A Relentless Pursuit of Global Rules

Tom Jones, director of Pace University's international accounting center, looks forward to a world without local GAAPs.
Marie LeoneOctober 21, 2010

Until he stepped down last year, Tom Jones was the only person who had ever served as vice chairman of the International Accounting Standards Board. But as director of the Center for the Study of International Accounting Standards at New York’s Pace University, Jones continues to promote international financial reporting standards. Thanks in part to his efforts, which began when the IASB was formed in 2001, at least 120 countries currently use or are contemplating using some form of IFRS.

Jones will deliver a keynote address about the future of accounting next week at the CFO Rising West Conference, to be held October 24-27 in Las Vegas. Having served more than 20 years as a senior finance executive at Citibank, including a stint as the bank’s CFO, Jones has dealt with accounting rules both as a preparer and a standard-setter, giving him a unique point of view on some of today’s most contentious issues.

In an interview with CFO, Jones spoke candidly about recent accounting developments, including a blue-ribbon panel’s endorsement of private-company accounting rules, the selection of a Dutch regulator to head the IASB, and concerns about IFRS carve-outs. The following is an edited version of the interview.

This month a blue-ribbon panel voted to recommend that U.S. standard-setters issue a separate set of accounting standards for private companies, similar to what the IASB issued 18 months ago for small and midsize entities (SMEs). What’s your reaction to the decision?
I feel very strongly that every country should have a simplified set of standards for small entities. There is a huge demand around the world for it. IASB has observed that even in environments that have good standards, like Australia, it is difficult to make small companies comply with the same standards as large listed companies. Right now the count is up to 60 countries that have adopted the SME standards.

Tom Jones quote

The panel suggested that a separate board be created to develop and oversee private-company standards in the United States. Do you agree?
A separate board? No. But then, I think it depends on the board you are talking about. In the case of IASB, it was pretty obvious that a number of our board members had real experience in small entities, and we had Paul Pacter [IASB’s director of standards for SMEs and director fo the global IFRS office for Deloitte Touche Tohmatsu] who is very interested and knowledgeable in this area.

Are there circumstances under which you would consider a two-board system?
It’s another solution, but the reason I am not really enthusiastic about a second board is that there is the danger that you don’t get the integration. If your company is complying with the SME standards, you are on track to becoming a listed company, if that’s your goal. The SME standards and IFRS are based on the same framework, written by the same people. It seems to be an easier route to going public, which requires using full IFRS. In contrast, if there were two separate boards, why should there be any commonality?

Hans Hoogervorst, currently chairman of the Netherlands Authority for the Financial Markets, will chair the IASB when David Tweedie retires next year. Does that portend more or less political interference for the board?
I know Hans well because he is the head of the monitoring board [the group of regulators that oversees the work of the IASB Trustees]. He will strongly uphold the independence of the board, partly because of his background and partly because of his personality. You can’t set standards by negotiation; it’s impossible, and he’s the guy who knows that well. The fact that he is a European, and a continental European, is also a positive, because IASB has a fair amount of interplay with the continental Europeans, and I think his background will be useful.

Are carve-outs from IFRS — the rule exceptions that some countries write into the standards before adopting them — a real threat to the concept of a single set of global standards?
The carve-out issue is very exaggerated by people who are not enthusiastic about moving to international standards. I hear way more about carve-outs from people who are not using the standards than I ever do from people who are using them.

Take Europe, for example. Those 27 countries are required by law to use international standards, and the only exception is the original carve-out, which is 11 paragraphs out of the entire full set of standards. [The carve-out relates to IAS 39, the financial-instrument standard, and hedge accounting.] It is most unfortunate that it happened, and very unfortunate that it hasn’t been remedied, but that is purely political. Some people were hoping for a European standard, but it didn’t make any sense from the point of view of cleaning up accounting around the world. Still, there are only 29 companies out of 8,000 European listed companies that used the carve-out. So the issue is insignificant.

Was there a change of heart about rushing through rules on financial instruments?
Some people suspected the new rule would not eliminate as much fair value as they had hoped, so they felt IFRS 9 would not yield the benefit they expected. [Most critics] were looking for less fair value with respect to financial instruments, so why would they rush to implement the changes? The other thing is that some of the air was let out of the balloon: a few months had gone by and some of the anxiety about the financial crisis had abated, so there was no rush. Still, people claim that IASB didn’t approve IFRS 9 in Europe. Well, it is going through the normal approval process, and it is likely that the whole rule [classification, measurement, impairment methodology, hedge accounting] will be issued at one time. [IFRS 9 is scheduled to be issued during the second quarter of 2011.]

How do you respond to accusations that IFRS allows too many choices and requires too much judgment, and is therefore lax compared with U.S. generally accepted accounting principles?
IFRS doesn’t allow a lot of choices. That was true of the old standards, about 10 years ago, but the choices are dramatically limited now. The other criticism, that IFRS allows people to use judgment, and therefore you can report whatever you want, is absolute rubbish. I even find that people teaching accounting say that there is more flexibility under IFRS, and that is simply not true.

The new leasing standard being released by [the Financial Accounting Standards Board] and IASB is a good example. It is more principles-based than U.S. GAAP. The fact is, you can so easily get around the existing U.S. leasing standard because the rules are detailed, and any financial engineer or accountant can find a way around a detailed rule. The new standard is very simple. It says if you have a long-term lease, you must record the liability, discounted, because it exists. There is no way around that. No one can say, “My lease is different.”

Will there be a shortage of IFRS-trained accountants and auditors in the United States if the [Securities and Exchange Commission] decides to replace U.S. GAAP with international rules?
On the one hand, there is a very sophisticated accounting environment in the U.S., with extremely long and complicated rules. The international standards are based on a similar framework and approach, but are much simpler. So it is hard for me to believe that the U.S. will have much difficulty making the transition. However, the training is clearly inadequate right now if the decision to move to IFRS is approved [by the SEC]. I teach international accounting at Pace University, but I have observed that generally, little is known about IFRS in U.S. colleges. That said, many large companies in the U.S. that are contemplating the change to international standards probably already are doing their own training today — likely relying to some extent on their overseas subsidiaries that are already staffed by folks that use IFRS and know it backward and forward.

How should the United States address the education gap?
In a sense, we are solving the problem through the convergence process, which is calling for changes to about a dozen major U.S. standards designed to bring together U.S. GAAP and IFRS. For instance, the revenue-recognition standard under the two [sets of] standards will be identical once the convergence project is complete. Nevertheless, a transition to IFRS will still be a big event in the U.S., because you are swapping out about 16,000 pages of rules and detailed interpretations for 2,500 pages based heavily on broad principles.