develops in straight, flawless lines, so it is entirely possible that the trend towards growing global investment and trade may be temporarily interrupted. But we have to be careful not to draw hasty conclusions. For example, while the UK has decided to leave the EU, the British are determined to remain a global economic player. The Brexiteers are indeed very keen to be seen as pro-free trade and pro-globalisation. Even if the level of cross-border transactions ended up reducing, however unlikely for the long haul, the case for global accounting standards remains compelling. Multinational corporations will continue to span the world and investors will continue to seek investment opportunities on a global basis. Countries' financial systems are increasingly built on a compendium of best-practice international standards (much the same way as the internet is also built on a compendium of technology standards). According to the Financial Stability Board and the International Monetary Fund, IFRS Standards are one of a handful of such standards. IFRS Standards IFRS Standards bring transparency by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions. They also strengthen accountability. They do that by reducing the information gap between companies and those who have entrusted their money to these companies. They help those on the outside hold those on the inside to account. IFRS Standards are also an important tool for regulators because they generate comparable information to the global regulatory community. IFRS Standards contribute to economic efficiency. They do that by helping investors to better identify opportunities and risks - in a specific country and across the world. They help improving capital allocation around the world. Your vision of transforming the Public Investment Fund into the world's largest sovereign wealth fund is greatly helped by the adoption of IFRS Standards around the world. Sovereign wealth funds need to invest internationally to build up a diversified and safe portfolio. The spread of IFRS has made this a much less daunting task than in the pre-IFRS world of wildly diverging national accounting standards. Research shows that moving from national to international accounting standards can bring several benefits, including lowering the cost of capital. This goes back to trust and confidence. When confidence is high, money flows in. When confidence is low, it drains out. AUTUMN/1H 2017 Page 4 of 9 Finally, the use of a single, trusted accounting language is also helpful to businesses at a micro level. Not only as a key facilitator in accessing capital from foreign investors. The use of IFRS Standards can also have internal business benefits. For companies with large international operations, the use of one accounting language brings down accounting costs and helps improve internal management systems among subsidiaries. Research conducted among companies in Japan, by the Japan Financial Services Agency in 2015, illustrates the benefits seen at a micro level. In Japan, companies have a choice of different sets of accounting standards. There is a big trend at the moment for large Japanese companies to voluntarily adopt IFRS Standards. A few years ago, only a handful of companies reported using IFRS Standards. Today, the companies that have either adopted, or are in the process of adopting our Standards account for about 30 per cent of the market capitalisation1. That amounts to just over 140 companies. In addition, more than 200 other companies are considering the adoption of IFRS. The research showed that companies ranked 'efficiency in business management' as the top reason for voluntarily adopting IFRS Standards. This was followed by enhanced comparability with competitors and better communication with international investors. The Kingdom's new language The benefits of adopting IFRS Standards have been recognised here in Saudi Arabia. The silver anniversary celebration of SOCPA coincides with another important event here this year; the requirement for companies to report using IFRS Standards. This sends clear signals to the world that Saudi Arabia welcomes foreign direct investment. With Saudi Arabia on board, 125 countries and 75 per cent of the G20 countries now require the use of IFRS Standards. This is truly a momentous occasion and we are grateful for your vote of confidence. Close I would like to close by expressing once again my thanks to SOCPA. It is in our interest as much as in yours that Saudi's experience with IFRS is a positive one. So we are very happy to work with you on making the transition process a success. As I said in my introduction, we have an excellent relationship with SOCPA and we look forward to very close cooperation in the future. Through SOCPA, Saudi Arabia plays an important role in helping shape the future direction of IFRS Standards. I wish you all good luck in the next 25 years, which I am sure will also be very fruitful, both for the accounting profession and for the development of the capital market in the Kingdom. Thank you. 1 http://www.ifrs.org/Alerts/PressRelease/Pages/Japan-FSA-study-on-IFRS-May-2015-.aspx AUTUMN/1H 2017 Page 5 of 9 Safety in numbers Date: 6 December 2016 Speaker: Hans Hoogervorst, Chairman, International Accounting Standards Board Venue: AICPA Conference, Washington, DC, US Introduction It is a great pleasure to be with you again at this important conference. Let me start by thanking someone who would have normally addressed you yesterday, but who will leave her office soon. IFRS is a very difficult subject for the Securities and Exchange Commission (SEC), but I would like to thank SEC Chair Mary Jo White for the constructive cooperation we have enjoyed over the past four years, and for