Bringing the US on board

Sir David Tweedie

For a man who’s built a career promoting prudence in financial rules, Sir David Tweedie seems comfortable betting the bank in the high stakes world of international accounting.

Sir David, chairman of the International Accounting Standards Board (IASB), now has only ten months left to set in place the stable global accounting regime he has long championed.

As the IASB approaches its tenth year, the global accounting regime remains far from stable. The 2005 decision by Europe to adopt international standards has not been followed by the US. Meanwhile, Asia has embraced international accounting rules, but on the shaky assumption the US will follow suit.

“Our job has been to keep Europe in, to bring America in, without antagonising Asia, and that’s quite tricky,” said Sir David, who steps down in June 2011. “It’s been a case of not changing the standards to please anyone, because then you annoy somebody else – it’s trying to show that they’re fair, reasonable.”

Euro-sceptics

Europe has a fickle relationship with the IASB. In October 2008, as the crisis was reaching its peak, the European Commission threatened to throw out parts of the infamous accounting rule known as IAS 39. Entire economies had been ravaged by the rule which forced banks to measure loans at rock-bottom market prices instead of cost.
Sir David capitulated, allowing the now infamous “carve-out” from the standard, while also promising to build a new standard in its place.

“The danger was that, if we didn’t do it, then Europe certainly were going to do it by law, and there would have been no constraints on who could do it, no disclosures – I think the markets would have collapsed” he said.

But the move failed to quell the anti-IASB sentiment in Europe which has had an acrimonious relationship with the standard setter ever since. The decision also left a stain on the IASB’s independence and didn’t go unnoticed by the US, still undecided on whether to adopt international rules.

The last ten months of Sir David’s chairmanship will be crucial. Outwardly, the world’s largest economy has openly declared its support for international accounting rules, but has failed to commit to adoption. The crucial decision is expected next year, and success will depend in part on the good-will built up by Sir David.

The decision will ultimately be made by US policy makers with backing from Congress. But, so far, there are forces pulling them in different directions. Most US-listed businesses rarely trade outside the country and will see no need to make the costly switch in a recession.

But the nation’s major trading partners across Asia are embracing international accounting rules and abandoning their previous reliance on US standards.

“The US capitalisation, as a proportion of world capitalisation, has gone from 52% in 2000 down to about 34% now. It is Asia that is booming. So, the US, if you like, diminishes. It will still be growing but, in relation to the rest of the world, it diminishes,” he said.

“International standards will provide [US companies with] easier consolidation within a group, easier IT, easier training. It will help to understand subsidiaries and understand competitors a lot better. You’ll have a lower cost of capital because you can go to what ever market has the cheapest rates.”

US and them

A critical factor will be whether the IASB and its US counterpart the Financial Accounting Standards Board (FASB) can substantially converge their two accounting codes and, crucially, their two financial instruments standards.

FASB seems wedded to an accounting approach that forces banks to value their loan books at market prices. The IASB has in place a mixed-measurement model which offers banks more flexibility. Sir David believes FASB can be persuaded to lean closer to the IASB model.

“They will look at the comments and, if they accept the arguments, they will change,” he said.

“I don’t know what the American [account] users are going to say. Analysts are very important for both of us and they may say, their standard is much better… I don’t think they will frankly.”

Success in converging financial instruments will bring the US one giant step closer
to adopting the standards. Failure will promote distrust between the boards and may embolden US critics who argue international standards are of a lower quality.

Sir David is a realist – the two accounting codes will never match. “There’s absolutely no way [international standards] can converge with US GAAP – you can’t converge two and a half thousand pages with seventeen and a half thousand. There are going to be differences,” he said.

The FASB-IASB convergence agenda has attracted criticism on another front. Both boards had planned to release ten converged standards by June 2011 – more standards than the IASB had released in its almost ten-year life.

The burden on those who provide feedback on the proposals was heavy. Some were worried new accounting standards would not receive the rigorous road testing other standards enjoyed. Both boards came under pressure to knock some projects off their work list.

After a series of secret meetings in June, the boards said they would reduce their workload, but there remain some who believe the IASB is still being too ambitious. To these critics, Sir David is unsympathetic.

“It’s tough, but goodness, it’s tough for us too. We can’t keep getting all this advice. We always get conflicting advice like ‘you must have these done by June 2011, but don’t give them to us all at once’,” he said.

“I’m not terribly sympathetic. It’s not as though these have sprung out of no where… they’ve seen the drafts coming, they know what we’re doing.”

All change

It’s unlikely these critics can derail the process, but the situation remains fragile. As if to highlight the point, the day following Sir David’s interview with Accountancy Age the IASB is shocked by the surprise departure of Bob Herz, chairman of the FASB.

The departure of Herz eliminates one of the key critics to the IASB’s financial instruments standards, but also points to instability within US accounting which may prolong convergence.

With ten months left in the hourglass, it seems the only certainty for Sir David is that this will go to the wire.

“But, if you’d asked in 2001, when we started, ‘where do you think you’ll be in ten years time?’ I wouldn’t have said we’d be here.”