26 Mar 2008
By Andrew Sawers
The man who was once branded ‘the most hated accountant in Britain’ by The Scotsman newspaper is now poised to take over the world. Sir David Tweedie, who turned UK accounting standards on their heads in the 1990s and then repeated the trick with international financial reporting standards since the start of the 21st century, is on the verge of winning the biggest prize you can get in this corner of the business world: America.
Having spent a lot of time looking at IFRS and how it is being used and interpreted by companies around the world, the Securities and Exchange Commission in Washington DC recently relented on one of its most stringent – yet increasingly pointless – bureaucratic demands: the requirement that overseas companies listed on Wall Street publish a reconciliation between their IFRS reporting and US standards, revealing all the key differences in their profits and balance sheet between the two sets of rules.
But according to FDs we’ve spoken to, it has been evident, at least since European companies switched over to IFRS in 2005, that US analysts and investors simply ignore these reconciliations, putting all their effort into understanding the main accounts (and, more importantly, the key business drivers). Wall Street has been sidelining US GAAP. As of next year, reconciliations are out.
Great news for Tweedie and the International Accounting Standards Board, which he has chaired since 2001. But suddenly the SEC has a problem: overseas companies – foreign private issuers, in the jargon – now have a choice: they can publish their results using IFRS or (if for some bizarre reason they chose to) using US GAAP. American companies, on the other hand, have no such choice: they must use the voluminous American rules stuck together over the decades by the Financial Accounting Standards Board (FASB).
Having oh, so tentatively flagged up the issue as one worthy of high-level debate last summer, the SEC is now publicly, officially acknowledging that the current situation is untenable: US companies must soon be allowed to have the same choice as foreign companies. They may even be compelled to switch to IFRS by some date in the not too-distant future – possibly as early as 2011 – coincidentally, the year David Tweedie’s chairmanship of the IASB comes to an end.
Falling in line
Thanks in part to the European Commission’s decision six years ago to force the adoption of IFRS, more than 100 countries now require or permit their use. Even Canada and Japan are falling into line. But America is the prize.
Tweedie himself seems remarkably relaxed by this turn of events, though there is a sense that he’s being very professional and hiding his schoolboy glee. “It’s quicker than we imagined,” he concedes. Tweedie explains that, when the IASB was created out of the old International Accounting Standards Committee in the 1990s, “our constitution was actually written for us by the Americans - the SEC and the FASB – and it was about one single set of high-quality global standards, worldwide. We didn’t expect it to start emerging quite so quickly, though. But it’s been a snowball effect.”
Barely seven years ago, Tweedie stepped up to the plate at the IASB, which had inherited from the IASC a clutch of accounting standards that were, in the eyes of securities regulators around the world, graded ‘B-minus’ at best. They simply weren’t good enough for major stock exchanges to allow listed companies to use them as the basis of their financial reporting to investors. Tweedie and his colleagues devised a six-year plan to upgrade the whole body of standards.
Then, a year later, the European Commission delivered a bombshell: within three years, all listed companies within the EU would be required to publish their results using IFRS. “They weren’t fit for it,” Tweedie recalls. “One of the things we often say is, when countries like those in the EU took IAS stand ards, they did so with great courage – and total ignorance of what was in them.” To get IFRS in shape for the new deadline, “we really had to go in and cut-and-paste and improve.” Bits of accounting standards – mostly from the US and British rulebooks – were lifted and rammed into place, while other standards were drafted from scratch and others hastily rewritten. It wasn’t easy, it wasn’t elegant, but they did it, and the first full-year IFRS numbers started pouring out of European companies in January 2006.
Europe was a catalyst, though, as, soon afterwards, country after country allowed or compelled their own companies to use IFRS. “If we’d stuck to our original plan of doing everything by 2008, we’d probably only now be starting to pick up countries,” Tweedie says. Instead, given a huge boost, thanks to Europe, the country count now stands at 109. “So, in a way, in as much as we didn’t like what we had to do, it actually was the right strategy at the time.”
But IFRS as it stands now is seemingly far removed from what it will ultimately be. At a hefty 2,500 pages, or so, it seems a little disingenuous to argue that IFRS is a principles-based set of standards – even if the American rules stack up ten times as high. At this point, we expect the oft-repeated Tweedie joke about the Europeans having no rules and the Americans having no principles. It isn’t forthcoming. “We’ve said, don’t judge us on what happened in the past,” which takes us by surprise. He explains that one reason for rebranding “international accounting standards (IAS)” as IFRS is that “IAS isn’t ours. We inherited them. So we don’t take the blame for IAS39 [the much-hated financial instruments standard]. That was there [already].”
Unpopular, but effective
At this point, Tweedie, the master of the ready quip, doesn’t disappoint: “If you understand 39, you haven’t read it properly.” He adds that, for all its warts – “and it has plenty”, IA39 is regarded by the European Central Bank as having “vastly increased the transparency of European financial institutions because they have to disclose all these derivatives and so on, which they didn’t do before,” Tweedie says. “In the medium term, it’s a wonderful discipline on banks because it actually reveals to the markets what they’re up to. Despite its not being the greatest standard, it has improved things.”
As for the new standards, his own IFRS, he concedes, “You can’t say we’re ecstatic about them, either.” IFRS 2 on share-based payments is a good example of a bad standard. Basically, it’s the American standard, but “we did it to make sure the problem of share options [being used as a seemingly cost-free way of paying staff and directors] didn’t spread around the rest of the world. We just grabbed the American standard.” So IFRS 2 is on the list for future simplification.