the considerable time and effort she has devoted to our cause. Developments around the world 2016 certainly has not been a boring year. Recent events made clear that forecasting political outcomes can be at least as tricky as forecasting company earnings! First we had Brexit and then the surprising outcome of the Presidential elections in this country. Both outcomes have been widely interpreted as a negative reaction to globalisation. Recently, one of your compatriots asked me whether this alleged retreat from globalisation would have consequences for IFRS as a global standard. Of course it is too early to tell, but for now we see no immediate consequences. While the UK has decided to leave the EU, it has not yet decided to leave the world. The Brexiteers are indeed very keen to be seen as pro-free trade and pro-globalisation. Britain has already signalled support for continued use of IFRS Standards post Brexit. However, history never develops in straight, flawless lines, so it is entirely possible that the trend towards growing global investment and trade may be interrupted. But even if the level of cross-border transactions ended up reducing, however unlikely for the long haul, the logic for common accounting standards remains compelling. Multinational corporations will continue to span the world and investors will continue to seek investment opportunities on a global basis. Moreover, the framework for global accounting standards is already in place for much of the world, and I can't see why anyone would want to chip away at it. Among the G20, three- quarters of the countries will be on board with domestic use of IFRS Standards when Saudi Arabia adopts next year. In Japan, the number of companies using IFRS Standards continues to rise every month. India has just taken a giant step towards IFRS adoption. Even though the US does not permit domestic use of IFRS Standards, you have a great deal invested in our success. US investors have more than $7 trillion dollars invested in companies that report using IFRS Standards. Many American companies have subsidiaries that will be producing IFRS-compliant financial statements, while nearly 500 foreign companies listed on US markets report using our Standards. For these reasons, the IASB is keen to keep IFRS Standards as closely converged as possible to US GAAP. And I promise you, if the Financial Accounting Standards Board (FASB) comes up with good ideas before we do, then we will steal them as quickly as possible. We have no shame, and good accounting ideas cannot be patented! AUTUMN/1H 2017 Page 6 of 9 Completion of the major projects Moving onto our technical agenda, we are in the process of finalising our Conceptual Framework, which we will issue next year. We will also soon issue our new insurance contracts Standard, which we expect to publish in the first half of 2017. We began this project back in 1997, so the new Standard will not come one day too soon. Should you have forgotten what a world without global accounting standards looks like, just look at the accounting anarchy in the world of insurance. Just about every country in the world does its own thing and it doesn't look pretty. The table below shows a real-life insurance company that uses one national GAAP as the subsidiary of a group, while using another GAAP for its statutory financial statements. As you can see, the same company shows quite astounding differences-between 25 and 60 per cent in revenue, operating income and equity-depending on the accounting language it uses. Even for those who know that accounting is not a simple matter of adding and subtracting, this divergence in outcomes is simply shocking. (In millions of USD) GAAP 1 GAAP 2 Difference Revenue 9,010 11,244 (2,234) -25% Operating income 1,606 748 858 53% Total equity 10,375 4,567 5,808 56% Moreover, some of the accounting practices used for insurance contracts around the world are at odds with what are considered generally accepted (or should I even say acceptable...) accounting practices for all other sectors of the economy. For example, many insurance premiums contain a deposit component because many insurance products combine insurance protection with investment. More than a few insurance companies recognise all deposits they receive as revenue. Can you imagine a bank or an asset management company doing that? Moreover, premium revenue is often recognised on a cash basis, which is at odds with the general principles of revenue recognition. A comparison with the IFRS treatment of the pension liability is also illustrative. IAS 19 requires current measurement of the pension liability, so that the pension liability is continually updated to account for-amongst other things-changes in interest rates. In large parts of the world, however, insurers do not fully update the insurance liability. Often they use historical interest rates. As a result, the devastating impact of the current low-interest-rate environment on long-term obligations is not nearly as visible in the insurance industry as it is in the Defined Benefit pension schemes of many companies. Clearly, discounting an insurance liability that was incurred 15 years ago at a historical interest rate of five-six per cent does not give relevant information in a time when interest rates are close to-or even below-zero. Our new insurance contracts Standard will put an end to these outdated accounting practices. It will require current valuation of all insurance liabilities, not just life, but also non-life. It will dramatically increase comparability between insurance companies and between insurance and other parts of the financial industry, such as banks and asset management. It will be a huge step forward in accounting and it will bring much