Happy New Year, Global Accounting

Though it's a little early for cork-popping, IASB chairman David Tweedie talks about what's ahead for global accounting — and offers resolutions ge...
Marie LeoneDecember 10, 2008

As New Year’s resolutions are pondered around the globe, David Tweedie, chairman of the International Accounting Standards Board, is announcing his organization’s resolve to push through its agenda in 2009 — including many joint projects with its American counterpart, the Financial Accounting Standards Board.

For example, next week the IASB will issue an exposure draft on off-balance sheet consolidation focusing on the issue of “control,” noted Tweedie at a Wednesday breakfast meeting sponsored by Pace University’s Lubin School of Business. Tweedie confirmed that the proposed standard won’t be a duplicate of American rule FIN 46(R), which currently is being reworked by FASB to include more stringent criteria for when companies are allowed to transfer ownership of securitized assets and liabilities.

Instead, the new IASB proposal will focus efforts on making the criteria for consolidating assets and liabilities more straightforward. “If you have the power to call the shots, it is yours,” said Tweedie. “We don’t care if you have zero percent equity, it is yours.” Expanding on the control criteria, Tweedie asserted that if a company with an investment in an off-balance sheet vehicle is, for example, making policy decisions about the investment or deciding what to do with troubled assets, it must consolidate the vehicle on its balance sheet.

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The proposed standard will also call for preparers and auditors to use judgment regarding vehicles that are not consolidated, since those items must be disclosed in tabular form in the financial statements. Tweedie noted that the related disclosures will likely cover “how much skin” a company has invested in an off-balance sheet vehicle, what the maximum loss could be if “all goes wrong,” and which structured vehicles currently on the balance sheet were not expected to be brought back onto the corporate books after a bank packaged them up and sold them off to various customers.

Tweedie hopes that next year IASB and FASB jointly will tackle the issue of reducing the number of combined impairment tests in U.S. GAAP and IFRS to two or three tests. Such an undertaking will take two or more years, but the chairman hopes to convince his board as well as FASB to put the task on the agenda in January.

In 2009, IASB will take a tougher stance in the face of political pressure, said the chairman. In November, IASB was forced to skip its due process and rush out a fair-value accounting rule that mirrored FASB’s FAS 115. That was because heads of state, including Nicolas Sarkozy and Angela Merkel, insisted that European banks were at a disadvantage during the credit crunch because they used IFRS. As a result, the European Union threatened to undo international accounting standards related to the reclassification of financial assets unless IASB issued a revised standard.

IASB made the quick change, but Tweedie maintains that his organization and FASB will move in “lock step” going forward, to stop politicians from hijacking the standards setting process by claiming that one region of the world has an advantage over another in terms of accounting rules. Further, Tweedie says that IASB has suggested to its trustees a constitutional amendment to allow a fast-track standard-setting process for emergency situations, such as the current credit crisis. The new fast-track scheme may be available in 2009.

Also due out next year is an IASB/FASB discussion paper aimed at defining lease contracts. For his part, Tweedie would like to see leases always defined as liabilities. Currently, FASB uses 18 different standards and nearly 40 staff interpretations to govern the treatment of leases. “And nothing is on the balance sheet,” remarked Tweedie.

“For lease accounting to be principles based, you have to have a core principle. Here it is: show the liability incurred by signing the lease contract of the rights of the asset you’ve obtained thereby, that’s it,” said Tweedie. He figures a new IFRS standard on leasing should be able to cover the core principle, plus other information related to leases — such as how to handle options or residual guarantees — in 15 pages.

The argument that principles-based rules that require professional judgment will be hotly debated next year. Despite the complaint that the U.S. is more litigious than other parts of the world, Tweedie said that he had gotten support from large accounting firms regarding auditors making judgment calls. Indeed, U.S. accounting firms often say their auditors will be hauled into court by shareholders and clients if their judgment regarding a principles-based standard is deemed wrong.

But Tweedie maintained that he got buy-in on the professional judgment issue from all Big Four firms last year when he sent out a mock leasing standard “that was very short,” and asked the firms if they could audit the standard. Their general response, claims Tweedie, is that the standard was a bit shorter than they would have liked, but ultimately, the accountants were sure they could audit financial statements that used the dummy principle.

Also on the calendar for 2009, is IASB’s slim 250-page IFRS for small and medium businesses. The shrunken standards will be stripped of many disclosure rules, and be a less complicated version of full IFRS, which numbers 2,500 pages. For example, smaller companies won’t see standards related to complex derivative arrangements in the hedging section. Tweedie estimates that businesses with 50 employees or less make up 99 percent of companies worldwide, and that small company IFRS will cover 95 percent of the transactions completed by those modest-size businesses.

Next year IASB will continue working with the International Organization of Securities Commissions to solve spats that crop up between regulators and standard setters. For instance, Tweedie contends that bank regulators must address the credit crisis problem through adjusting regulatory capital requirements, and not insisting that accounting standard setters roll-back fair value rules.

In addition, IASB would like to work with IOSCO to push countries to publicly state whether they require the use of full IFRS as prescribed by IASB, or a local version which includes exceptions known as carve-outs. “The regulators know this is a big issue.”

What companies will not see in 2009 are industry specific standards from IASB — except for a rewrite of insurance and mining industry rules. Canada, Australia, Norway, and South Africa are working to complete a briefing for IASB on the challenges of accounting for proven and unproven reserves in mining, and offer potential solutions. Meanwhile, new insurance industry rules will focus on the treatment of reserves and a business model that collects revenue upfront for services that won’t be delivered until some future date.

Still, Tweedie insisted that IFRS should contain an “absolute minimum of industry standards,” and prepares should focus on applying general principles to industry-specific issues using professional judgment.

Wrapping up the outlook for next year, Tweedie assured the audience that the future of FASB is in tact — despite claims that the standard setter will disappear when IFRS and U.S. GAAP are converged. FASB will continue to thrive because ational standards setters play a vital role in IASB’s rulemaking process, noted the chairman.

“They take the temperature” within countries to identify key issues for IASB consideration, and put the issues into context, explaining whether a concern is wide-spread or a self-interested plea, for example. National standard-setters also keep the 14-member IASB honest. “Fourteen people sitting in London can get it wrong and need to be challenged,” quipped Tweedie. National standards setters also, “do a lot of the initial work for us,” said the chairman, using the mining industry standards as one example.

Looking out further to 2011, Tweedie says that is the year the convergence project with FASB will end, and hopefully the trans-Atlantic standards will be so similar that the transition from U.S. GAAP to IFRS “will be much easier.” He also expects that the IASB of 2011 will include four North Americans and an U.S.-based office.

“U.S. GAAP does not rule the world … like it did 10 years ago,” added Tweedie. “The markets will decide that the world does not need two sets of standards…. But that will take a bit of time.”