Synchronizing accounting principles globally on top accountant’s agenda

(July 9, 2003) Countries that don’t accept new accounting standards will find themselves frozen out of top markets like the U.S., U.K., Canada and Australia, warned Sir David Tweedie, chair of the International Accounting Standards Board (IASB).

The goal of the IASB is to collect and put forward a set of global accounting standards. The new standards are scheduled to be in place by 2005, with March 2004 as the deadline for the initial draft.

Currently, every country in the world has its own peculiar set of standards for the accounting industry, but following the accounting scandals of recent years, it was decided that a universal standard was needed.

Accounting standards should have the same standards and not just mutual recognition, Tweedie told the audience at a breakfast hosted by the Economic Club of Toronto. “So we don’t have all these regimes dotted around that are all different.”

He said that eventually, the only way to gain access to the major markets, most important the U.S., will be to comply with the standards that are adopted.

The process of adopting new standards will include selecting the best practices currently in place in the countries that participate in their formulation. Tweedie pointed out that it was therefore in the best interest of all countries to join the IASB early to make their voices heard.

“If someone’s got a great idea, why don’t we all do it?” he asked rhetorically. “There’s no point going down to the weaker standard… So we are picking the best one and moving up.”

Tweedie said the IASB was not interested in generating a list of rules for accounting, as this would give less reputable practitioners room to devise new accounting methods to circumvent the rules. The IASB favours a more general approach, setting out principles, which must be adhered to.

It is akin to the principles guiding doctors. Imagine if the principle “Do no harm” was replaced with the rule “Do not punch your patient.” There would still be the option of kicking, elbowing or pushing. Using rules would make it necessary to have a rule against every possible abuse. And in accounting, there are always new abuses to dodge the latest rule.

“It’s hard to wriggle out from under a principle,” he said.

Two of the big points of contention are accounting practices for pensions funds and how to treat stock options. Until recently, companies would not consider the stock options given to executives to be expenses. But the IASB wants to change that and Tweedie says it is now only a question of how they will be valued.

He pointed out that Canada, the U.K., Australia and Germany are all onside with expensing options, and that the movement to do so is picking up steam in America.

“The U.S., in a way, has helped with Enron. Well over a hundred companies that a year ago did not expense options are now doing it.”

U.S. and Europe are nervous about reforming accounting standards for pension funds because huge deficits are common. These are often smoothed out, by amortizing losses over the expected span of an employee’s career. On top of this, unrealistic projections for investment returns are often counted into the mix.

Tweedie said this practice should be replaced by the strict reporting of what has actually happened. Projected returns should be excluded and accounted for only after the returns are realized.

There has been some movement on this front, as General Motors recently topped up their pension fund to the tune of $10 billion to get it back in order.

Companies that do adopt the new principals in 2005 will face a one-time nuisance, as they will be required to offer two sets of their balance sheets — one prepared under their country’s old standards, and one prepared according to the IASB standard. This will allow investors to see the differences between the two sets of principals and lessen the “sticker shock” of any sudden changes by demonstrating where they came from.

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Filed by Steven Lamb, Advisor.ca slamb@rmpublishing.com

(07/09/03)

Steven Lamb