2.1 Historical perspective

From a historical (evolutionary) perspective, the IFRS are a recent phenomenon. Two dimensions can be mentioned in this respect. One is that, as recently identified by Biondi and Zambon (2012), the European tradition of accounting over five centuries – in Italy, France, Germany, with long and deep ramifications on all others continents – is different from the UK tradition, which Ramanna rightly identifies as essential in the origins of IFRS. Is the resulting imbalance here to stay, or can debates in Europe and elsewhere lead to fundamental adjustments?

A second element lies in the commonalities identified by Ramanna between IFRS and US GAAP. However, they also are recent, as accounting in the United States has changed fundamentally in the end of the twentieth century, in the wake of the considerable development of financial activities (a phenomenon often labelled financialization). Is this likely to last indefinitely?

These two examples show how the “politics of IFRS” and individual country choices vis-à-vis accounting standards may evolve fundamentally, if such possible critical changes in context and perspective occur. Such changes are likely, in an environment constantly evolving in a manner that is anything but linear.

2.2 “Geopolitical” perspective

From a geopolitical perspective, some facts must be well considered. Ramanna is much more careful than other authors when he rightly and carefully says that “around 100 countries have to varying degrees committed themselves to the globalization of accounting through IFRS harmonization.” Indeed there is no uniform adoption of IFRS around the world as is too often said; far from it. Actually besides the 27 countries of the EU, Australia, New Zealand and South Africa, who have been applying IFRS for many years, most others have engaged in processes of many kinds towards harmonization.

What “adoption” of IFRS means remains vague, considering other expressions that constantly live and die in the debate about accounting globalization: “convergence” with IFRS (which can last indefinitely and is assessed according to no fixed criterion); “condorsement” (a hybrid of convergence and straight “endorsement”); “incorporation” (of some IFRS, partially or not, into local standards, thus likely to be changed at local level) …

In fact, as Ramanna points out through some examples, the situation varies drastically: among countries that do not adopt IFRS but claim that they “converge” towards IFRS on their own terms, each of them according to a different pattern; between countries where some IFRS are adopted and others not, leading to a “mosaic” of different situations, i.e. the exact contrary to the goal pursued of a single set of standards in the world; among countries where IFRS are adopted but adapted explicitly or implicitly, through lower-level guidance and prescriptions or simply practices. In addition, confusion is increased by the fact that the respective choices made by countries are not always transparently stated and understandable for the public.

Can this uncertainty and such divergences remain unquestioned? Is not now time to look at the present situation as it is, rather than to try and convince oneself that the evolution of accounting globalization will necessarily take us towards the ultimate state of full uniformity? And is such future outcome even desirable? Is there another and more credible way to achieve a “single set of rules” that the EU and the G20 are rightly calling for?

Another important example of confusion can be found in the nature of regional arrangements, which vary fundamentally from Asia to Europe and Latin America. The evolution of these groups and the motivations of their members is, as Ramanna rightly puts, a key factor to study, based on evidence. A key factual characteristic of these groups is their extreme diversity in size, composition and mission in countries in highly different situations vis-à-vis IFRS. The IASB is today nevertheless trying to develop a regional approach, which aims at dividing the world into regions – a somewhat artificial approach that has not appeared relevant in the management of any other area of world matters.¹

2.3 Macroeconomic perspective

It must be recalled that, in the wake of the financial crisis, the G20 has been asking for changes in accounting since 2008, which have not yet materialized. Two key examples can be given: one is about impairment of loans, an area for which the Basel Committee has already approved key changes under the Basel III prudential rules (the so-called “counter-cyclical buffers”) but no accounting standard has been agreed yet at global level, in spite of high quality proposals made by the IASB.

More broadly, although a new standard about financial instruments (IFRS 9, due to replace IAS 39) has been produced by the IASB in 2009, it has not been endorsed by the EU. Although views differ about it, and beyond various limited explanations given officially, the main reason ultimately lies in the lack of consideration given by the IASB to the call by the G20 (in its second meeting, in London in April 2009) to value “financial investments based on their liquidity and investors’ holding horizons.” This was to be opposed to immediate valuations that do just lead to “importing” information about general market movements into the financial statements of a given company, masking its real own performance in its business activity, which does not only consist in merely speculating in the short term but also undertaking longer-term activities²: this is how fair value accounting has exacerbated what the G20 called the “pro-cyclicality” of accounting standards.³

