IASB's Sir David Tweedie: "One Chance in a Lifetime"

Imagine trying to get the major countries of the world to agree on one set of accounting standards -- with a deadline of 2005. It's a humongous task -- and one might think, an impossible dream. Yet, to hear Sir David Tweedie describe it, convergence could be just around the corner. Well, around some corner, some time -- and on some items, sooner than on others.

"Let's converge on the major principles," says Tweedie, Chairman of the London-based International Accounting Standards Board (IASB). Indeed, he explains, the U.S. standards are also "principles-based," but then go into a lot of guidance, and internationally, people don't want to do that. "So, the idea is, let's say, the answer under international accounting is 70 and under U.S. it's 100; that's not acceptable. But if we got it down to a difference of 98 to 100, well, who cares?" As long as agreement can be on a certain level, he argues, "We are all trying to do the same thing.

"It's a one chance-in-a-lifetime to get everything together," he says of the current climate. Since he took the chairmanship -- coming up on two years now -- he says the process is working even better than he thought it would. He uses words like "agreement," "very quick" and "spirit of cooperation" to describe the progress of his team of the various IASB-member countries, national standard-setters and other constituents, such as FEI.

The Enron debacle, coming just months after Tweedie's new board got going, he says, "changed the game in the sense that you could see the priorities," and that many of those priorities stem from issues related to corporate governance. He lauds FEI for the job it does on corporate governance. "If you have lazy corporate governance, we can produce rules that are coming out of our ears, and the whole thing will be a mess," says Tweedie, who formerly led the United Kingdom Accounting Standards Board.

The way Tweedie sees convergence really nets down to finding who's got the better answer. It could be the U.S., the U.K., another country or the IAS (International Accounting Standards) "Maybe, in some cases, neither of us have it -- but that's going to be rare. Most of the time, one or another answer is copied by all the others," he says.

The IASB and FASB staffs, currently working together on a highly-publicized "short-term project," are going through differences in the standards and making recommendations for one or the other to switch to the best solution. Tweedie says this is already done, for example, on discontinuing operations. "We think the U.S. standard [is] an improvement on the one we've got; it is the newer standard, built on the older one, so we're going to switch -- and that was done in 20 minutes.

What we've got to do is all get together and say, "We're the CFOs and that's the right way; it's silly having a different rule in the U.K. or Australia or the U.S., when we should just see who's got the better rule and let's do it worldwide," so that investors worldwide will know what the rules are."

A key to progress is the relationships with the national standard-setters, which Tweedie says are working well. "FASB is a huge partner," he says, citing the "very good paper" it has prepared on principles-based versus rules-based accounting and attendant problems. Other national standard setters are also doing a lot of the early work. The Australians are looking at intangible assets, dealing with the big issue of "What do you do about development costs?" The U.S. writes them off; the rest of the world capitalizes them, in certain cases. "One of these has got to go," says Tweedie, "so we've asked them to come back with an analysis and recommendation."

The Canadians are working on borrowing costs; most other countries have an option, you either capitalize or you don't, but the U.S. says "you must capitalize," and New Zealand is working on management discussion and analysis (MD&A).

Have the U.S. accounting scandals had an impact on convergence? Tweedie says a few things that were false came of it. One, the view that the U.S. standards are broken, is not the case at all. When you look at the scandals, he says, "they [individuals] broke the rules," and he further believe the problems were a corporate governance issue. He says that those people in the U.K. who believe it couldn't happen there are wrong. "Oh, yes it could; because if people cheat and break rules, and if those in charge of corporate governance don't do what you think they are going to do, you'll have a problem."

The scandals, he says, "woke up everybody worldwide to corporate governance," and the U.S. has now started asking some interesting questions, which will also drive changes in other countries. It made people realize that lack of confidence in accounting does matter, he asserts, reminding that, after all, it was a lack of confidence that caused the Asian crisis of the late 1990s.

