vox The IFRS ’ stress test

Some blame poor accounting standards for the crisis, and many now place accounting reform atop the global agenda. But the International Accounting Standards Board suffers significant institutional weaknesses, this column argues. While the International Financial Reporting Standards are not doomed to failure, there is significant risk of globally fragmented and divergent accounting standards, which would be a loss for everyone. The International Accounting Standards Board (IASB), which decides the content of International Financial Reporting Standards (IFRS), had its eighth birthday in April (though its roots can be traced back to 1973). Few companies used IFRS before their 2005 application throughout the EU. The financial crisis is thus the first real test for this arguably unique experiment in global economic policymaking. And what a test it is. Accounting standards are now on the agenda at the highest level. They are cited by some as being a cause of the crisis. The number-one suspect is “fair value”, the accounting method based on observable transaction prices or, if none are available, evaluation models. The IFRS make liberal use of fair value, as do the US GAAP standards applicable in America; similar controversies rage on both sides of the Atlantic. As early as March 2008, Martin Sullivan, then CEO of insurance giant AIG, championed the call for the “suspension ” of fair value. While AIG has collapsed for other reasons in th