International Accounting Standards Board Chairman Sir David Tweedie

You're now working with FASB to accelerate some long-term — and pretty major — accounting convergence projects and finish them by June 2011. Why that date?
When we first agreed to converge U.S. GAAP and IFRS in 2002, there were 10 areas where we felt that both our standards were pretty poor. The target date for writing new ones was 2012 or 2013.

If we took a theoretical date of 2013 — and it is theoretical — for the United States to adopt IFRS, plus a year to get ready, as Europe more or less had, that puts us at 2011. Combined with the number of countries that are adopting in 2011, it really became clear that people didn't want us constantly producing standards in 2012 or 2013.

If we want to get the all-singing, all-dancing standard, we could spend another couple of years. But if we want the 80 percent standard, this will make one heck of a difference. All the bells and whistles can be done afterward.

What will we likely see, for example, with regard to financial statement presentation?
That will make quite a big difference, because U.S. accounts and international accounts will look the same. There will be new features the analysts will love, such as reconciliation from the cash- flow statement to the income statement, showing the effects of fair value changes. We are talking about this to CFOs today around the world, and some of them are quite excited about that. They said this will answer a lot of questions that are asked by analysts.

How will that project help soothe existing fears about the volatility that fair value introduces into financial statements?
We should separate items such as financing, investing, operating in the income statement, and we should show the assets involved clearly in the balance sheet.

We should also relate...the income statement to the cash-flow statement. So you can see what is cash, what is simply accruals, and what is valuations. That would have shown most of Enron's income was fair value, and FAS 157 would have shown you most of that was their models. That's why IASB is doing [its own version] of FAS 157.

Aren't there some differences between FASB and IASB's definition of fair value, particularly in terms of financial instruments?
Our financial instruments standard is not so different--it's just phrased differently.

We have perhaps been unfairly accused of having more fair value than FASB because the old IASC--and we never bothered correcting it--scattered the term "fair value" around the standards. We've got to go back to our standards and take out the term fair value when we don't mean it.

The only part where fair value comes in a bit more in IFRS is we allow the revaluations of properties. And that is quite useful, because it shows the financial strength of the organization. When you think about building companies and land banks--they could be holding a field for 30 years which is rocketing in value, and suddenly they sell it, and in comes the profit in year 30. An asset stripper who is wise could take over that company for much less and just sell off the fields.

What do you say to the criticism of FAS 157 and the idea that fair-value accounting in general exacerbated the subprime woes of the banks?
Basically, the standards didn't fail.

There undoubtedly was a problem with the valuations. Part of that was the drying up of the markets [that banks used to get values]. The big banks had a plan B--they switched to modeling. The smaller banks were starting from scratch, and they were really struggling. And that wasn't surprising, because this hadn't happened before. And there was a panic.

So what we've discovered is that we need to lay out the process of how you go about doing a valuation in that situation.

We've heard all the flack about pro-cyclicality. I think it was very telling that the Japanese finance minister said that the one lesson from the Japanese banking crisis in the 1990s was that further transparency would have allowed the problem to be dealt with earlier. Fair value has forced this crisis right out, whereas in Japan it bubbled along for 10 years and stagnated the economy.

As far as [FAS 157's valuation hierarchy], that has proved very popular in the financial statements. We've noticed even some of our IFRS companies have used it. I think the markets like it. I think we will bring that in even before we bring in an equivalent of FAS 157.

You've also accelerated the leasing project. Will you still be able to address what you've often said are serious problems there?
That project was going to address lessor and lessee accounting, but most of the problems are in the lessee accounting, so we decided that is the priority. In 2006, the leasing industry was a $634 billion industry--that's excluding property leases. And most of that is off balance sheet.

Yet, what is a lease? It's people committing to pay so much for so many years to get the use of an asset. Well, we think that is a liability. As does FASB. And we should bring that on balance sheet.

So what we're really talking about is, maybe we should get rid of the distinction between operating and finance leases. We could probably do that in three years. It will be tough, and some people might not like it so much. But nonetheless, that will make a massive difference.

• « previous
• 1
• 2
• 3
• next »