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Count U.S. Out?

How the French Put U.S. Adoption of International Accounting Standards on the Rocks. 

It all started with a French accountant named René Ricol. 

Cartoon of people holding the world with ropes

In mid-2008 Ricol was commissioned by French president Nicolas Sarkozy to write a report on the impact of the worldwide financial crisis of 2007 and 2008.1 This 148-page report covered a variety of topics, including the origins of the crisis, the ongoing response by governments and businesses, and thirty detailed recommendations for additional actions. 

On page 53 Ricol wrote something that has had explosive consequences: “At present, it is important to ensure that . . . a level playing field between European and U.S. [accounting] rules is achieved.” By implication, according to Ricol, one reason that European banks were having such severe difficulties in the third quarter of 2008 was that U.S. accounting rules were giving an advantage to U.S. banks.
President Sarkozy passed Ricol’s report along to the assembled European Union’s finance ministers, who happened to be meeting in Paris. These ministers were shocked to learn that U.S. accounting rules were creating an “unlevel playing field.” The finance ministers issued a communiqué on 7 October 2008 calling for: “[T]he necessity of avoiding any distortion of treatment between U.S. and European banks due to differences in accounting rules. . . . We also consider that the issue of asset reclassification must be resolved quickly. . . . We expect this issue to be solved by the end of the month, with the objective to implement as of the third quarter.”2 

To whom was the call to arms addressed? To the International Accounting Standards Board (IASB), based in London and designated by the European Union as the approved source of accounting standards for all EU nations. IASB standards, collectively known as International Financial Reporting Standards (IFRS), are also recognized as the source of generally accepted accounting principles in every sizeable economy in the world—except one, the United States.

Let’s turn our attention to Sir David Tweedie, chair of the IASB. Tweedie was told that the IASB had three days to revise IFRS. Three days? The due process requirements of both the IASB and its U.S. counterpart, the FASB, typically result in proposed accounting standards being circulated and discussed for years. However, Tweedie was told that without an immediate rule change, the EU would go around the IASB and unilaterally change the accounting rules for companies in its constituent countries. 

It is reported that Tweedie considered resigning; however, he succumbed to the EU pressure and rushed through the accounting change.3

Fair Value Accounting 

What was this accounting rule that was viewed as threatening the very survival of European banks? The accountants call it “fair value accounting”; the business press often calls it “mark-to-market accounting.” For companies, such as banks, that actively trade stocks and bonds, the mark-to-market rule says that the investments must be reported on the company’s books at current market value, with any paper gains or losses (called “unrealized” gains or losses by accountants) being reported in the company’s income statement. 

From July 2008 through September 2008 there were huge paper losses for banks and other investors all over the world. These losses reduced the recorded capital of banks and threatened to put many banks in violation of their regulatory capital requirements. You can see why banks were particularly upset at mark-to-market accounting. (Although no one complained much about mark-to-market accounting when the market was up.)

Incomplete puzzle with various countries on pieces

Back to Ricol. He claimed to have found a provision in the U.S. accounting rules that allowed U.S. banks to reclassify their investment securities into a category that accountants call “held to maturity.” The important thing about held-to-maturity securities is that they are reported in the balance sheet at their original cost, not their current market value, with any changes in value being ignored (as long as a company has the ability and intent to hold that security until its maturity date). Thus, this appears to be a loophole that U.S. banks could use to sidestep the harsh impact of mark-to-market accounting. At least that is the way this U.S. rule was explained to the EU finance ministers. 

What the finance ministers were not told is that this reclassification is so rare and the rules so restrictive that no one can think of an example of a U.S. company ever actually doing it. In addition, the U.S. rule requires the reclassification of “held-to-maturity” be done at the prevailing market value on the date of the reclassification, so any paper gains or losses must be recorded in full on that day—not much of a loophole. But remember, the EU finance ministers probably weren’t given a full briefing on all the aspects of the rule; they were told only that this U.S. loophole allowed U.S. banks to avoid mark-to-market accounting, thus appearing to create an unlevel international playing field with European banks losing out.

Rolling Back the Clock 

Now the story gets really interesting. In drafting the hasty revision to its rules, someone in the IASB (no one is saying who) allowed the European banks to roll back the clock to 1 July 2008 and, with the benefit of hindsight, designate some investments to be accounted for using mark-to-market accounting (probably the investments they knew went up during the third quarter) and some investments to be reclassified as “held to maturity” at the existing value on 1 July (probably the investments they knew went down during the third quarter). Very clever. 

