Sir David Tweedie, IASB chairman

Sir David Tweedie

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

Career
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

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