Question: The IASB seems to be trying to solve two problems – the 2005 deadline, and convergence with US GAAP. Do you think it would be best to forget about the US for now, and concentrate on preparing for 2005?

FOR US, priority is given to 2005, but the objective of our Constitution is one single set of high quality standards, some people don’t realise where that objective came from. It actually came from the FASB.  That’s the American standards setter - before the IASB was even born. After the Asian financial crisis when apparently sound companies failed, investment stopped, growth stopped and unemployment rose.  They realised that world growth and trade is related to accounting, and it prompted regulators worldwide into thinking that something really ought to be done about accounting around the world.

Shortly after we started our work, the European Union said they wanted to use IASB standards for 2005.  No sooner had Europe decided to adopt international standards, the next month Australia did, and then Russia, China – by 2005, we think there will be more than 90 countries either using our standards or permitting companies to use them.

We inherited 34 standards from the old International Accounting Standards Committee, and some of them had been very heavily criticised. Our choice was, do we start doing new standards, and leave these 34 alone, or do we take these standards, change the most criticised ones before companies make their move in 2005, so they don’t have to change twice. That became the priority – to clean up the existing standards as quickly as we could. We have three others coming: first, share options – that’s been a huge scandal in the US.  We will make companies charge options against income.  Second, business combinations – the major difference between us and the US, where we will use a standard very similar to the US one, and an interim standard on insurance companies. That’s the stable platform; we have to finish that by March next year to give companies a chance to get ready for 2005.

Some critics are still saying that effort to meet the deadline is wasted, because you will not have the standards in place by that time.

THE DEADLINE will be met. We’re saying that it doesn’t matter how much time we have to spend in Board meetings, we will meet the deadline. It also means that when people want to come to see us to discuss a problem, we sometimes have to say no and the discussion is over now it is time for us to get our standards ready. Then people might say we are not listening, but I would say to them: you have had two years. Time’s up.

What happens about the other track, converging with the US standards?

AT THE SAME TIME, we are saying, what if you are on international standards and want to be listed in the US?  Currently you have to reconcile your accounts to US GAAP. With the help of the SEC in the US, we pulled out these reconciliations and we are looking for the big differences between IFRS, and US GAAP. We are putting each individual standard side by side, and where there is a difference, we decide which is better. If it’s the Americans’, we withdraw ours, and put theirs in its place – and vice versa. We’re working down these differences. We hope by 2007 – we won’t make the final goal by 2005 – we will have got rid of the major differences. We are doing the big ones first. So the two processes of international standards for 2005 and convergence with the US are twin tracks – they are both related to the same thing.

In Europe, some governments and financial institutions are still unhappy to use the standard on financial instruments, IAS 39, by which they report derivatives on the balance sheet. Is it here to stay?

THAT STANDARD has been there for four years. People ignored it, when our predecessor body first produced it.  The trouble started when companies realised that they have to implement it. There are derivatives around the world with a nominal value of $128 trillion. Gains and losses from those are about $4.5 trillion. There is nothing on the balance sheet in Europe about those. We can’t allow derivatives to be shown at zero – the potential to destroy companies is real.

The debate can’t carry on forever. We have to have the final text of the standard by March 2004. As I said, IAS 39 is not a new standard – it’s been around since 1999. We have tried to make it easier to implement, which has been well received – the arguments have been over the parts of the standard we inherited. The problem is related to convergence; IAS39 is similar to the American standard, and if we sweep it all away, there is suddenly a huge difference between us and the US. We can’t do that. You have to say – here is IAS39. After 2005, our job is to decide how best to replace it. The US isn’t happy with its equivalent standard either. What we should do is move on - and four or five years down the line produce a new standard. But that will be equally controversial. For now, if you really believe in one set of standards, IAS 39 has to be in the IASB suite of standards.

Is the political debate useful, or does it undermine your work?

THE PROBLEM is that some people don’t quite understand what we do. We went to meet with a group of senior European businessmen a week ago. It was a superb meeting. But it started with them telling us that the convergence project wasn’t working and with complaints about what they thought we were doing. When we explained what was actually happening in the near future, they were much happier, but there’s still a massive confusion.  We have more communication work to do.

Part of the problem is the breakneck speed at which you are moving.

YES, WE ARE MOVING FAST. But if we didn’t go fast, we would end up with a series of changes because we would have to change these 14 standards anyway. So do we start with a set of 34, and then over three or four years change 14 of them, bit by bit. That would drive anyone mad. We’ve tried to say, before you start, we’ll clean them up, and that has given us the pressure. But they will be ready – we will have 12 out by November, and the other two, the financial instruments standards, will be only a month or two later. Most companies have a clean year between the standards being set and their 2005 financial statements.

Recent surveys show that some companies in Europe are still unprepared. Are you confident they will make their deadline?

CERTAIN COMPANIES will find it easier. Scandinavian standards are very much based on international standards already. The UK is similar. Germany is moving that way, and France is starting to move in that direction. Some other companies in Europe have a big problem because they are coming from a standing start and thus will find it tougher. In the UK or the US we are changing 15 per cent of the standards. Some countries are changing 90 per cent. That is a massive change for them, but it can’t be helped.

Most European standards are principle-based, whereas US GAAP relies much more on rules. Will the new international standard introduce rules for European companies?

