Moral hazard was the root cause of the global financial crisis. The global financial crisis has shaken trust in our market economies and its institutions to the core. The economic and political repercussions of this loss of trust will be felt for many years to come.
The mission of the IASB is to build trust in financial markets. With the spread of IFRS around the world, the IASB has come a long way in fulfilling this mission. But IASB's mission is not complete. Some very significant jurisdictions still have not adopted or completely adopted IFRS. That is why the IASB needs the continued support of the G20 for a single set of global accounting standards.
Eliminating information asymmetry is the key to minimising moral hazard. The IASB should be completely unapologetic about it. Over the years, the IASB has built up an impressive track record in its efforts to combat moral hazard. Mr Hoogervorst gave a few examples:
Some years ago, the IASB and the FASB had the mother of all battles against vested interests to record the granting of stock options as an expense. There was a hugely expensive lobbying campaign to keep it that way. But there was one question that this lobby never could answer: if these stock options really cost nothing, why not give them to everybody? Almost ten years later and very few people question the logic of recording stock options as an expense. It is simply regarded as good business practice.
The same is true with pensions. In the past, companies were able to keep pension liabilities off the balance sheet. As is often the case, what is not measured is not managed. As a result, the management of some companies were able to literally give away the value of the company without shareholders knowing anything about it. At the time, bringing pensions liabilities on balance sheet was hugely controversial. Today, these liabilities are routinely discussed in the boardroom and with investors.
The vast majority of lease contracts are not recorded on the balance sheet, even though they usually contain a heavy element of financing. For many companies, such as airlines and retail chains, the off-balance sheet financing numbers can be quite substantial.
Stripped bare, the leasing project is all about preventing the understatement of liabilities. Some might want to say it is about bringing prudence to lease accounting.
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