There must have been a heavy sigh of relief round at the IASB after the weekend’s events. Not only did the G20 group of nations get behind international standards in a big way, but the US at last published its roadmap to IFRS adoption, a sure sign that the country’s regulators want to commit the world’s biggest capital market to adopting global standards – sometime around 2014.
It’s a relief because going into the weekend the was much concern around. In recent weeks the standard setter has had to put down its drafting pencil and think about politics because keeping the IFRS project on track has been nothing if not about trying to out manouevre those who, observers and insiders believe, want to see the International Accounting Standards Board undermined and, perhaps, even the creation of an alternative standard setter put in place.
Indeed, there are those that now see the IASB as the target of ideologues set on formulating a new more controlled kind of capitalism for Europe and see the board as getting in the way.
And how does it get in the way? Because it stands by fair value accounting much to the annoyance of banks in France who have always hated the principle and even more so the board that has stood by it.
G20 was just the latest round in the battle of the IASB in the war on the credit crisis.
It started with scathing attacks on fair value, embodied in both US and international standards. The attack came from republican politicians and the business community who blamed the standard for destroying the value of certain financial assets.
The attacks appeared to reach their peak after the collapse of Lehman. US efforts to drive through a rescue package reiterated the regulator’s right in the US to suspend fair value and ordered a review of the principle.
This appeared to give momentum to critics in Europe. But the IASB and US standard setter FASB joined together to announce they had checked and their separate standards were compatible.
This had the effect of showing the IASB and the US were on the same hymn sheet and isolated European critics.
Behind the scenes French officials started lobbying for changes to the key standard on financial instruments, IAS39, or at least the right for European banks to duck some of its requirements, a carve-out that would leave vast swathes of assets no longer subject to a fair value calculation.
The IASB had to move quickly and offered a concession in allowing some securities to be reclassified from held for sale to held for investment and therefore duck fair value.
IASB chairman Sir David Tweedie has since made it clear he did not want to do this but felt he had no choice. A broad carve-out would have made international standards irrelevant by essentially creating a Europe only standard. Support in Washington for global standards would then be seriously damaged because the US could no longer rely on coherent support of IFRS at the EU.
But the reclassification move put European banks on the same footing as US banks and seemed enough to keep most of Europe happy. So much so that support for a broad-based carve- out allowing all assets, including the toxic kind, to be reclassified withered, leaving the French isolated again.
But the French convinced the EU that the subject should not be dropped and a meeting of stakeholders was organised for 21 October at which they hoped the big carve-out might win favour. It didn’t. The stakeholders whole heartedly backed the due process of the IASB and its independence to set standards.
Then came G20 and in advance French president Nicholas Sarkozy put together an agenda for the Washignton meet which proposed giving the IASB responsibility for financial security. It wasn’t clear how this was to be achieved but the fear was that it would have to be managed through the setting of standards. This was an untenable prospect for the IASB which sees its core role as ensuring transparency, an aim potentially in conflict with a stability remit.
It’s possible therefore that the IASB, an independent body, would have to reject this role giving critics room to argue it had lost its relevance and push for an alternative, once again undermining the international accounting standards project. the IASB neatly sidestepped this by announcing it was already working on an arrangement to hold discussions with the Basel Committee on bank regulation. ie. it was already helping with stability.
So G20 didn’t go for it. There were some vague references to ensuring stability through governance of the standard setter but it really is far from clear what this could mean.
G20 still wants to have a go at valuations which could be interpreted by some as a license to have another go at fair value. It also asked for a review of the standard setter’s membership. But there are moves underway already to improve its accountability.
But the key thing is that G20 endorsed global standards, which need a global independent standard setter and therefore making it almost impossible for critics to seek more ways to undermine the IASB. The US roadmap appears to cement the IASB’s role.
The episodes so far show that the IASB and its trustees, apparently technicians cloisted in ivory towers, has become a very canny political operator. It has remained one step ahead of those who would like to see it gone, or reduced in some way, or brought under the control of a governmental body.
It also means that international standards have become politicised in a way that could not have been imagined. The pressures must be enormous. But politicians, while pursuing an agenda, rarely completely give up. The grudge against the IASB has been held for years. What’s new is the way the board has become caught up in the fight to determine the shape of capitalism of the future. The French saw an opportunity to do that as US officials, until now always the most influential, literally withdrew as the credit crunch worsened and their credibility sank with it. Just around the corner however is a new president. He will not be tainted by the crisis, though he might have to cut deals to keep pushing solutions in tandem with the rest of the G20. It’s anybody’s guess whether the IASB will once again be caught up in the cross fire.
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