IASB's Sir David Tweedie 'optimistic' on convergence: International Accounting Standards Board Chairman Sir David Tweedie remains optimistic about convergence. Now, in the third year of his five-year term, he speaks with Financial Executive's Managing Editor Ellen M. Heffes about progress to date, sticking points and what he'd still like to see happen.

You spoke with us a year ago, extremely optimistic about convergence--with IASB, FASB and other country accounting standard-setters. How would you now describe your position on convergence?

Tweedie: I am still optimistic. A document was just released (December 15) by FASB, changing four of its standards to move in Line with ours; we've already issued one to move in line with FASB, and another is coming. The standards include business combinations and impairment. FASB is also looking at IPR&D and the fact that it is written off instantly on an acquisition; they're thinking of not doing that; and also prohibiting certain types of acquisition provisions.

We are all trying to head to the same answer. As for share-based payments [stock options], we are going ahead of the U.S., but we are in close contact with FASB. We'll probably be going into standard just as they go into Exposure Draft (ED). But, we have agreed that if there are differences, they will show what we have proposed and ask a question on it. Similarly, if the ED changes or is different from our standard--by the time it becomes a standard--we'll re-debate the issues [and] change our standard, if we don't like the answer. The idea is that we both have the same standard in 2005.

There is a good atmosphere between the two boards, and we've agreed to meet twice a year now--the next meeting is in April in London. Also, we've set up an Agenda Committee to work on getting our two agendas together, to work on the same projects--so we don't end up creating new differences.

So joint meetings, agendas, getting rid of the differences between the standards--that's all going on. It is going well; as good as we can expect. We [at IASB] will be able to spend more time now because we've been sort of going flat-out for the Europe 2005, with March 2004 our deadline. That frees up a lot of time to look more closely at convergence.

How difficult is it for you, dealing with the IAS 2005 deadline and convergence issues, concurrently?

Tweedie: We firmly believe that we shouldn't have two different ways of accounting for the same transaction. If we have a major difference, then we have to sit and debate it until we decide which one is the right one. And we have to go into it honestly and fairly, with an open mind and willingness to change. If it doesn't matter, quite frankly, we can toss for it, as long as we are at the same answer. We did that for one of the business combination issues. One board had one answer and one board had another; we redebated and we both swapped to the other position. So, we were still apart! Eventually, we had everyone vote, and it was 11 to 10. We asked if the 10 could accept the majority? Fine. So that was it.

So, generally, big picture, things are moving in the same direction?

Tweedie: Yes, absolutely. As we do it, we look around [at other country standards] and say, "This is better, and would be the one we try to pick up in due course." Then, we will both change to it.

It's one thing for your groups to sit around tables and agree or disagree, but how about the users of the financial statements? What's the nature of the feedback you're getting?

Tweedie: There are two types. One is the unspecific. A multinational will say, "For goodness sake, just agree on a way to do it." I remember people saying, "We don't care if it's U.S. or international, just say it one way so we don't have differences." That is a fairly common view among multinationals.

National companies are not unnaturally resistant to change; even with analysts, you find resistance to change. That is always part of it. There are some that are very nationalistic--both in Europe, as well as the U.S.--who say, "We believe that we should stick to our positions. Who cares about convergence? I don't list on the New York Stock Exchange," or "I don't list on London." If they don't see the benefit for them, people will resist it. The benefit really is the cross-border investment and the sheer savings and resources of these multinationals. But more than that, [it's] for the analyst, who can just pick up any set of accounts worldwide. Assuming that the accounts [auditing] are right, he or she knows what the accounting is.

At present, there are so many different methods of accounting around the world--probably 150. In Europe, we have 15 countries in the European Union, and there are 14 different ways of accounting, with a choice of international or American standards, so that's 16. With another 10 [countries] coming in to the EU next year, it'll be 26.

How can you run an economy, a single market, with 26 different ways of accounting? It doesn't make any sense. So you can see why people are changing Certainly, for Europe there is no question; they've got to have the same standards.

What do you say to countries that are adamant about changing standards because it doesn't benefit them?

Tweedie: What's going to happen is: FASB and IASB are going to get closer and closer, until, in a few year's time--and I don't think it's that many years--it doesn't matter which one we use. But, basically, we're going to get the same answer.

When FASB and IASB agree--and at present 91 countries are gong to be using our standards in 2005 and one country does something differently, people are gong to look at it and say: "Well, FASB thinks this is the answer. IASB thinks this is the answer. And you guys have it different. What's special about you?" They will come under pressure. What are you hiding, fellows? I think that is the key to it.

The other thing is [that] multinationals will start putting pressure on as well. "For goodness sake, come into line here. We have a subsidiary here. We have to change all those accounts." So, you'll find a lot of pressure.