needed transparency in this very important part of the economy. AUTUMN/1H 2017 Page 7 of 9 Better Communication With the completion of the new insurance contracts Standard, the IASB will have filled most (but not all) of the gaps in our suite of Standards. So that begs the question, what's next? Well, rather than developing, yet again, major cross- cutting Standards, in the next couple of years we will try to focus more on improving what is already there. We feel we can do more to improve the communication effectiveness of the financial statements. For that reason, we have decided to make Better Communication the central theme of our new agenda. There are a couple of issues that need to be addressed. First of all, investors often tell us that, currently, financial reporting does not depict the performance of a company clearly enough. They notice that we define revenue and profit or loss, but not too much in between. As a result, there is very little comparability above the bottom line. Investors therefore want more disaggregation, additional line items and possibly subtotals that tell more about the performance of a company. Preparers, on the other hand, tend to look at the financial statements as too much of a compliance exercise. We also see increasing use of non-IFRS alternative performance measures, also known as non-GAAP, which tend to dominate press releases and investor information packs. Let me make clear that we do not intend to ban alternative performance measures, because some of them clearly have added value. Yet, we share the SEC's concern that non-GAAP generally paints a rosier picture of a company's performance than GAAP. This is not in the interest of investors and I even believe it is not in the interest of preparers themselves. Let me explain why. While our Standards are designed to help investors understand a company, we should never forget that modern accounting was originally developed as a management tool. I firmly believe that high quality accounting standards should still be part of management's toolkit, helping a company better understand the complexity of its business. Our pensions Standard, for example, made the very complex pension liability visible and, therefore, more manageable. Likewise, I strongly believe that our new leases Standard will help companies make better decisions between leasing or buying an asset. Alternatively, non-GAAP measures that consistently flatter a company's performance are probably not the best basis for sound business decisions. Audit and remuneration committees should also be concerned about the increasing use of non-GAAP, usually developed by management itself. All involved in managing a company should realise that there is safety in the GAAP numbers. They are rigorous and based on sound economic principles. They should serve as an anchor, not just in reporting, but also in management decisions. At the end of the day, you manage correctly what you measure correctly. What can the IASB do? The central part of the Better Communication theme will be to take a fresh look at the Primary Financial Statements-what we call performance reporting. We will have to provide more and better structure to the income statement and the cash flow statement. We will look at additional line-items and possibly sub-totals. We might decide to create more discipline around the presentation of nonrecurring items (which have such a nasty habit of recurring time and again!). The end result should be better-formatted primary statements, which increase comparability and which should make it easier for regulators to enforce discipline around the presentation of non-GAAP measures. AUTUMN/1H 2017 Page 8 of 9 We are continuing our work on disclosures, providing guidance on the application of materiality and developing general principles for disclosure. This should help companies to remove clutter and make their disclosures more meaningful. In the context of Better Communication we will also look at the changing nature of the consumption of financial information. Increasingly, investors are using electronic means to digest financial information. Data aggregators are developing artificial intelligence that mines disclosures, press releases and big economic data. Some even believe that these new research capabilities are becoming so sophisticated that accounting as it exists might become less relevant. While I do believe we have entered a new era of information gathering and consumption, I am not yet concerned about my job security. The more information becomes available to data aggregators and investors, the more need there is for adequate formatting along sound underlying economic concepts. Just think back at the schizophrenic accounting numbers of the insurance company I just presented to you. No artificial intelligence in the world would be able to make heads or tails from information that is so inherently flawed. Apart from setting high quality Standards, the IASB can do more to improve the quality of electronic financial data. We will continue to work on the IFRS Taxonomy to shore up the reliability of electronic reporting. We also believe that better structuring of the primary financial statements will contribute to the quality and comparability of the information provided by data aggregators. More generally, we will ask ourselves what impact changing patterns of data consumption and provision should have on the way we set Standards. Close Ladies and gentlemen, I have come to the end of my presentation in which I have tried to give you some insight into what keeps us awake at night-apart from jetlag! I hope you will continue to follow us closely and invite you to contribute to our work. Thank you for your attention AUTUMN/1H 2017 Page 9 of 9