Sir David Tweedie led the International Accounting Standards Board for a decade until the end of his second term in June of last year, and now he is getting set to make a similar impact on the valuation profession.
As the founding chairman of the IASB, he led the way in establishing International Financial Reporting Standards in over 100 countries across the globe while striving to achieve convergence with U.S. GAAP. Last week, he was named chairman of the London-based International Valuation Standards Council (see Tweedie to Chair Int’l Valuation Standards Council).
Tweedie explained his goals for the recently established IVSC in a telephone interview Thursday with Accounting Today. As with the IASB, one of them is to create common standards that can be used by the various valuation-credentialing organizations around the world, as well as to set up forms of regulation, discipline and continuing education.
“OK, you passed your qualification, but are you keeping up to date? Now accountants have all of those,” said Tweedie. “And that’s what, if we’re going to have a unified valuation profession, it needs to do that worldwide.”
Tweedie also shared his views on the currently stalled state of the convergence effort between the IASB and the U.S. Financial Accounting Standards Board.
“There are absolutely the same valid reasons which were initially pushed by the SEC, the fact that we should have one single set of global standards,” he said. “I think it will happen. There has just been a temporary delay of a year or so, but then we move on.”
Excerpts of the interview follow:
Congratulations on your new appointment, Sir David. Could you tell me what your goals will be with chairing the International Valuation Standards Council?
I was present when [IFRS Foundation chairman] Michel Prada launched it probably three years ago. I spoke there because quite clearly there was an overlap between what I was doing then and what the council standard-setting board did, namely that the balance of advantage on valuation does not lie with the IASB because we’re accountants and not valuers.
But clearly, the more you move into areas of fair value, the more you came across valuations, and that came to a real crisis point in the middle of the financial crisis in 2008 and 2009. It was quite clear the markets had frozen. Frankly, there was no guidance whatsoever on how we dealt with illiquid markets, how you valued them. These were instruments that were supposed to be at [market] value and quite suddenly the market had frozen, so now what happens? And we and the FASB were forced to set up working parties, and we aligned the views eventually of the two.
But we felt at that time this really shouldn’t be our role. It should be somebody else doing this, so we did mention that to the IVSC afterwards. It wasn’t their fault. Their expertise was looking at other areas. But now they’ve moved into looking at valuation of financial instruments, credit instruments, intangibles, as well as real estate, which is where the real strength of the profession came from. That’s really where I came across them.
And it’s very important, I think, to make sure that people do look at these values, but especially do them the same way. And we’ve got exactly the same issue. It’s very difficult for the IASB to say, “OK, use IVSC standards,” if not many countries use them. Now, quite a few do, but it’s really the same role as I had in part as chair of the IASB. Can we get people to accept it? It’s trying to find out what is the best way of valuing and using it. Now, I’m not a valuer, so I’m not going to be involved in the standard-setting, but it’s the sheer principle of that.
The second thing is, one of the disadvantages that valuers have is that there are several organizations, each with their own requirements, but they are different, and there isn’t a common, if you like, qualification. With accounting, it’s quite clear there are CPAs and there are chartered accountants, and they’re equivalent, but everybody knows that, at least those who are in the financial sector do. With valuers, we don’t know that. We don’t know what it is.
In fact, anybody can call themselves a valuer, the same way as they call them an accountant, but there are so many qualified accountants, they probably won’t be given much credence. But the trouble with the valuers, it’s a case of “can we sort of mesh them into a profession?”
They’ve got bits of that already. They’ve got a standard-setting board, which is independent. It’s part time, so it’s not as full time as the IASB was, but these are early days. It’s got a standards board that sets the standards, internationally based. It’s got a code of ethics.
What it now needs is two other things, well, more than two. It needs a common qualification, and this is not for the IVSC to do. It’s for all the various valuation bodies. They would continue to exist. This isn’t a takeover bid. But can they agree on what the qualifications should be and all use it?
Secondly, can they put in some common form of regulation and discipline so that people stick with the rules, and if they don’t, remove them? The accountants will do that.
And the third area is continuing professional education. OK, you passed your qualification, but are you keeping up to date?
Now accountants have all of those. And that’s what, if we’re going to have a unified valuation profession, it needs to do that worldwide. So it’s not just the standards, but it’s three roles. One is the standards, two is selling the idea of global standards, and three is the idea of can we get a unified profession? That is how I see the role.
How does it tie in with the work you did while at the IASB? Does it grow out of the work you’ve done with fair value accounting?
That’s where we came across it, of course, but it’s also valuing buildings; there are investment properties to be valued under IFRS standards and FASB standards. Under IASB standards, there’s the question of re-evaluation of the office properties, things like that. Intangibles under both U.S. GAAP and IFRS, and financial instruments are clearly under both systems. We don’t want people valuing them differently in America from the ability to do them in Europe or Asia, or vice versa. Can we agree on what’s the best way, and let’s all do it?
How do you feel about the status now of the convergence efforts and how it’s gone since new people carried on after you left the IASB? Do you think it’s ever going to happen?
Yeah, I think it will happen. I think they’re good people. The fact that the U.S. didn’t make a decision—it’s not a no decision, it is no decision. They’re different. I think Mary [Schapiro] and the other commissioners at the SEC were just swamped with the legislation they had to do, the Dodd-Frank legislation. Putting that into effect, they had a massive load on their plate. I think it just got [too close] to the election to make a decision, because clearly this is something they want to deliberate in time, so I think it’s a shame, but it’s not a disaster. There are absolutely the same valid reasons which were initially pushed by the SEC, the fact that we should have one single set of global standards. I think it will happen. There has just been a temporary delay of a year or so, but then we move on. No, I think it will get there.