Should it come from the SEC, FASB, IASB? Tweedie sees financial reporting becoming more narrative, or what he dubs "financial communication." He explains that while accounting has become more complicated, standards that were fine in the 1950s have remained unchanged. "We've been very keen on smoothing, because management doesn't want us to show we're jumping all over the place." Yet, he argues, "We have to do more than that. Management has got to really explain: the reports will say, 'There is a stark message, now don't just buy those, let me take you through these accounts, and tell you the story.'"

That, he says, is going to put a real challenge on the CFO, but it's what the markets are after. "So the earnings and accounts might look more volatile as they reflect the assets and liabilities, but then management can explain the situation in something like the MD&A."

The sorts of issues he refers to that require more narrative are not just special purpose entities -- but others, such as leasing and pension accounting. He gives as example United Airlines. Its aircraft is leased, as is its space in Denver's airport, yet the numbers, "hidden in the notes," don't provide enough information to see the cash flow implications over the next few years. "It's not that they're trying to cheat," says Tweedie, "it's what the accounting standard is, and it was written many, many years ago, as were all of the international standards."

On the issue of stock options, Tweedie is saying he doesn't know what comments to expect by the March 7 deadline for the IASB-issued Exposure Draft, but he acknowledges differences with FEI and the FASB. He opines that Europeans don't have the same problem, but probably would, at some time since "whatever happens here [in the U.S.] comes across to Europe eventually," and that it was a pre-emptive move that shouldn't be viewed as re-fighting the battle of the mid-1990s in the U.S. "We opened on that, putting out a proposal that is different from the U.S. proposal, but it's debatable.

"Our job is to report -- not to try to kill off schemes -- and we think share options have a great rational basis for being used, but nonetheless, we see it as compensation." The next question, he continues, is How do you measure them? "Anyone's got a better answer than we've got, we'll be listening."

The Improvements Project, he says, is a big one, and while not very exciting, it was inherited from the old International Accounting Standards Committee's (IASC) efforts to get companies listed on the NYSE. The IASC had made an agreement with IOCSO (the International Organization of Securities Commissions, which the SEC dominates) to come up with 30 core standards of acceptable quality that would allow anyone using them to go on any stock exchange -- with New York the real target; and, although they didn't make it, with Europe switching to the IAS by 2005, there's now a big rush to get that done next year, he says. On top of that, is the short-term convergence project, so some standards will be changed twice -- first, to be in line with the improvements project, and then, based on the criteria for the short-term convergence project of which is the better answer? Indeed, he says, "There is a lot of change going on."

Insurance Accounting is a "huge issue," also begun by the old IASC. Insurance, Tweedie says, is a "very special case," involving revenue recognition, and more. Although many European companies are saying that this must be done by 2005, the IASB has said, "We can't; it's too big an issue, and different countries have different views. We want to make sure we treat insurance companies fairly, and we can't invent special rules for them [for example on liability issues related to catastrophes]. Although they have special cases, we understand that, and we have to make certain the rules apply in those cases. We're really trying to make sure whatever we do is a building block to the future -- it's not something that's temporary and that will be replaced," says Tweedie.

In fact, he's suggesting working with FEI's Committee on Corporate Reporting (CCR) to develop a draft -- before exposure -- that, in essence, says, "Does that make sense?" He says he wants to make sure the industry thinks "it's fair, and that we've taken out as many opportunities for manipulation as possible." On the other hand, he adds, "We don't want a standard that says, 'Don't do this, don't do that -- but rather [one that says], do this.'"

As for the changed structure of the IASB, Tweedie believes a balance is needed -- for the 14 board members (from 9 different countries, with 5 from the U.S.) to both spend time in London, as well as to be out talking with people, like FEI members. "If you get a situation where somebody says, 'that doesn't make sense to me, the way I run my business,' we've got to think about that. If they say, 'I'm a special case,' well, I hear that all the time. You've got to really be a special case," he says.

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