With convergence closer, IASB chair reflects on progress.
When asked what pleases him about his first term as International Accounting Standards Board (IASB) Chairman, far and away, Sir David Tweedie talks about the progress made towards converging accounting standards between IASB and the U.S. Financial Accounting Standards Board (FASB). He refers to the "Norwalk Agreement," the document that set the stage for the two groups to work together "on how to get rid of the reconciliation between U.S. generally accepted accounting principles (GAAP) and international standards."
Additionally, he's pleased that the European Union (EU) decided to adopt the International Financial Reporting Standards (IFRS), which "has led to 100 countries already using the standards, plus a whole lot more starting to come in."
His trip to China--one of several during the last year, he says--came "because they are converging with us." The Norwalk agreement, he says, combined with the fact that Europe has switched, has done two things. "First, when you look at all the standard-setters who are liaison members with us [read IASB]--the United Kingdom, Germany, France--their major companies have to use our standards now, by law." It's the same, he says, for Australia and New Zealand, and Canada has recently announced that it's going to switch to international standards, as has Japan. So, basically, that leaves the international standards and the U.S. Thus, he says, "We're working to get our two countries' standards set and together. And, it's happening."
In addition, Tweedie explains that there is a list of countries that are waiting to see the outcome of the final standards for small and medium-sized enterprises (SMEs) for which an Exposure Draft (ED) was issued last summer. Following comments, the IASB will make a decision on where to do the cut-off--which companies use the regular standards and which use the smaller-company version. He says as a working example for the company size they're writing standards for, they're considering a target of about 50 employees. "We won't say it's only for companies with 50 employees, because some of the developing companies [may have] slightly bigger companies than that, but they haven't got the infrastructure to do the main standards."
Basically, Tweedie believes the process is progressing more quickly than he had expected it to. "If you asked me four years ago, when we started, 'where would you be in four year's time?' I wouldn't have thought we'd have gotten so far. I thought we'd face more of a slog!"
He says research has shown that if you're familiar with a country's accounting, you will invest there more than if you are unfamiliar with it. "The U.S. investors can be very familiar with international standards because in four or five years' time, it will be the same as the American standards; not exactly the same, but so close it's not worth the difference," he argues.
'Selling' the Standards
In a February 2004 interview published in Financial Executive, Tweedie used the term "political accounting" to describe his IASB chairman role--saying he has to "sell his concept." Does he stick with that definition? "It certainly is selling," he says. Indeed, he adds, that's why he was off to China, to explain the advantages of IFRS, which he says is to drive inland investment.
If you conduct business in China, Tweedie explains, you have to think about Chinese accounting standards, you have to learn them, and then you're concerned you missed something. This will increase your cost of capital and risk premium, as well as the interest you are charged. There's a risk, he says, which can have the effect of a firm cutting its investment, and thus cutting employment, which will cut its growth. "The whole thing is all tied together. This is all political accounting," he says, "but it is also macro-economics."
China is an example of a country that is hungry for economic growth and sees adopting IFRS as a way to achieve its goal. Tweedie says he's amazed with the youthful business structure in China. "It's a sea of black, with no gray and wrinkles that I'm so used to talking to." Accounting itself, he explains, is a young profession there, and one being built from the ground up.
"They've built three huge training schools to learn accounting, and they're trying to build a financial infrastructure, really from scratch. They've been at it for a few years now, of course, but they are building an auditing profession and more. One of their biggest problems is training accountants."
Another growing economic powerhouse is India. And, while not onboard yet, Tweedie says it's 95 percent there. What about the 5 percent? He says India has been asked to "look at the differences, tell us where you think you've got a better answer than us and we'll debate it. But where you think that the IASB has a better standard than you, then we don't even need to discuss it."
Generally the relationship between the IASB and FASB is good and the board members get on well--perhaps since there is a common goal. All eventually are interested in convergence, and seem to be willing to do what it takes to get there. Tweedie talks about the group's roadmap that is currently under discussion between commissioners of both the European Commission (EU) and the U.S. Securities and Exchange Commission (SEC); one of its goals is to get rid of certain requirements. He says FASB and IASB have been setting out what exactly that roadmap is and what each needs to do.
*(Editor's note: see the end of this article for an update on the roadmap.)
Bottom line, they've decided that "instead of trying to remove every single difference, why don't we just go for the big ones? Never mind the detail; we could spend years playing with the detail and it is not going to make much difference, anyway."
Tweedie gives an example of one area of difference: "FASB capitalizes interest. If you build something yourself, you capitalize the interest on it; you are compelled to, under the law. With us [IFRS] it's an option; it's one of these standards we inherited. We agree FASB's got the right answer, and we are going to remove the option. But when it comes to how do you capitalize it ... then it's different, but it's not that different. So, we are not even going to bother changing it."
So, basically, if one country does something a little differently, it is not going to make a difference, as long as they accept the principle. Like segments, he says, for example. "If we think you've got the better standard, then we are going to take it. Don't argue about it. Don't bother improving it. Just take it."
The good FASB/IASB relationship, Tweedie says, extends to the SEC. One of the big issues recently has been "what to do with standards like IS 39 and FAS133, which are very complicated." A lot of people can't understand them, he says, because they are complicated and have a lot of exceptions. So, instead of trying to converge two standards like that--where it'll still be complicated and difficult, in essence they're saying, "Why don't we just rip up the paper and get another one?"
