Response by the IASB
258. On 13 October 2008 the IASB issued amendments
to its international accounting standards that permitted the reclassification
of some financial instruments, in order to bring them into line
with US practice.
As a result of the amendments, banks would be able to transfer
financial instruments from the trading book to the banking book,
if the firm's management's intentions changed as a result of trading
becoming unfeasible due to markets collapsing. The change was
good news for banks, which would now be able to apply historical
cost accounting to instruments which previously had been subject
to the dramatic write downs of the fair value method in the trading
book. The IASB reasoned that the deterioration of the world's
financial markets during the third quarter of 2008 "justified
bringing IFRSs largely into line with practice in the United States,
therefore justifying the amendment's immediate publication".
Mr Picot welcomed the changes made by the IASB, saying that "they
did even up the playing field vis-à-vis the US and they
did give some relief from unnecessary write-downs".
259. In making the specific amendment on 13 October,
the IASB noted the concern expressed by EU leaders and finance
ministers through the ECOFIN Council to ensure that "European
financial institutions are not disadvantaged vis-à-vis
their international competitors in terms of accounting rules and
of their interpretation".
The IASB was also lobbied by the European Commission (EC) directly,
to Sir David's chagrin, who said that the EC's actions amounted
to "a blunt threat to blow the organisation [the IASB] away
that came very, very rapidly".
This section of the Report examines the unseemly spat between
the IASB and the EC.
260. Prior to their adoption within the EU, the IASB's
standards are scrutinised by the European Financial Reporting
Advisory Group (EFRAG), set up by the EC in 2001.
The EC has the power to 'carve-out' any elements of the IASB's
standards of which EFRAG does not approve. Sir David Tweedie told
us that the EC had threatened to carve-out an element of International
Accounting Standard (IAS) 39 that prohibited banks from reclassifying
financial instruments from the trading book to the banking book,
unless the IASB acted speedily to amend IAS 39 itself.
The effect of such a carve-out, according to Sir David, would
have been a free-for-all in banks' financial reporting:
[Banks] would be able to transfer out of things like
the trading account into some other account
I think accounting in Europe would
have been totally out of control if they had used the option to
take the "carve-out".
261. Rather than allow the EC to create such a situation,
the IASB agreed to the EC's demands for change. By drawing up
amendments to IAS 39, the IASB was able to insert new disclosure
requirements (for example, requiring the additional disclosure
of the fair value of those assets that had been reclassified),
which the EC carve-out could not have introduced.
262. Mr Picot told us that "the overwhelming
consensus of stakeholders" involved in the EC's process had
not been to ask for a carve-out, and he stressed how important
it was that all parties respected the due process of the IASB,
as the independent standard-setter.
Mr Haddrill speculated that the EC itself was "under pressure
from the French Government" and "the French financial
Mr Cronin agreed, bemoaning the situation where "what we
have got at the moment is the European Commission via the French
banking sector essentially altering the rules that are to their
263. Sir David told us that if the IASB had not acceded
to the EC's demands, triggering the threatened carve-out, then
the credibility and reputation of the IASB would have been in
If Europe had yet another "carve-out" I
think you would have found the United States saying: "This
is impossible; we're not going to have global standards after
all". The whole idea of the US moving towards IFRS has been
based on the fact that you have got Europe doing it, Japan's agreement
to 2011, China did it last year and you have got India and Korea
coming in, and then suddenly Europe moves out. That would have
crippled the whole global process.
Whilst the IASB may have avoided the most damaging
threat to its credibility by acceding to the EC's demands, Sir
David Tweedie admitted that the IASB had been damaged:
I was in the United States a fortnight ago and there
were questions of: "Why did you do this? This is European
influence. Are you a European body?" Other countries that
were completely taken by surprisebecause all of this happened
very, very quicklyhave to put it through their legislature
sometime; the standards lie on the table in parliament for so
and suddenly they were given something they had
no knowledge was coming. That was a major problem for us. It upset
a great deal of people.
Sir David told us that he had considered resigning
over the EC's demands, but decided not to, in order to persevere
with the mission of establishing a single global set of accounting
standards, which, he said, the IASB were "almost on the verge
of winning". Nevertheless, he was of the view that the IASB
"could not survive" another carve-out by the EC.
Mr Cronin told us that this was the first time there had been
a "direct threat to the independence of the IASB through
pressure from the European Union". In his view, the IASB
had "put a very brave face on it", but had had little
choice but to accept the EC's demands. If the IASB had to cave
in again, "then the game may be up in the convergence agenda".
Michael Izza, the Chief Executive of the ICAEW, agreed that the
IASB had been damaged by the episode.
Mr Boyle said the IASB was caught "between a rock and a hard
place", as the alternative for the IASB "would have
been even worse". He added that it would be "extremely
damaging if accounting standards are made, in effect, by politicians
for political reasons".
264. The European Commission sent a letter to the
IASB on 27 October 2008 requiring the IASB to address three further
issues before publication of the banks' year-end results.
Mr Haddrill described this pressure as "lamentable",
and argued that, "if the European Commission should be doing
anything at the moment, it should be considering how to bolster
the independence of a body [the IASB] that is the only global
standard-setter we have in this area".
Mr Picot said it was "very important that in Europe we recognise
that a single language of accounting is a very good thing".
He was therefore very concerned by the European Commission's carve-out
powers, because in the coming years, the IASB would come under
pressure from recent adoptees of international accounting standards,
such as China and the United States, and, if Europe did not "properly
and fully endorse IFRSs", there was a real risk that a European
voice would start "to get severely weakened and that would
damage the interests of British and European companies significantly".
265. Sir David told us that the IASB were rather
taken by surprise by the EC's action: "It came very quickly
... and almost out of nowhere, so it took us by surprise. We were
not expecting this at all."
The IASB was anyway in the process of considering changes to IAS39,
in order to permit some reclassification of assets to bring international
standards into line with US standards, but the EC was keen for
a quicker decision than the IASB's planned timeline of one week.
According to Sir David, the IASB had "no time whatsoever
266. Ms Murrall took the view that the IASB's decision
to amend the accounting standards without any prior consultation
was "a pragmatic response to a very difficult situation".
But Andrew Crockett, former General Manager of the Bank of International
Settlements, questioned the wisdom of rushing through amendments
without due consultation:
I do not believe that ad hoc shifts in valuation
methods in crisis situations would help either manage a crisis
or provide comfort to bank counterparties".
Mr Haddrill thought that changing the accounting
rules in the moment of crisis risked "undermining the confidence
of people who may not understand at depth what is going on".
Mr Picot also thought it "very important, where you have
an independent standard-setter, that the due process is respected
because, quite frankly, not everyone is always going to agree
with what the IASB says, but you have to trust their due process
and accept what they come out with in the final outcome".
He added that there was a need for the IASB to have a "proper,
fast-track [consultation] process, but with consultation on an
267. The existence
of the European Commission's carve-out power seriously undermines
the ability of the International Accounting Standards Board to
project itself as a truly global setter of accounting standards,
and indeed threatens the integrity of published accounts. Both
are profoundly regrettable. Any threatened carve-out effectively
presents the IASB with an invidious choice between losing the
IASB's coverage of the European Union on the one hand, or acceding
to the Commission's demands at the expense of a loss of credibility
in other nations on the other. We are concerned that the IASB
has already become tarnished by the accusation that it gave in
too easily to the Commission's demands over fair value accounting,
and by its suspension of its usual consultation process. We recommend
that the Treasury consider the impact of the Commission's carve-out
power on the prospects for the IASB's reputation and continuing
work in establishing a global set of accounting standards.