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: the US.
Having spent a lot of time looking at IFRS and how they are 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)
use US GAAP.
On the other hand, US companies have no such choice, they must use the
voluminous rules stuck together over the decades by the Financial Accounting
The SEC is now publicly and officially acknowledging that the current
situation is untenable. US companies must soon be allowed to have the same
choice as foreign companies.
Thanks in part to the European Commission’s decision six years ago to force
the adoption of IFRS, more than 100 countries require or permit their use. Even
Canada and Japan are falling into line but the US is the prize.
Sir David 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, Sir David 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.Along
with his colleagues, he devised a six-year plan to upgrade the whole body of
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 standards, 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.
But IFRS as it stands 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 US rules stack up ten
times as high.
At this point, we expect the oft-repeated joke about Europe having no rules and
the US having no principles. It isn’t forthcoming.
‘We’ve said: don’t judge us on what happened in the past,’ he says, 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]’.
At this point, Sir David, 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.
As for the new standards, his own IFRS, he concedes: ‘You can’t say we’re
ecstatic about them, either.’
IFRS2 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 IFRS2 is on the list for future simplification.
‘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’.
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.
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”,’ Sir David
admits. That could just be a catalyst that helps encourage the adoption of the
stripped-down standard by private companies large and small possibly, he
agrees, even including subsidiaries of quoted companies, though he thinks that
the consolidation of subsidiary accounts might prove easier if they were on full
But even ‘private IFRS’ would be easier than the current situation in which
many companies still use local, national GAAP below group level.
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. Sir David’s accounting principles seem
certain to cover the globe before many years come and go. It would be a
remarkable retirement present for him.
A standard malfunction
The IASB standard on leases ‘doesn’t work’, says its chairman Sir David
Tweedie. 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.’
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.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
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.’
This is an abridged version of an article that appeared in the April
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