Simplifying Global Accounting
IASB chair predicts the future of IFRS, U.S. GAAP and the global accounting profession.
from Journal of Accountancy
This article has been excerpted from Journal of Accountancy. View full article here.
As chair of the London-based International Accounting Standards Board (IASB), Sir David Tweedie is championing an effort to develop a single set of global financial reporting standards that will be both understandable and enforceable. More than 100 countries now require or permit the use of International Financial Reporting Standards (IFRS) developed by the IASB. Before taking on the convergence mission, Tweedie served as the first full-time chair of Britain’s Accounting Standards Board. He was knighted in 1994 for his service to the profession and his efforts to reform British accounting standards in the wake of financial scandals.
Tweedie spoke recently with Journal of Accountancy Publishing Director, Geoffrey Pickard, about convergence issues and the future of accounting.
JofA: What do you think the IASB’s biggest challenges will be over the next three to five years?
Tweedie: Right now, just over a hundred countries require or allow companies to use the IASB’s International Financial Reporting Standards. In five years that figure will probably have risen to 150 countries.
We have a major convergence program with the Financial Accounting Standards Board based on the idea that if the U.S. has a better answer, we should have it — and vice versa. Our two boards made an agreement with the SEC that, rather than making sure that every single detail in our respective standards was aligned, we’d divide the standards into two sets: one for which we should just pull the principles into line because the standards were basically OK, and the other set where we both had outdated standards, which we would replace by writing new ones together.
So by 2011–12, U.S. and international accounting should be pretty much the same — with 150 countries using IFRS and several others using U.S. GAAP. That adds up to about 170 countries accounting in much the same way. So, by then, if you’re a company in one of the remaining 50-odd countries, you’re going to have a problem attracting finance. The idea of one single set of standards for use around the world is gathering momentum. And that’s why it’s important, I think, for the U.S. profession to look at what’s happening internationally, because it’s coming your way, just as the rest of us are watching the U.S. because we’re moving together.
JofA: In the United States, FASB and the AICPA are collaborating on private company GAAP. What are your thoughts on this initiative?
Tweedie: This is very similar to what we’re doing. I think this is something that we will certainly look at because when we move towards issuing our standard on this some time next year, we shall look at the U.S. and see how you have treated issues such as income tax. Perhaps the U.S. has got a better answer, in which case we shall be perfectly willing to change ours over time.
We know there’s not so much international trade involving smaller companies, but there is some, so it would be quite useful if, again, we had a similar standard.
JofA: There has been a concern in the U.S. about auditability of some fair value measurements. Are concerns about auditability as strong in other parts of the world? And how does the IASB ensure the auditability of information it requires in financial statements?
Tweedie: That’s a very interesting question, because I think the rest of the world would be surprised that you asked it. After all, you’ve got deep and liquid markets, so what about the rest of us? We have taken your fair value standard SFAS 157, put a cover around it and published it as a discussion paper, saying, ‘Look. This is what the U.S. does. Do you agree with it? Could you operationalize it? Is there more guidance you need?’ We’re in the process of getting the answers back now. We will then look at the responses and decide what to do.
JofA: eXtensible Business Reporting Language (XBRL) is and has been an exciting phenomenon in the U.S., and it’s spreading globally. As you know, SEC Chairman, Christopher Cox, has committed more than $50 million this year to help to advance that. The Netherlands has implemented XBRL for statutory reporting. Do you see similar public and private efforts in other countries?
Tweedie: This is going to spread. Chairman Cox actually has done us all a favor by pushing this issue in the U.S. But it was already starting elsewhere. At the IASC Foundation we have had an XBRL program running for some years now. One of the things we have to do is make sure that we don’t have two XBRL taxonomies for financial reporting running internationally. So this is another convergence issue and one that we are working on to make sure that people using our XBRL system use exactly the same terms as the U.S. has.
JofA: The joint conceptual framework will serve as a basis for U.S. GAAP and IFRS. Similarly, the Enhanced Business Reporting Consortium is developing a structured framework for non-GAAP information. Has the IASB addressed this issue and, if so, what’s your current thinking about a non-GAAP framework?
Tweedie: We haven’t done much in non-GAAP information mainly because we’ve been so busy trying to make sure we’ve got all our existing standards in good shape. However, this is obviously going to be an important topic for the future. Again, it’s tied up with the management commentary. What important drivers and other aspects of a company’s performance and financial position should we report? I can see this being the next major issue after the conceptual framework.
JofA: Talk about GAAP convergence. In 2002, the Norwalk Agreement between the IASB and FASB was to move toward a convergency — U.S. GAAP and IFRS. Are you satisfied with the progress of this convergence?
Tweedie: Well, we weren’t until recently. Take income taxes — we’ve already spent two or three years on it, and we still haven’t published an exposure draft. We thought that, if we continue like this, we’ll get our standards converging in something like 20 years’ time. And people will not wait that long.
So that’s where I think the SEC and the FASB helped us enormously by saying, ‘Look. Why don’t we accept that removing every difference will take too long? We still want to converge. It is a process. In some cases we need only to change a principle or two. Forget the detail. Where we realize that we’ve both got some pretty outdated standards, let’s jointly write the new ones.’ So this is the new program.
JofA: You are a full professor. We have some challenges in the U.S. in attracting young people into the profession. Is this a problem you’re seeing in your country, or more importantly, in other parts of the world?
Tweedie: No, not really. I think it’s fun enough. The scandals that we have seen in recent years are often attributed to accounting although, in fact, I think the U.S. cases are corporate governance scandals involving fraud. If anything, however, the scandals have made accounting more exciting to people.
Where I take issue with universities is in their teaching of accounting standards. They do that to help their students with their professional training. I think the universities should be teaching them to think. I see all these kids learning all the rules about leasing and I think, some day soon, we’re going to get rid of all those rules.
If we move to principle-based standards, those students are going to have to come back and say, “Well, how do I do this?”
When I was a young accountant, we didn’t have any standards in the U.K., so you were on your own. And it was the old partner, with a lifetime of experience and judgment, who was the guy who got you through the challenges of practice.
As we start pressing on judgment, we’re going to bring the professionalism back. I don’t think we’re professional enough in the profession at the moment because we ask our colleagues to learn a huge amount of rules. And a lot of them don’t make sense. The question ‘Where does the profession go from here?’ is one that we need to confront now, because I don’t think we can continue going in the direction we’ve been traveling for many years.
Read the full interview with Sir David Tweedie here.
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