Political Interventions in Standard Setting .1 The Incentives of Politicians to Intervene

5.4 Political Interventions in Standard Setting

vote was settled). The evidence is likely generalizable to the European environment, where similar political forces are at play but more often tend to remain behind the scenes.

5.4.2 Political Forces in the IASB’s Standard Setting

Although it is likely that other jurisdictions’ political representatives have similar incentives as their U.S. counterparts, the complexities of the international environment constrain IFRS constituents’ possibilities to influence accounting standards by mobilizing politicians. In case of the European Union, lobbying for the rejection of the endorsement of a standard would require the concerted actions of IFRS constituents from different member states, which have potentially diverging incentives and views.²² Moreover, the typical divergence of interests implies that European constituents’ chances to successfully lobby the IASB to change its position depends also on the alignment of their preferences with those of other important IFRS constituents (Ramanna,2013).

Historically, the European Union made active use of the endorsement process to influence the IASB’s standard setting. For example, in 2006, the European Commission and Parliament objected the endorsement of the standard on segment reporting, IFRS 8, which converged IFRS with U.S. GAAP by adopting the U.S. rules. Büthe and Mattli (2011, pp. 100–101) describe the debate on IFRS 8 as an incident in which European constituents realized the disadvantages arising from a lack of coordination of their lobbying. European constituents informed the Commission about their concerns about IFRS 8 only at a point when the IASB had already issued IFRS 8 (some of the constituents missed the commenting deadline of the IASB and subsequently tried to involve political powers). As a consequence, the Commission and Parliament

22Even though the French banking industry has succeeded in lobbying for a change of IAS 39 in 2004 (by using its strong ties to the highest levels of the French government, resulting in the personal involvement of French President Jacques Chirac; see Alexander, 2006), their success might be idiosyncratic to the French setting and historical circumstances shortly before the crucial first-time adoption of the European Union. Other industries or interest groups in other EU member states do not necessarily have the same tight connections with top-level politicians (Camfferman and Zeff,2011).

had no possibilities to exert pressure on the IASB anymore and finally agreed to the endorsement of IFRS 8 (see also Camfferman and Zeff, 2015, Chapter 9.6.3). Crawford et al.’s (2014) interview-based study suggests that the intense debate on IFRS 8 between European politicians and the IASB aimed at further increasing the EU’s bargaining power during future standard setting by signaling the IASB that the EU endorsement process was not a one-way road toward the adoption of newly issued standards.

Two years earlier, in 2004, the European Commission had already underscored this position when taking action against the former financial instruments standard, IAS 39. The symbolic significance of the EU decision to carve out parts of IAS 39 in 2004 considerably exceeded the practical significance of the carve-outs.²³ The carve-outs’ “very existence . . . raised the spectre of more such carve-outs, both by the European Union and by other jurisdictions adopting IFRSs, leading to a dilution of the ideal of comparable financial reporting” (Camfferman and Zeff,2015, p. 160). In other words, the European Union’s decision backed the credibility of carve-out threats and sensitized the IASB to the possibility of local IFRS versions.

The European Commission’s decision to use its political bargain-ing power durbargain-ing the global financial crisis of 2008–2009 created the most delicate situation for the IASB so far, which its then-Chair Sir David Tweedie experienced as “a blunt threat to blow the organisation away” (House of Commons, 2008). In early October 2008, the Euro-pean Commission threatened to carve-out passages from IAS 39 unless the IASB amended the standard to allow firms to reclassify financial instruments from fair value into historical cost categories.²⁴ While the global financial crisis provided strong incentives for an economically and politically powerful interest group to lobby, the crisis also forced

23In their own analysis of jurisdictional profiles, the IASB notes that a “‘carve-out’

has been applied by fewer than two dozen banks out of the 8,000 IFRS companies whose securities trade on a regulated market in Europe” (IFRS Foundation,2020i).

See Whittington (2005), and Camfferman and Zeff (2015, pp. 157–160) on the background of the EU carve-outs in 2004.

24See Andréet al.(2009), Bengtsson (2011), and Camfferman and Zeff (2015) for more information on the controversy. See Subsection3.5.2for evidence on economic consequences.

politicians to act to prevent the financial system from collapsing.²⁵ Overall, the intensity of the political pressure on the IASB to change accounting rules at the disregard of its normal due process therefore rooted in the existential threat for the financial services industry and the stability of the financial system.

The European Commission’s decision to modify IFRS 4 (Insurance Contracts) to defer the effective date of IFRS 9 (Financial Instruments) for EU-based financial conglomerates (see Commission Regulation (EU) 2017/1988) is the most recent case in which the European Union took advantage of its endorsement process to amend IFRS. Moreover, while labelled “top up”, this modification can very well be interpreted as the first “carve-in” that has occurred in the history of European IFRS endorsements (Dobler,2020). As of today, Regulation (EC) 1606/2002 does officially not allow for carve-ins. Yet, survey responses to the Eu-ropean Commission’s question on whether carve-ins should be allowed in the EU IFRS endorsement process document that some constituents support the idea of using them to increase Europe’s influence on IFRS (European Commission, 2018). At the same time, the report also doc-uments European constituents’ awareness that amendments to IFRS create a European version of IFRSs and that such a move, first, imperils the acceptance of European firms’ IFRS-based financial statements for listings at foreign stock exchanges (such as in the United States) and, second, incentivizes other jurisdictions to adjust IFRS to their local needs, thereby undermining the very reason for adopting IFRS. Despite the benefits that arise to some of their local constituents, jurisdictions therefore also have strong disincentives to create local variations of IFRS.

The IASB’s ambition to convince more jurisdictions to incorporate its standards provides another gateway for jurisdictions to affect IFRS.

Analyzing the convergence efforts of the IASB and FASB from 2002

25Ultimately, the crisis forced worldwide government reactions in form of multiple bank rescue packages starting from October 2008 (see BIS,2009, and ECB,2010, for overviews). For instance, the U.S. government established the 700 billion USD Troubled Asset Relief Program (TARP) and the British, German, and French governments provided approximately 850 billion USD, 610 billion USD, and 470 billion USD respectively of additional loans and guarantees.

to 2011, Baudot (2014) illuminates the standard setters’ reactions to changes in economic, political, and social situations when trying to converge their sets of standards. On the one hand, calls for the convergence of IFRS and U.S. GAAP (by the G20) as well as the prospects of potential acceptance of IFRS for U.S. issuers supported the boards’ cooperation. On the other hand, the political decision to reject the adoption of IFRS for U.S. issuers in the near future discouraged the IASB from devoting attention to the needs of U.S. constituents at the expense of the needs of constituents from other jurisdictions.²⁶

While the IASB experienced only few open political interventions so far, most of them had strong symbolic relevance. The carve-out decision by the European Union in 2004 constituted a landmark case for jurisdictions’ actual willingness to deviate from IFRS as issued by the IASB. Similarly, the European Union’s intervention in 2008 forced the IASB for the first-time to change a standard solely due to political intervention and at the dispense of its own due process, which damaged its reputation (e.g., Selling,2008).