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An Executive Guide to IFRS: Content, Costs and Benefits to Business by Peter Walton

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The financial crisis

The most significant event for the IASB in this turbulent first decade has to be the financial crisis. All sorts of politicians and others who until then had thought accounting was not worth spending any money on, suddenly got the idea that it was crucial in maintaining world financial stability. This sudden interest caught the IASB and FASB unawares but eventually triggered a massive re-think of their financial instrument accounting. It also triggered interest in convergence from the governments of the world’s 20 largest countries (G20).

The banking crisis was blamed by some bankers on the requirement under US GAAP and IFRS to report many financial assets at fair value. As the sub-prime loan panic grew, the financial markets seized up because people were suspicious of the value of assets and preferred to stay liquid. This meant that market values plummeted and banks that were required to mark to market ended up recording losses.

The most significant event for the IASB in this turbulent first decade has to be the financial crisis

The argument then went in different directions. Politicians and others started saying that marking to market had created paper profits for banks in the economic upswing and encouraged them to over-extend and now they were being obliged to sell in fire sale markets. They said fair value accounting was ‘pro-cyclical’ – it exaggerated the economic cycle – and it should be abandoned.

Standard-setters responded by saying that if the market ...

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