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,


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

“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

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
to adopting the standards. Failure will promote distrust between the boards and
may embolden US critics who argue international standards are of a lower

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.”

Related reading

Fiona Westwood of Smith and Williamson.