The SEC is supportive, he says, and has said, "Where the standards clearly need to be improved, don't try and converge them. Write a new one." Obviously, any new standard would have an Invitation to Comment period. He says there are 11 such standards--including pensions and derecognition--"where we'll say, we should have an international standard written by a joint FASB/IASB team, and ideally the words [will be] the same." It certainly will make things a lot easier, he notes.
Also, says Tweedie, "when you look at something like IS 39, which I know better than FAS 133, obviously, they are very similar. So, you think, 'too many complications. Can't we just simplify these things?'" However, he cautions, "We are not making them any less rigid. We just don't need to have them as absolutely detailed as they are."
Speaking of detail, is Tweedie in favor of less details in the form of rules? He says the next IASB/FASB joint meeting will include debate about how to write the standards. One thing being considered is pulling out what are really "core principles." He offers, for example, leasing standards, which he says don't work. "Basically, there are very few capitalized leases; and that's because the existing leasing standards clearly need improvement." A new standard would be pretty short, he says, but not "slack." It would be fairly tough.
Hold-ups to Convergence?
With all the good news on progress, what obstacles or "stand-offs" have deterred further progress? For one, Tweedie quickly says, "business combinations," adding, "we've got an Exposure Draft that is unpopular." He believes both IASB and FASB have not explained it very well. Both groups will be looking at the ED, which he says is "causing real angst at the moment." He expects the IASB will spend about a year going through that again with FASB to see what has to be done. "Part of it," he concedes, is communication. "This is political accounting, again. You've got to explain yourself and sell things. We haven't done a very good job of that."
Another area that he expects will "cause interesting issues" is fair values, for which discussion and debates will take place towards the end of 2006 and into 2007. Pensions will present challenges as well. The U.K., he says, shows pension surplus and deficits on the balance sheet, and FASB is presently working on the balance-sheet side of pensions. But there are other issues that he alludes to, such as measurement of a liability, gains going through income, etc.
For those who say they are in favor of convergence and with moving towards principles-based accounting, won't it be hard to not have those rules? Does he believe a mindset change is necessary--particularly for those in the U.S.?
Tweedie says that while he always thought it was a litigation issue, it's possible it's not. "What we really found out is: it's probably regulation." People, he says, "are being second-guessed by a regulator, and then being forced to restate their accounts. So, they want certainty."
FASB and IASB are trying to work out how to write the joint standards. When they are in agreement, they'll go to the SEC, other national regulators and the International Organization of Securities Commissions (IOSCO), and say, "Everyone wants one principles-based standard. If it means under that principle, somebody gets the answer 97 and somebody gets 95, but it meets the principle, you can't second-guess them. If you say it's got to be done 'Method E,' that's a rule."
Thus, he explains, if you mean you want principles, you've got to allow people to accept slightly different answers. And, judgment is going to be used. That's going to happen. He says it doesn't worry him--he's used to that system in the U.K. "I don't think the U.K. [system] is that bad. Not perfect, but not bad either," says Tweedie.
However, he continues, "If, for example, you get 94 and I get 61, then the standard's hopeless; that's too far. We really have to make sure we write the principles so we have just enough guidance so people know what we are trying to get at."
Will it cause more litigation, particularly in the U.S., because of people second-guessing others? Tweedie says it doesn't happen that way in the U.K., and he doesn't believe it would happen in the U.S., either. What would happen, he says, if, for example, you've got a situation and you are trying to work out what the answer is, you would do a search to see what you thought the standard said. "Then, you'd consult with various people and the more anxious you were, the further out you'd go. You might even ring up accounting firms. And you document all that."
In the U.K., he says, that process will get you off any negligence--because you've tried. "Okay, say you made the wrong call, in hindsight. But anyone can do that. That's professional judgment."
Sound like a Utopia? Tweedie reiterates: that's the way it is in the U.K.
So, when does he believe the convergence process will be completed? On the prospects of getting the reconciliation requirement removed, he says "hopefully early 2008, which means we are well on our way in our convergence program. When the U.S. and the international accounts will be pretty much the same, we're talking 2010-2011."
Editor's note: Following the interview with Sir David Tweedie in early February, on February 27, the IASB and FASB released a joint press release stating that they had published a Memorandum of Understanding (MOU) "that reaffirms the boards' shared objective of developing high-quality common accounting standards for use in the world's capital markets."
The press release explains that the MOU is a further elaboration of the objectives and principles first described in the Norwalk Agreement published in October 2002. And, while the MOU does not represent a change in the convergence program, it does reflect the context of the "roadmap for the removal of the reconciliation requirement for non-U.S. companies that use IFRS and are registered in the U.S." It also reflects the work of the Committee of European Securities Regulators (CESR) to identify areas for improvement of accounting standards.
IASB and FASB note that removing current reconciliation requirements will require continued progress on the boards' convergence program. As such, the MOU sets out milestones that FASB and IASB believe are achievable.
For the complete press release, additional information on the MOU, roadmap and continuing coverage of this subject, see FEI's website (www.fei.org/news/finrep/), FASB's website (www.fasb.org/) and IASB's website (www.iasb.org/).
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|Title Annotation:||David Tweedie of International Accounting Standards Board|
|Author:||Heffes, Ellen M.|
|Date:||Apr 1, 2006|
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