Stress testing International Financial Reporting Standards (IFRSs) : Accounting for stability and the public good in a financialized world

Abstract

The recent Maystads report (2013) challenged the European Parliament to modify governance arrangements surrounding the design and endorsment of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). In addition the Maystadt report constructs an argument that accounting information has the capacity to also modify behaviour and that this might not be conducive for the European public good, financial stability and economic development. In this paper we argue that IFRS need to be stress tested for their impact on firm-level financial stability in a financialized World. The financialized firm can revalue a range of assets to their market value crystalizing future earning stream into current value but these valuations can become impaired. Asset value impairments will be charged to shareholder equity but this is being hollwed out because a higher proportion of earnings are being distributed to shareholders. Accounting disclosures are not only an information feed to users they inform the stewardship and control of a firm´s resources and in the financialized firm the potential for financial instability is heightend and this can translate into a moral hazard for society.