Tweedie’s third way could help bridge the rules gap

Sir David Tweedie

The bridge between US and international fair value rules may lie in a third
proposal, which could offer account users a convenient means to reconcile the
two divergent accounting standards.

The International Accounting Standards Board (IASB) and its US counterpart
the Financial Accounting Standards Board (FASB) have taken differing approaches
to classification and measurement of bank assets; an issue at the centre of
accounting issues highlighted by the crisis.

The IASB released a mixed-measurement approach in November. This divided
banks’ assets into those intended to be traded, measured at their fair value;
and those which are held to maturity, measured at amortised cost. The FASB
proposal, released on 26 May, values all assets at fair value, but discloses the

The two bodies will have to reach agreement on their two standards if they
are to converge to a global set of standards by their likely June 2011 deadline.

Last month IASB chairman Sir David Tweedie told the Journal of Accountancy
that the two standards could be reconciled on paper.

“There are ways to do it,” he said. “Say we both stick to our same positions,
maybe we need to put out something that would say ‘if you want to get the same
other comprehensive income as FASB, you have to add this on, which would be the
fair value…FASB would do the opposite.”

Accountants say this “Tweedie model” would require agreement in a third area;
which to the uninitiated seems like little more than a formating change.

The IASB wants to place two income statements on the same page. Under the
proposal the profit and loss statement and the statement of “other consolidated
income” (OCI) would be printed together in financial statements.

The move would offer account users all the numbers they need, within the same
statement, to reconcile the US fair value rule with the international rule.
However this approach is not without its critics.

“While reconciliation is one way of dealing with the situation, it must be
inferior to full alignment of the rules,” said Kathryn Cearns, consultant
accountant with lawyers Herbert Smith. “It’s to be hoped that as people respond
to both the IASB and FASB on these proposals they will come to one standard
instead of two different ones.”

Veronica Poole, global IFRS leader with Deloitte, believes reconciliation is
not a clear cut process. She said the con­trasting fair value measurements feed
through to other calculations, including interest rate accrual, impairment and
hedging. “Disclosure does not substitute for convergence,” she said. “The actual
measurement basis you are using has to feed through to all the numbers.”

The IASB is seeking feedback on its OCI proposals, with the deadline closing
30 September.

In our view

It’s becoming increasingly clear that FASB and the IASB need to come to some
form of agreement on financial instruments. A sticking plaster won’t cut it.
Changes to the presentation of OCI may make it easier for account users to
reconcile different measurement models, but let’s be clear, this isn’t

Further reading:

Related reading

Fiona Westwood of Smith and Williamson.