A new standard recently produced and approved by the European Union, IFRS 13, is supposed to deal with these questions, under the name of “fair value measurement.” Although the standard is not harmful in itself, it essentially prescribes a considerable amount of additional information to be added in the already too voluminous annexes produced by banks: they will be as complex to establish – some of the requirements seem almost impossible to fulfil – as unlikely to be useful to any of the market participants. However, this standard is presented as a response to the crisis. Yet the issue of illiquid instruments, for example, which has been one of the key loopholes fuelling the crisis in 2008, has not been addressed.⁴ In other words, if this standard has given elements of guidance about how to measure such instruments, it did not address the key question, whether it is relevant to value those products at “fair value” when there is no market and no credible price and if not, whether fundamental concepts and definitions should rather be improved or even changed.

These are facts, although never recognised and commented as such. Are these issues not elements to take into account in the political play of actors in global accounting? How long is this situation likely to last?

In the same time, other standards, mostly “convergence standards,” are since 2006 in a process of permanent redrafting period. Some therefore conclude that these draft standards do not respond to “evidence-based needs.”⁵ As a result, no satisfying outcome has been reached about leasing or revenue recognition, for example, and the cost of monitoring the frequent changes in these projects has to be added to the costs implied by the projects themselves, if they were adopted.

More generally, critics surge from many quarters about the complexity and abstract nature of IFRS. That is linked to many factors. One is that conceptual underpinnings of the IFRS may not be acceptable to many actors. Another one can be found in the way in which the standards are drafted both in form and substance, which may be fundamentally at odds with legal or cultural traditions in many countries around the world. As the standards become more and more detailed, these issues gain increasing weight and touch upon fundamental stakes, however left unresolved, if not denied.

2.4 Microeconomic perspective

From a microeconomic perspective, Ramanna rightly points out the need to identify ultimately whether the globalization process of accounting serves the purpose of the “production of economically efficient standards.” It is clear elsewhere in the article that there are substantive debates about a number of economically relevant issues. One of these debates pertains to “fair value,” i.e. financial market driven measurement approach and whether it faithfully represents the entity’s performance.

This debate has taken place in the EU and elsewhere. It has led to the same type of action, both in Europe and in the United States in 2008–2009: when the role of accounting standards in amplifying the financial crisis had imposed to take urgent and radical measures, fundamental changes to accounting standards were made in order to limit the use of market value and to ensure continuity in the functioning of the financial system and of the economy.

Beyond the questions of “fair value” strictly speaking, lies the question of the IASB’s approach focused on the balance sheet.⁶ The preeminence given to assets and liabilities dates back to the 1970’s and originated in the United States and FASB litterature based on technical considerations, which can be debated. But the absolute preference to a balance sheet approach to be appears linked to the priority given since the 1990s to financial valuations over economic measurement.⁷ That in turn has been leading to give more and more weight in the financial statements to the evaluation of the future – resulting in considerable increase of uncertainty in the financial statements – as opposed to prudent accounting⁸ based upon realized facts⁹ with only circumscribed elements of judgment about the future, most of what concerns the future being left to financial analysts¹⁰. We have not reached a satisfactory synthesis today in the current “mixed model.”

Although the IASB claims to combine both approaches, it constantly reverts to pure balance-sheet approaches in most of its production which can be seen as a major source of concern.¹¹ Not all IFRS are based on this approach, which was not so clearly detected and discussed as an issue when the European Union adopted IFRS in 2002. But more recent developments persistently adopt this view, as for example very important standards like IAS 41 on agriculture or the current project on leases, or the interrupted projects Ias 36 on liabilities and others. This is leading to the instant valuation of assets and liabilities, reflecting more the financial – often volatile and therefore meaningless – environment of the entity than its actual own performance, which should however be the sole purpose of accounting.¹² This explains why more and more stakeholders in business as in the investment worlds rely on ‘slides’ or so-called ‘non GAAP’ approaches extensively used by companies instead of audited financial statements. Such approaches are widespread and used by companies and investors “strip out” of IFRS figures all the non realized, non operational and largely financial information it includes. That means in essence to recognise the necessity of longstanding approaches distinguishing operational, financial and non realized results, which have been abolished in IFRS for theoritical reasons and are re-created to respond to practical needs. The ANC is currently working with European partners on the notion of ‘business model’ to propose an alternative and more balanced approach.

