KEEPING THE PROMISE OF GLOBAL ACCOUNTING STANDARDS
b r u e g e l
p o l i c y b r i e f
3. The key correspon-ding legislation,Regulation (EC) No.1606/2002, wasadopted by 492 votesin favour out of 526 bythe European Parlia-ment, and unanimouslyby the Council.4. Generally AcceptedAccounting Principles.5. The IASB has starteddiscussion on a stan-dard on EmissionsTrading Schemes in2009, currently on holdbut expected to restartlater in 2011.6. See also Véron(2008) for a more in-depth analysis of arguments over fairvalue.7. The IASB’s chairmanwas widely reported ashaving come close toresigning on this occa-sion. See David Jetuah,‘Tweedie nearly quitafter fair value change’,
, 12November 2008.8. See Francesco Guer-rera and JenniferHughes, ‘AIG urges ‘fairvalue’ rethink’,
, 14 March2008.
not all accounting disputes areabout fair value. In the US, forexample, there were vivid contro-versies about accountingstandards for mergers and acqui-sitions in the 1950s, leases andconglomerates in the 1960s, oilexploration costs and inflation inthe 1970s, pension obligationsin the 1980s, and stock optionsin the 1990s and early 2000s(Zeff, 2005). Emissions-tradingpermits are also likely to give riseto heated discussions
.The economic impact of account-ing standards has majorimplications. Standard-settersare generally accounting profes-sionals by background and seetheir role as intrinsically techni-cal, namely finding the bestmeasurement and disclosureprinciples for financial state-ments to give investors theinformation they need. But cor-porate issuers tend to view themlike policymakers, and oftenattempt to influence themaccordingly. Auditors also havespecial interests in the process,especially in those cases wherethe wording of the standardsmay affect their future legal lia-bility. Governments can havemultiple and sometimes conflict-ing public-policy objectivesbeyond the efficiency of capitalallocation, such as usingaccounting standards to influ-ence corporate behaviour, orleveraging their control over thestandard-setting process fortheir own information needs fortax, regulatory or statistical pur-poses. There is also thepossibility of the occasional cap-ture of governments by privatespecial interests which can befacilitated by the arcane contentof some accounting discussions.These diverging perspectivesimply that the 'quality' of accounting standards can onlybe considered in reference to aspecific group of stakeholders,rather than in absolute terms.They also explain why the mostintractable policy debates aboutIFRS relate to the governance of the standard-setting process, ieto which stakeholders it effec-tively gives priority.The second half of 2011 will beparticularly important in shapingthe future of IFRS, with:•Adjustments to be made to theIFRS Foundation’s governance,
BOX 1: THE FAIR VALUE CONTROVERSY
At the start of the financial crisis in 2007-08, many financial exec-utives called for the suspension of fair-value (also known asmark-to-market) accounting, claiming that the sudden disappear-ance of liquidity from markets, such as those for USmortgage-based securities, had made market price references forthe value of their assets meaningless. At the height of the crisis inOctober 2008, EU policymakers strong-armed the IASB into hastilyamending their IAS 39 standard on financial instruments to allowfinancial firms to retroactively reclassify assets in order to escapethe requirement to mark them to market prices, at a high cost interms of perception of the IASB’s integrity
. Separately, in April2009, the US FASB loosened its standard on financial-asset impair-ments, and the IASB later adopted a new financial instrumentsstandard (IFRS 9) that redefines the scope of fair-value accounting.Nonetheless, numerous subsequent studies from public authori-ties and academics (Escaffre
, 2008; SEC, 2008b; Novoa
, 2009; FCAG, 2009; Huizinga and Laeven, 2009;Laux and Leuz, 2010) concluded against blaming fair-valueaccounting for accelerating the crisis, as they generally recom-mended ‘prudential filters’ in regulatory capital calculations tomitigate the effect of short-term accounting volatility on capitalrequirements. Dissenters (eg Bezold, 2009; Marteau and Morand,2009) fail to provide any empirical evidence for their harshassessment of the fair-value principle. More to the point, the 2007-08 decline in market price of mortgage-based securities and otherassets, which financial firms had blamed on ‘fire sales’, eventuallyappeared to be justified by fundamentals. The possibility of a biasin financiers’ perceptions is illustrated by the point that the leadingUS advocate of suspending fair-value accounting in early 2008 wasMartin Sullivan, then CEO of AIG
. Even so, many leaders still viewfair-value accounting as a negative factor in the crisis, particularlyin Europe (see eg French President Nicolas Sarkozy’s speech tothe 40th World Economic Forum in Davos, 27 January 2010).