The topic turns to leases – no, please, don’t switch off – and Tweedie compliments his usual joke about wanting someday to fly on an airplane that actually appears on the airline’s balance sheet with the footnote that he usually upsets British Airways with that remark, and they then send him information to prove that some, at least, of their airplanes are on the balance sheet. The IASB standard on leases “doesn’t work”, he says. Being 20-years old and based on the US standard, it’s rules-based. The test is whether the present value of future lease payments is more or less than 90% of the cost of the asset when you get it. More, and it’s on the balance sheet; less, and it’s off. So all the leasing deals in the industry are structured around delivering a figure of 88%.
“I can give you a principle-based standard that just simply says, ‘Principle one: show the liability incurred by signing the lease contract and the rights in the asset taken thereby.’ That’s it. That’s the standard. Now how much more do you want?” Maybe, he concedes, something else is required since, for example, airlines don’t usually lease aircraft for more than seven years at a time – a fraction of their useful life. “Do you want to know what happens in the second seven years? Okay, well I’ve got to give you a wee bit on that,” he adds. “And what happens if you guarantee that you’ll hand it back in a certain condition? We could do a bit on that. But there’s not much else.”
So, seemingly on less than one side of A4, Tweedie has sketched out an accounting standard before our very eyes. “And yet the Americans have half-a-dozen standards and 30 interpretations standing this high.”
He gestures as if holding a stack of accounting bibles. “And nothing is on balance sheets.” He points to his sheet of A4: “That’s how you do principles-based standards.
“Accounting isn’t rocket science. That’s what upsets me about the present system. I believe the average audit partner can’t do an audit without referring to the people in the technical department and probably sometimes the specialist department within the technical department. Well, that’s crazy – and we’ve just got to get accounting back to the profession.”
It’s great evangelism and, yet, he adds that it is the accounting profession that is largely to blame for the current state of affairs. “We won’t get principle-based standards if several things happen: if people cheat; if they jump out of the sandpit and run naked around the beach, we’ll stick them back in the sandpit by putting rules round it; if the accounting firms don’t really internalise it and they appear in court, their forensic partner saying, ‘We wouldn’t have done this’ – knowing full well he would have done! – then the firms are going to say, ‘Give us a rule so we’re safe’.” The point, he says, of principles-based accounting is that people will have to accept that “We’re not going to tell them the answer to everything.”
Tweedie recalls meeting an accountant who was aggrieved at what he regarded as an inadequate accounting standard relating to emission rights. Not only did Tweedie agree with him, he told him that the standard had been withdrawn the previous day. The complainant was flummoxed. “What am I to do, then?” he asked. “Your best,” Tweedie replied. “You’re on your own, Jimmy. Go for it. Just don’t break any standards. Do whatever you can.”
Out of time
Financial instruments, hedging, pension schemes – Tweedie rattles through examples of how, like leasing, these standards can be simplified. So could the IFRS rulebook – size zero compared with American standards – be even shorter in a few years? “I hope so,” he replies, pointing to the IFRS for SMEs exposure draft that is about one-tenth the size of the full set of IFRS.
One intriguing thing about the SME standard is that it has no definition of SME that has anything to do with size. “We’re even thinking of changing the name to ‘Private companies’,” Tweedie admits. That could just be a catalyst that helps encourage the adoption of the stripped-down standard by private companies large and small – possibly, Tweedie agrees, even including subsidiaries of quoted companies, though he thinks that the consolidation of subsidiary accounts might prove easier if they were on full IFRS. But even ‘Private IFRS’ would be easier than the current situation in which many companies still use local, national GAAP below group level.
Tweedie seems very unfussed about whether Europe or its private companies adopt the proposed SME standard, though it’s got the biggest working party on it that the IASB has ever thrown at a project. South America, Africa and lots of emerging markets are very keen on the standard, he says, “and we have a duty to them as well as the big [countries]”.
There is a hint of disappointment in his voice that he won’t be able to change things as much as he would like. He’s now 63, and with just three years left in his term at the IASB. “I’m going to run out of time because I spent the first few years doing this thing for Europe. On the other hand that’s what we had to do.”
Fewer pages, more countries, companies – public and private – and an elephant gun with which to bag the Americans. Tweedie’s accounting principles seem certain to cover the globe before many years come and go. It would be a remarkable retirement present for him.
Curriculum Vitae – Sir David Tweedie
Age – 63
Qualifications – PhD (Edin, 1969), CA (1972); Knighted 1994
2001-now IASB, chairman
1990-2000 Accounting Standards Board, chairman
1987-90 KPMG Peat Marwick McLintock, national technical partner
1982-87 KMG Thomson McLintock, national research partner
1978-81 Inst of Chartered Accountants of Scotland, technical director
1973-78 Univ of Edinburgh, lecturer
1969-72 Mann Judd Gordon & Co, apprentice and qualified assistant
Sign up for Financial Director email alerts
Please enter your email below to receive your profile link
Search by job title, salary, or location - we only list senior financial roles
Our panel of experts explore the major pension pain points and discuss what actions finance professionals should be taking in order to alleviate them
The first CFO Agenda, hosted by Financial Director at the Royal Society of Arts, was a roaring success
Corporate failures can almost always be traced back to a failure of corporate culture. But how do you assess culture? asks Richard Crump
Send to a friend