Other (often related) issues are now triggering a considerable amount of debate not only in countries pondering adoption, but also in others, starting with the United Kingdom where the Parliament¹³ and the Bank of England¹⁴ are taking a renewed interest in the economic consequences of accounting standards. Issues are raised by companies,¹⁵ investors¹⁶ and national authorities or others¹⁷ who are not satisfied with the representation of their companies as it arises from IFRS, and ask for change.

In essence, the views of the IASB on the matter are not generally accepted.¹⁸ As implied on a number of occasions by Ramanna, there are views in the IASB which do not correspond to those held in many countries. Isn’t it the main reason that such a framework as developed by Ramanna can even be imagined? If the views at the IASB were generally held reasonable, would there be such (and so much) “politics” around it? Would the IASB not be a technical body like others, well respected and in which some debates could now and then trigger political discussions, but not on such a scale and so permanently as in the case of the IASB? One may think of other areas of global technical cooperation where stakes are high but the political debate is not permanent or so intense.

2.5 Public interest perspective

From the point of view of the public interest, one’s attention could be drawn to a number of relevant elements.

Three precise themes can first be mentioned. Each of them deserves full examination and could justify specific research, which would help many decision-makers. The first example relates to the search for appropriate accounting standards for small and medium-size enterprises (SMEs). Although IFRS have been specifically meant for listed companies, the IASB has attempted to “sell”¹⁹ them for unlisted SMEs, with limited simplifications. Above all, no change is made in the approach, which remains focused on the needs of financial market investors: one may wonder how this can fit the need of companies – an overwhelming majority – with no such investors in their capital and whose needs are much more focused. Can IFRS serve those tax, legal and other such requirements and are IFRS fit for that purpose or is it necessary to have recourse to different set of standards and if so, what is the associated cost? That is the theme of comparable critiques heard in the United States about the use of US GAAP for SMEs and more broadly in most European countries (where IFRS for SMEs is not allowed) as well as in Asia.

If different needs are best addressed differently, this can have a very strong bearing on the future of IFRS, as countries will discover that they can only address part of the functions of accounting through IFRS, which cannot be a “one stop shop” as originally believed.

A second example, in the same vein, relates to the introduction of IFRS in countries where there are no listed companies, in the poorest countries on the planet. This is often the result of policies imposed by the World Bank, certainly in good faith, in order to foster global harmonization. However, isn’t it time to suggest an evaluation of whether IFRS have been effectively used and, where it would be the case, whether it is producing the expected results? Such studies in different areas have led to healthy reappraisals of policies in the past and would be very welcome.

A last and distinct example has to do with the “volatility” of standards, which tend to change too often. Would it not be useful to see some stability in accounting rules that are supposed to be an important infrastructure of financial markets and the economy more broadly? That in turn leads to two separate issues. One is the quantity of “anti-abuse”-driven standards, that result in the reversal of positions (like in IFRS 11 and IFRS 12 on consolidation) that can only be understood as a move by the IASB to counter-attack some suspected abuse – not even revealed – from some companies in some countries. Instead of addressing such issue as an enforcement question to be dealt with by the relevant market regulators on a case by case basis, all companies of all countries using IFRS have to abide by the changes prescribed, sometimes considerable, and overturn their practices. A second element of instability comes from the IASB “conceptual framework,” which is sometimes applied by the IASB in new standards – and sometimes not. The framework, which does not supercede standards, does not regulate standard-setting in practice. New and untested concepts may be crafted outside the framework and lead to new standards. Revision of this framework is now on the agenda of the IASB.

In sum, from the public interest perspective, all these shortcomings or questions can be portrayed in the form of gaps – also mentioned by Ramanna, even if not characterized as such, like inter alia: the gap between the goal of a “fair” and “generally accepted” potentially global accounting standard and the current level of critique; between the expectations raised by a global standard and the present situation, where the current “mosaique” of country choices and practices leads one to wonder how much real progress has been made in practice towards harmonization; between the list of countries that apply IFRS and the list of the most influential countries in the IASB; between the expectations from IFRS and the implementation challenges.

This is why, as for all public policies, there is a need to fully assess benefits and costs of IFRS or, rather of IFRS as they have been evolving in the context of post-crisis globalization. Today there is an emerging willingness to undertake such work. The result of such evaluations, and potential remedial action thereafter, can strongly influence all countries’ choices in the development of global accounting harmonization, which therefore will be less of a pre-set story than a dynamic process.