WE WANT to set out principles, not rules. We often say, don’t ask us the question, because then we will have to give you a rule in answer to it. when we develop a standard, we say to the person who is providing it, ‘stand up and tell us what this standard is about in one minute’. that should be the principle. we can write standards that will deal with 80 per cent of problems in 40 or 50 pages. if you want us to deal with 95 per cent of problems, we are up to 300 or 400 pages. so when auditors come to us and say ‘i’ve got a little issue’, we say, ‘solve it yourself’. that’s the auditor’s job and the finance director’s job.

Can you reflect the complexity of a company’s financial structure using such a short set of standards?

ACCOUNTING is not rocket science – people sometimes think it is. Most things are very simple. For example, take the standard on reporting pension funds used in the UK [which the IASB proposes to adopt]. In the UK, if you have a deficit in your pension fund of £10 million, that will soon be shown on the balance sheet. No one else does that in the world: they say, ‘Well we might not have to pay it for 10 years, we will break it up into 10 bits and report it that way’ – that doesn’t mean a thing. You wouldn’t have a clue what was happening in that company. While there was an outcry against the UK standard when it was introduced, now you find pension fund liabilities are debated in British boardrooms because people know where they are under that system.

Is your job to keep as many people as possible happy, or to risk making them unhappy by doing what you believe to be right?

OUR JOB is not to make people happy, our job is to write standards that will make financial reports reflect, as best we can, the economic reality. We have to tell it as it is. That means we have to understand the problem, but deal with it without fear. When a big company comes to us and says it doesn’t like what we are doing, we ask it to prove that we are wrong. Politicians may not like us – their job is also to prove where we are wrong. For example, on share options, we have been told that we can’t charge them against profit because companies will not be able to issue them as a result.  ‘Why? Because then people will see the sheer size of the awards you are giving to your executives? That’s the best reason for doing it our way’.

Nevertheless in the US the government decided against changing accounting standards to report share options. Didn’t you lose that battle?

WE DIDN’T. We are going to win. When we announced the share option project two years ago, it caused mayhem in the US, because in the US that project had been killed by a bill going through Congress. That kept the US standard-setter out of the process, but we went ahead anyway. Immediately we published our proposal, the proposed American standard followed ours. It’s very difficult for the US, which boasts – justifiably – about how good its accounting standards are if it says that although the rest of the world reports share options in the accounts, it doesn’t matter in the US. Some of these companies boasted that between them they spent $70 million to kill the drive to report share options. Whose money was that? Shareholders’ money, spent to hide from the shareholders the fact that executives are getting all these share options! This will change – the US accounting standards body will use us as a catalyst, and come in behind us.

If the US sticks with a rules-driven environment, can there be any meaningful convergence unless everyone moves to an American-style regime?

WE CAN CONVERGE at the principle level, and all that happens is they go into far more detail. In the US, many people are trying to move away from that method of regulation. One of the problems for the US has been the number of exceptions to their rules. When you have an exception, you must have a rule for that exception, decide how to distinguish that exception from all the others, and so on. Instead we can say to auditors: ‘Sort it out yourselves. You are meant to be a professional accountant. I’m not going to tell you all the answers’. In the US, a potential problem is that accounting firms say the standards are flawed because they don’t deal with a particular situation, and they would rather hide behind rules, rather than say to the client ‘In my judgement, what you want to do is outside the standard’. It requires professionalism to use principles. It’s a big chance for auditors and the CFOs throughout the world to prove themselves. We are saying: you make the call.

Will you have to get tough in the coming months?

WE ARE TOLD that we have to give way to political forces. Absolutely not. Why should we? If governments withdraw cooperation, it’s their problem. We were set up to decide, who has the best standard, the gold standard? When we find it, we take it as the global standard. We will use the British standard on pensions, the US one on business combinations with a bit of the British one and we’ll probably take the New Zealand standard on consolidation. If there isn’t a good standard, we will write one. If someone doesn’t like a standard, we ask why not? Give us an argument. Those with vested interests will run to their governments and try and avoid some standards. If they succeed, people will look at that country’s regime and ask why their companies, use a watered-down standard, and ask whether they have a problem.

Do you get tired of the criticism the IASB receives?

PEOPLE ARE entitled to complain. its part of our job to listen to ascertain if the complaint is justified.  i’m accustomed to people ringing up and complaining, telling us we don’t listen. i tell them that we listen – it’s just that we don’t agree.

Sir David Tweedie

Chairman, International Accounting Standards Board

Sir David was educated at the University of Edinburgh (B.Com., Ph.D).  He qualified as a Chartered Accountant in 1972 and between 1973 and 1978 he was a Lecturer in Department of Accounting at University of Edinburgh.  Subsequently he served as Technical Director, Institute of Chartered Accountants of Scotland (1978 - 1981), National Research Partner, KMG Thomson McLintock (1982 - 1987) and National Technical Partner, KPMG Peat Marwick McLintock (1987 - 1990). 

In 1990 he was appointed the first Chairman of the UK Accounting Standards Board (990 – 2000) and the Chairman of the Urgent Issues Task Force.

He has received a number of honorary degrees and professional awards, including the Institute of Chartered Accountants in England and Wales’s Founding Societies Award (1997), awarded annually to a member who has made an outstanding contribution in any field of endeavour and the Chartered Institute of Management Accounting’s CIMA Award (1998), awarded to non-members of CIMA who have made an outstanding contribution to the profession.

He has been a visiting professor at the University of Lancaster International Centre for Research in Accounting (ICRA), the University of Bristol and the University of Edinburgh.

He was knighted in 1994 for his services to the Accounting Profession.