Mary Schapiro is expected to be leaving her chairmanship of the SEC after the election or by next year, and I think Leslie Seidman’s term at the FASB is supposed to be over next year too. Do you think there will be more progress next year, or less progress?
No, I think personalities clearly matter, but Leslie and Mary are both internationalists, and their successors clearly will just have to learn what it’s about. It will take a little while, but anybody changing always dilutes it slightly until the new people pick it up, but Hans [Hoogervorst], who took it over from me, picked it up very rapidly and I’m sure Leslie’s successor may well know a lot about it to start with. In that case, it will be absolutely seamless. And of course it depends on who becomes the chairman [at the SEC]. They might know all about it [convergence] as well. It’s either that, or it’s just a learning curve, but it’s not a massive one.
Are you still going to be running the Institute of Chartered Accountants of Scotland while chairing the IVSC?
It’s equivalent to being the chairman of the AICPA. It’s a one-year thing, so I’m halfway through. And it’s an honor to be asked to do it. But you’re a volunteer. There’s a staff there that will keep running it, and my successor has already been chosen. He starts at the end of April of next year, so in the first few months, I will have to do both [the IVSC and the ICAS], but after that it will drop away.
How does the Institute of Chartered Accountants of Scotland work with the Institute of Chartered Accountants in England and Wales?
We’re independent bodies, and we have our own research arm, and we have our own views, but if it comes to major issues, we usually try to get together and have a common British view or something like that, so we do it that way. It’s partly geographic, it’s partly historical. The Scottish institute was the first professional body of accountants in 1854. The English one came along later, I think, about 30 years later. There’s a lot of Scottish influence in American accounting too. Now of course it’s coming back, a lot of American influence in British accounting, so it’s a cycle.
How can accountants work best with valuation professionals? It sounds like you want to have the valuation professionals follow the same pattern as the accountants in setting up international standards. Is it a good idea for them to call in an independent valuation expert when assessing the value of financial instruments, real estate or other types of assets?
What I think would happen, it’s already happening now in a sense, is that the accounting standard-setters, FASB and the IASB, would say, “This is when you value something, these are the circumstances, or even what has to be valued, and this is how we want it done.” And in general terms, now the value is then, “OK, we know what it is, we know how you want it. This is how you do it.”
“This is how you do it” is the valuers’ bit. The accountants aren’t skilled in that, but they have to set the parameters for the valuation. For accounting purposes, this is how it is to be done. That’s broad brush. In the crisis, we said you have got to find a way to value working in an illiquid market. We had to set up a working party to do that. There were no valuers on that. But that’s the sort of thing in the future, we would expect the valuers to do it. We would just say, “Fair value in an illiquid market, how do you do it, what is it?”
It would be things like setting up the different buckets for values?
That was impairment, if I remember rightly. That’s more an historical cost issue. It’s not so much a valuation issue. It’s a case of, here is your loan. You’ve given a loan out to somebody. Now there are signs it might be turning bad. How much do you think you’ll not be getting back? Accountants can do that, but it’s not so much the value. It would be, "OK, if I sold this in the market, what would I get for it?" And most of these loans won’t be valued that way in the accounts.
Does it seem like now that the economy is recovering to some extent, there aren’t as many questions about the fair value, or is it still a difficult thing for the accountants to determine, so they would need to call in a valuation expert?
It’s not just that. Where you’ve got the markets, it’s easy. You just take the market value. It’s where you don’t have markets, or you’ve got a unique building, but also on intangibles. There are not necessarily markets for intangibles. If you take over a company, you have to value its intangibles. That’s already in the accounting requirements. So the valuers are in there too. The valuers may have an accounting qualification, but how do you value it once you’re there?
How do they deal with the remaining differences between IFRS and U.S. GAAP in this area?
We try not to. We have a common standard on fair value measurement. That was one of the ones that, I think, are almost word for word the same, if I remember rightly. There’s probably a little more in the sense of valuing buildings in IFRS than there is in U.S. GAAP. You have an option under IFRS to value plant and equipment. Almost nobody values machinery and things like that, but there are a few who will value city center office blocks, which are very valuable, and things like that. That’s a difference, but the rest of it is practically the same.
What about the problems in Europe with the Eurozone crisis? Is that having an impact on the valuations of some of these assets?
Yeah, well, you see, while it might be a sovereign debt crisis, in essence it’s a hidden bank crisis, because lots of French banks have got debt instruments issued by some of these countries that are in trouble, probably more than most of the European countries, but the other ones have got them too, including the U.K. The U.K. has got a lot of Irish debt they hold, and also these things are linked to French banks. And the whole lot are tied together. So yes, it’s a problem. That’s an impairment problem basically.
I understand you also chair Leuchie House, a charity for people with degenerative diseases. Could you tell me about the type of work they do?
What it is, some people with muscle neuron disease or multiple sclerosis, they are almost confined to a room, they are so crippled. They often don’t get out of their own bedroom, and they also usually have a family [caregiver] who is looking after them, and of course it is very exhausting. The purpose of this charity is to let them come out into a sort of country house atmosphere, and we give them a sort of holiday, but there is medical care there. They can take trips. The carer gets a break. They can either come with them or stay with them if they like, or they can go off and have a fortnight’s holiday of their own, or something like that. It’s basically what’s called respite care. It gives both people a break, the carer and the sufferer. It’s things like Parkinson’s, Huntington’s, these sort of degenerative diseases that don’t get better, they just get worse. So it really is to brighten up their lives, frankly.