IFRS - A Progress Report

Sir David Tweedie is a man with a mission. As chairman of the International Accounting Standards Board, he has been tasked with pushing through new international accounting standards.

It is a job that has brought him many admirers for the sheer breadth of the project he is undertaking, but also plenty of detractors uncomfortable with the new rules. For years, he has kept a newspaper clipping that dubbed him 'the most hated accountant in Britain'.

THE SEARCH FOR CONSENSUS

There is broad agreement about the overall attractiveness of moving to the IASB's International Financial Reporting Standards (IFRS).

At the moment, accounting treatments vary widely from country to country, making it difficult for investors and others to make meaningful comparisons.

Any large, international business has to prepare figures in various different ways, thus running up costs and potentially clouding understanding of management problems.

However, reaching agreement on the right approach to a multitude of complex issues has proved difficult. And by far the thorniest problem has been the treatment of derivatives, the financial instruments that are increasingly used by big companies to manage their risks and liabilities.

French banks have led the opposition to the derivatives standard, known as IAS 39. "The total amount of money involved is close to $6 trillion," says Tweedie. "That's an awful lot to leave off the balance sheet."

The standard requires companies to recognise the market value of their hedging portfolios, potentially provoking large swings in reported figures from one period to the next.

Reaching consensus has proved impossible, and the European Commission has allowed companies to opt out of the most contentious parts of IAS 39. The IASB has strongly criticised this move, since it threatens to undermine the creation of a single set of standards.

Now, say critics, there will be two standards: IFRS and IFRS 'lite'. One is proposed by the IASB, the other by the EC.

ROOM FOR IMPROVEMENT

Even the IASB accepts that the derivatives standard is far from perfect. Whereas most of the IFRS rules are based on principles - thus allowing intelligent interpretation - IAS 39 consists of more prescriptive rules, reflecting the complexities in the use of derivatives. This is partly because IAS 39 is based on a similar US standard.

In a speech to bankers, Sir Andrew Large, the bank's deputy governor, set out his view that the new accounting standards - which must be adopted by all European quoted companies - were seriously flawed.

Large said the IASB needed to take 'a few steps back' to reach agreement on some fundamental issues, starting with who and what accounts are for. He was particularly concerned that the new rules would create 'spurious volatility' in banks' financial statements.

Tweedie responds by saying that Large was 'actually very supportive'. "He understood what we had to get through and said that drastic changes might need to be made. His speech was one we were actually very happy with."

Frits Bolkestein, the EU financial services commissioner, whose organisation has endorsed the standards, has defended the IAS 39 'carve-out', insisting the commission has no intention of turning its hand to devising accounting standards.

He said the carve-out was only temporary, and would allow the IASB time to resolve the acknowledged difficulties with IAS 39. On this, Tweedie says: "We do listen to everyone. But we have to make a decision. Someone is always going to be disappointed."

WIDESPREAD CONFUSION

Jon Symonds, CFO of Astra Zeneca and chairman of the Hundred Group of FTSE100 finance directors, said the big problem was that almost nobody truly understood IAS 39.

"We agree with him," says Tweedie. "It's complicated, but it's not our fault." Over the summer, the IASB sent out questionnaires to all the companies involved and is awaiting the outcome.

The difficulty has been that the standard has not been an IASB initiative. Tweedie adds: "It's been there since 1999, and it took 12 years to get there. We're still looking at how it can be improved through a working party. We'll replace the standard in due course."

LEASE ACCOUNTING

Another area being looked at is lease accounting that the IASB suggests should be based on contractual cash inflows and outflows. Under this method, both the lessor and lessee would report their economic interest in the leased assets, as well as assets and liabilities related to the lease payments.

Leases are at present characterised as operating leases, notes an IASB summary, giving rise to assets and liabilities – but only to the extent of the rights and obligations that are conveyed by the lease.

Tweedie says an agreement with the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board could be sealed in weeks. 'I would like to see an agreement for the EU and SEC. This will save an awful lot of work for European finance directors.'

KEY GOALS

Going forwards, one of Tweedie's outstanding objectives is the elimination of the US GAAP reconciliation for non-US companies listed in the US by 2007-08. This convergence of accounting standards was endorsed by SEC chairman William Donaldson and the EU internal market commissioner, Charlie McCreevy.

The final target is to implement IAS in all the other countries that have not signed up so far, including China, Japan, India and several other countries in South America.

Another plan is to put in place a gold standard derived from countries offering the best practice solution in a number of international accounting areas. "What we are trying to do is find out who has the best practice. For example, the UK has the best when it comes to pensions, and the USA has the best in share options."

Tweedie is certain of the result: "It will save companies a huge amount of cash because it is going to reduce the cost of capital, and that makes it much easier to invest," he says. "It will reduce many of the risk pressures that stop a lot of investment."

The number one objective, says the IASB, is to focus on the convergence of IFRSs with national accounting standards, with a particular emphasis on US generally accepted accounting principles. It is just another of Tweedie's plans for getting the message across.