The IASB rule was approved on 13 October 2008, two weeks after the end of the fiscal third quarter of the year.4

Page BreakThis IASB rule revision, which was intended to level the international playing field, substantially tilted it in favor of those European banks that chose to use it. Some European banks, like BNP Paribas, quickly backed away from this blatant manipulation. 

On the other hand, Deutsche Bank gratefully used the retroactive provision to turn a loss into a profit. Without the retroactive reclassifications, Deutsche Bank would have reported a pretax loss of €732 million for the third quarter. With the reclassifications, Deutsche Bank was able report a pretax profit of €93 million, which it proudly hailed in its third quarter report.5

U.S. Response 

There are certainly historical examples of U.S. politicians putting pressure on the FASB to revise its rules (such as with stock compensation rules). But in the United States the FASB is somewhat shielded from these pressures by the SEC. Internationally, there is no global SEC, so the IASB was left on its own to experience the full force of the European Union’s political pressure. When faced with an EU ultimatum, the IASB buckled.

Across the Atlantic, U.S. regulators and the U.S. business community could only stand back and watch this political power play with a mixture of amazement and disgust. As of October 2008 the SEC had proposed a “timeline” for shifting all U.S. accounting rule-making responsibility to the IASB by 2014. This proposal stemmed from two seemingly incontrovertible facts: (1) global capital markets demand a uniform set of accounting rules, and (2) the world will never accept “Yankee” control of this one-world standard.

The SEC had the choice of either watching the international harmonization parade go by or getting in line under the IASB banner. However, the October 2008 IASB rule change caused both the SEC and the U.S. business community to reevaluate the benefits of ceding standard-setting power to the IASB, an organization that had now revealed itself as being subject to powers more focused on the well-being of European banks than global accounting harmony. 

SEC chair Mary Shapiro was never as enthusiastic about international accounting convergence as was her predecessor, Christopher Cox. She was fearful of “convergence” really being a “race to the bottom” in terms of degradation in the quality of the U.S. financial reporting environment. During 2009 Shapiro said cautiously that the “timeline” was on hold until the SEC determined exactly how it wanted to proceed.

The SEC’s new international accounting convergence “work plan” was announced on 24 February 2010.6 The SEC is still convinced that “a single set of high-quality globally accepted accounting standards would benefit U.S. investors.” However, the SEC has expressed concern about both the quality of the international standards and the process by which those standards are set. Specifically, before ceding standard-making authority to the IASB (or any other international body), the SEC wants to ensure that “accounting standards are set by an independent standard-setter and for the benefit of investors.” The implication is that the SEC wants to be convinced that the IASB won’t again cave to EU pressure. The SEC’s “work plan” also states that the SEC will not switch over to IFRS until 2015 at the earliest.

The IASB has since attempted to create a barrier between itself and the political pressure aimed at it—a Monitoring Board that includes representation from a number of important international regulators, including SEC chair Shapiro. It isn’t clear yet whether this Monitoring Board has or can serve as a shield between the IASB and international political pressure. Time will tell.

Remember that report written by René Ricol? The primary result has been to bring home, dramatically, the remaining barriers to international convergence in financial reporting. The U.S. business community was forced to face the reality that it really doesn’t want its reporting rules set by a London-based group heavily influenced by the European Union. 

In addition, all interested parties, both in the United States and overseas, have seen that the IASB differs from the FASB in one extremely important way—the pronouncements of the FASB have the force of law because the regulatory power of the SEC is behind them. But who will enforce the pronouncements of the IASB? Who will ensure that the provisions are applied in a consistent way in each country around the world? Will it ever really be possible to have one truly global set of accounting standards, uniformly interpreted, implemented, and audited? For now, it looks like the answer may be no. 


Written by Earl K. Stice & James D. Stice

About the Authors
Kay Stice and Jim Stice are both accounting professors in the Marriott School. Yes, they are brothers.


  1. René Ricol, “Report to the President of the French Republic on the Financial Crisis,” September 2008.
  2. Ecofin Council of 7 October 2008, “Immediate Responses to Financial Turmoil.”
  3. David Jetuah, “Tweedie Nearly Quit after Fair Value Change,” Accountancy Age, 12 November 2008.
  4. “Reclassification of Financial Assets—Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures,” International Accounting Standards Board, London, October 2008.
  5. 5 Deutsche Bank, “Interim Report as of 30 September 2008,” October 2008, Frankfurt am Main, pages 2 and 53.
  6. SEC Press Release 2010-27, “SEC Approves Statement on Global Accounting Standards,” U.S. Securities and Exchange Commission, 24 February 2010, Washington, D.C.