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Published by: Bruegel on Jul 11, 2011
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policy brief 
JULY 2011
Nicolas Véron
Senior Fellow at Bruegel
The IFRS’s defining promise is cross-border comparability of financial state-ments, but the aim of global harmonisation will not be fully achieved in thenext few years. Given the varying pace and modalities of local IFRSadoption, the IFRS Foundation must focus on standards quality and theintegrity of its brand. Standard-setting should serve investors’ informationneeds, leaving other public-policygoals to be met through localassessment by individual jurisdic-tions. The Foundation’s governanceand funding framework shouldbecome more accountable to theglobal investor community. Activemonitoring of local implementationpractices should encourage thegradual convergence of ‘IFRSdialects’ towards a true singleglobal reporting language.
2003 2006 2009 2012 (est.)0%10%20%30%40%50%60%
Accounting standards used by the world’s 500largest listed companies
Accounting provides a fundamental underpinning for capital mar-kets, and the worldwide spread of International Financial ReportingStandards (IFRS) marks one of the most advanced attempts to developglobally consistent financial rules.
The financial crisis has generated heateddebate on the economic role of fair-value accounting and other IFRS princi-ples. Underlying these controversies are differing views about the missionand governance of accounting standard-setters, and how standards inter-act with other public policy instruments.
Choices are made more difficult bythe absence of relevant precedents for the unique institutional features of the global standard-setting organisation, the IFRS Foundation.
Source: Bruegel, see Figure 1.
       b     r     u     e     g     e       l
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1. Somewhat confus-ingly, these arenumbered IAS 1 to IAS41 and IFRS 1 to IFRS 9,as the label waschanged from IAS(International Account-ing Standard) to IFRS in2001. Some past stan-dards are no longer inuse. To these should beadded so-called IFRSinterpretations (25 cur-rently in use), whichdepending on the con-text can be referred toas part of the collectiveset known as IFRS. Sep-arately, a standardintended primarily foruse by non-listed com-panies, known as ‘IFRSfor SMEs’, was intro-duced in 2009.2. The Monitoring Boardincludes the chair of the US SEC, the Euro-pean Commissioner forthe Internal Market, theCommissioner of theJapanese FinancialServices Agency, andtwo representatives of the International Organ-isation of SecuritiesCommissions (IOSCO).Further expansion of itsmembership is underconsideration (Monitor-ing Board, 2011).
are thenorms that govern the prepara-tion of financial statements bycompanies, and as such play akey role in the proper functioningof capital markets. All thingsbeing equal, better financialreporting reduces the cost of capital by allowing investors tobetter assess and compare com-panies’ financial situations andoperations, especially for listedcompanies in which sharehold-ers are dispersed and have noaccess to inside information.Internationally uniform account-ing standards can contribute to abetter matching of capital-richinvestors and capital-hungryissuers on a global scale, and aretherefore an attractive economicproposition.This explains the emergence andrapid spread of InternationalFinancial Reporting Standards(IFRS), the roots of which goback to a 1973 initiative led byHenry Benson, a prominentBritish accountant. There are cur-rently 38 IFRS standards,intended primarily for use byissuers of public securities
.Since 2001, IFRS have beendeveloped and updated by theInternational Accounting Stan-dards Board (IASB), a16-member committee thatmeets about monthly and is sup-ported by a 110-strong staff based in London. The IASB isappointed and financed by theUS-incorporated IFRS Founda-tion, itself governed by a group of 22 Trustees under a set of rulesdubbed its 'Constitution'. In 2009the Trustees agreed to submittheir own appointments tomandatory approval by an adhoc group of public authoritiescalled the Monitoring Board
.Arguably the most importantmilestone in IFRS expansion wasthe European Union’s decision in2000 to require their use by alllisted companies by 2005, adecision based on near-total con-sensus
. In its wake, other major jurisdictions have made IFRS orvariations thereof either manda-tory for replacing pre-existingnational accounting standards,or an optional alternative. In2007, the US Securities andExchange Commission (SEC)authorised US-listed foreigncompanies to use IFRS. However,domestic US issuers still have touse the standards set by the USFinancial Accounting StandardsBoard (FASB), known as USGAAP
.Figure 1 shows how theIFRS’ 'market share' among theworld’s largest companies hasrisen rapidly from marginal todominant, and how the EU hasbeen joined by other jurisdictionsthat together will soon representthe majority of IFRS issuers.Accounting standards, like anymeasurement and disclosureframework, can influence thebehaviour of economic actors,even if this is not the standard-setters' intention. This helpsexplain the occasional intensityof related controversies. Box 1summarises recent disputesabout the fair-value accountingprinciple, which relies on marketprices (or in their absence, valu-ation models) to determine thebook value of some financialassets and liabilities. Moreover,
2003 2006 2009 2012 (est.)0%10%20%30%40%50%60%
All companies
Source: Bruegel based on FT Global 500 rankings, Datastream. Standards including some variations of pure IFRS, such as in the EU (see page 6), are counted asIFRS in these figures. Estimates for 2012 are based on the 2009 sample of companies, assuming IFRS use in Brazil, Canada, Japan (companies currentlyusing US GAAP), Mexico, and South Korea. EMEA: Europe, Middle East and Africa. The right-hand graph sorts companies by location of operational headquarters.
2006 2009 2012 (est.)0%10%20%30%40%50%60%70%80%90%
EUOther EMEAAsia/PacificAmericas
Companies using IFRS
Figure 1: Adoption of IFRS among the world’s 500 largest listed companies
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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’,
 Accountancy Age
, 12November 2008.8. See Francesco Guer-rera and JenniferHughes, ‘AIG urges ‘fairvalue’ rethink’,
Finan-cial Times
, 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,
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
et al
, 2008; SEC, 2008b; Novoa
et al
,2009; Coval
et al
, 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).

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