What are some of the 'sticking' points--which specific issues?

Tweedie: The big issue for Europe is IAS 39, the FAS 133 equivalent, related to recognition and measurement of financial instruments. That's come as massive change for Europe, as it did when the U.S. brought it in.

An issue we face that FASB didn't face, because FASB standards grew on people; whereas international standards for Europe, it's "crash, here they come, 38 of them--all at once." For some countries, like the U.K., it's maybe a 10 percent change. But for others, it's completely different, and suddenly they are drowning in these things. The most complicated one is the financial instruments standards. So it's taking most of the flack. Part of it is their [users'] frustration. The other part is: "Oh, my, this is going to show my results in a totally different way."

Banks, insurance companies, as financial institutions, are stuffed with financial instruments. It's not surprising that we've been getting plenty of pushback.

How do you expect to resolve it? Tweedie: We had some roundtables, which we learned from FASB. Instead of being confrontational--getting somebody to come up and talk with us for half an hour and argue with them--we had a few board members around a table with probably 10 or 15 people. That was very good, seeing people arguing with each other instead of just with us!

It gave us a feel for what the views were, and that was very helpful. As a result, we think we can see a way of saving a lot of systems costs. And we're working to see if we can help companies do micro-hedging, which really isn't allowed under 133 or IAS 39. It's something we will obviously want to discuss with FASB in due course. We're still working on it; we haven't quite agreed yet. We're meeting with bankers, and the board meeting is scheduled in January. It's on course, and we're trying to see if we can do it. Ultimately, we won't concede the principle--that's what it is about.

Other areas getting pushback?

Tweedie: Just fractionally, not all that much, actually, is the area of sham-based payments--and, not so much on the obvious options. It's more the employee schemes--buying shares at slightly reduced prices. That's the one that has some companies saying: "That is a big tradition with us, and you're going to stop it." To which, we're saying, "Look, what we're doing is a tiny measurement on the income statement. How can that stop it? It's a good idea." Also, if we'd gone into pensions, I'd expect we'd have some pushback there, too.

It's the third year of your five-year term. Under your leadership, what are you thinking of the accomplishments of your group thus far? And, what do you foresee?

Tweedie: One of the things that we have done that, quite frankly, isn't the greatest of fun, is actually improving all the standards we've got. It had to be done. We've done it in time for companies not to have to change after 2005; we've changed the standards so they only have to change the one time they switch to our standard. We've also taken on share options. I remember people in Washington banging the table, saying: "We'll destroy IASB if you do that." We were still prepared to do it anyway, because we thought it was very important, and FASB's coming along with us.

Also, we've moved the convergence. We got the agreement with FASB last October (2002), and that's made a big difference internationally. People have really sat up, saying, "If these two gorillas are getting together, they're going to start stomping all over us. So, we'd better join." Australia is coming in. Others are looking at what we are doing jointly with FASB. And we are very lucky with the FASB crew--Chairman Bob Herz, a former IASB board member, as well as some nice people on FASB's board, who I think are genuine internationalists. They, too, agree, "Why have two different ways of accounting for the same thing? Just pick which one is the better one, and take it."

Now, the next program is: let's get really after some of the nasty things that accounting has in it--we're going to clear out leasing, off-balance-sheet transactions and pensions. Don't pretend that your pension deficit investment doesn't exist. What are you going to do about it? I firmly believe the market wants no surprises. A company should know if it has cracks when they begin to appear, and know what it has to do to seal them.

On a personal note: when you started in this post, you had another offer, and you chose this. I'm wondering what you think of your choice now?

Tweedie: I always regret not becoming president of one of the old universities, which I was really, really keen on. But I think I'd have always looked back at this thinking: I walked away from it, and I shouldn't have. Because it's a challenge.

When I was a student at university, economics was called "political economy." It was the old name in Scotland. What we're doing at IASB is political accounting--it's not just the technical side. You've got to get right out there and sell it. And a lot of the time, you have to point out what is so ridiculous about the way we do it now. And how it fools people, and fools management. That's one of the horrible things about accounting. If people don't have to account for it, you often think that there is no problem; and we hide it. That is really bad accounting.

So we can do a service, as a people. The one thing about having converged standards is that it opens the markets. People from outside the U.S. who have the same accounting don't have to worry about U.S. accounting. If we're converged, they go straight into the U.S. and vice versa. So, this is about investment, about growth, about employment, world trade. It isn't just about bookkeeping. And, it matters.

I could've helped the education of a few thousand kids, but this way I can help increase global wealth. And that is very satisfying. I hope I can do a bit more before I pack it in.