Case study - accounting theory
International harmonisation of accounting standards was sold on the idea that such standards would make it easier for investors to compare companies operating in different geographic areas. The argument also proposed that capital would be allocated more efficiently, global companies would find it more difficult to pick regulators to suit them, and accounting scandals would occur less often. However the recent GFC raised several important questions about the International Accounting Standards Board (IASB) and its promotion of so- called high-quality accounting standards based on principles rather than rules. The GFC drew attention to the fundamental question of how to measure what an asset is worth. T he IASB had been advocating fair value accounting.
In October 2008, the IASB bowed to pressure from the European Union's regula- tors by relaxing its stance on fair value accounting by allowing companies to reclassify assets. Companies could transfer non-derivative financial assets out of classifications that required fair value accounting into classifications that allowed amortised cost. This change meant that Chairman of the IASB Sir David Tweedie's desire for accounting precision conflicted with the European view of accounting as a social construct, a tool among other tools to be used to ensure economic stability. According to commentators, Sir David considered resigning over the issue and the IASB only agreed to the change to avoid the European Union's threat to remove sections of the IFRSs relating to fair value practices. Commentators consider that the rule change saved some European banks m collapse as it allowed them to value more favourably loans and bonds that backed securities.
The IASB's bowing to pressure from the European Union compromises its independence, which is also threatened by its ongoing reliance on corporate contributions for its funding. The backdown may result in accounting blocs for Europe, the US (which has still to har- monise with IFRSs) and Asia (which is increasingly harmonising with IFRSs).
Questions
1. The conflict between the EU and the IASB suggests that accounting is a social construct. Do you consider accounting to be a social construct or a quasi-science based on precise facts? Justify your answer.
2. What is meant by 'fair value accounting'?
3. Why woul d accounting scandals occur less often with global accounting standards?
4. Why would trying to establish a standard based on what an asset is worth result in controversy?
5. What lobbying activity, and by whom, would you expect in relation to a measurement standard? You might like to visit the literature about Australia's attempt to resolve measurement issues.