Perspectives on interpretations and application—an interview with Wayne Upton

ROBERT BRUCE: You have been in the standard-setting business for a long time. You were almost 20 years at FASB; you have been at the IASB almost since its inception; you are an American abroad; what perspectives does that background give you?

WAYNE UPTON: Sometimes it seems like the last time I was a real accountant Eisenhower was President! My perspectives? I think the IASB is culturally different from the FASB, which stems from the IASB having more than 100 jurisdictions to consider while the FASB has only one. That means that we have to create a different dynamic.

I think it’s a mistake to characterise our standards at the IASB as principle based and the FASB standards as rule based. I didn’t spend 17 years over there being unprincipled.

I think there is a desire for IFRSs to be structured differently but I frankly view the differences as differences in degree and not differences in fundamentals. FASB standards, as I say, are, in the main, principle based.

ROBERT BRUCE: Can we talk about the application of IFRS around the world? The question is often raised, particularly in the US, suggesting that application is inconsistent from jurisdiction to jurisdiction, and that is a downside to IFRS.

WAYNE UPTON: Yes, if it was true, it sure would be. It seems to me that that sort of comment risks becoming an urban legend, a little bit like alligators in the sewers. When I talk to some of the Americans, certainly in the preparer community, they say: ‘Well, I look at two subsidiaries and they seem to be doing things differently, but I am not sure because I don’t know IFRS well enough’. So it is not a crystallised notion in many people’s minds. There is difference when surrounding legal structures are different, and there should be difference.

We had a discussion at the Interpretations Committee just this last meeting, at which we contrasted a real estate sale in one jurisdiction with the same sale in another jurisdiction. The product was the same, a unit sale in a 20 storey apartment building, but the transactions were different. To say that you ought to have the same accounting just because they are both about the sale of an apartment really doesn’t carry a lot of weight with me. And I think we need to be more systematic in identifying these areas of diverging practice. There will always be some. There is diversity in practice in any system. If US GAAP was applied worldwide I would guarantee you there would be significant diversity in practice in certain areas.

So, we will have to follow up on it but I think we need to be more analytical about this one and a little more careful in approaching it than to just say: ‘Well, there is diversity in practice’, because in some areas that may well be justified.

ROBERT BRUCE: So overall the jurisdictional differences do not worry you too much?

WAYNE UPTON: Some do, certainly. The revenue recognition example I cited has resulted in major difficulties between each jurisdiction and the major accounting firms. So, yes it is disturbing when a jurisdiction is adamant that it cannot accept aspects of a standard. Our standard on agriculture is another one that frequently causes problems.

I think that the full process of the agenda consultation will bring to the surface three or four issues like that, that people want the Board to deal with, and that we know have been areas of friction.

ROBERT BRUCE: It is a difficult issue and that is why it is a problem. Is there a feasible solution?

WAYNE UPTON: I think there is, and one of the difficulties with the real estate example is that the revenue recognition exposure draft in all likelihood provides a different answer than the answer that people are getting under the existing interpretation. And that’s sufficiently of concern that the Board asked to be consulted before the Interpretations Committee did anything more. The agriculture issue is on the list for agenda consultation so we know that one is coming up. There are, no doubt, other hidden areas of diversity in practice. When we hear about them we try and get them into the interpretations process. At least with IFRS you have everyone on the same page, which allows us to work on consistent application. That is a huge step forward from where we were 10 years ago.

ROBERT BRUCE: Can we turn to your new role, your mission, as Chairman of IFRIC, the Interpretations Committee? How is that changing and how would you like to change it under your chairmanship?

WAYNE UPTON: I’m not sure it is even appropriate for me to have a mission. I am the Chair of the Committee—the facilitator, hopefully a consensus builder, but to have a vision or a mission is not appropriate.

I think there is a recognised desire throughout the world for greater and more effective implementation assistance. If you are in a remote jurisdiction somewhere, a lecture on principle based standards is not very satisfying. You have a question and you want an answer to it and it is human nature that while the answer to my question is always important, the answer to somebody else’s is obviously unnecessary. It is my question which is the important one. And I think the Interpretations Committee wants to be responsive to that, and we’ve talked in the last two meetings about enlarging the menu of services, for lack of a better word, of the kinds of things that the Interpretations Committee is willing to be involved in. For example, some of their agenda rejections in the past have said: ‘Well, we would love to help you but doing so would be implementation guidance and we are not in the implementation guidance business’. I think our constituents find that unsatisfactory and the Committee does too.

I think the Committee members are willing to expand the range of things that they suggest to the Board that they do. We’ll develop this over time and we’ll see what works and what doesn’t. I do not see any need to fundamentally change the agenda criteria or to make any fundamental systemic changes to the procedures in the Interpretations Committee. I think there is enough flexibility in the Committee’s mandate that if we see something that needs doing then we can find a way to do it.

That may result in us suggesting things to the Board on a much more frequent basis. At the last meeting a member said: ‘We should suggest to the Board that they do this and that we the Committee do the work for them’. That might be successful. We’ll see.

ROBERT BRUCE: Could we start by talking about the work of the Emerging Economies Group (EEG)? It is now up and running and should bring the IASB closer to a wider range of its constituents.

WAYNE UPTON: This was a group that initially we really struggled to find a way to start. We wanted to build upon the meetings we already have with standard-setters, and to use this time to really understand the difficulties emerging economies have when implementing IFRSs. So, we settled on the idea of devoting each meeting of the EEG to a single issue.

Then came the question of membership. At the time, David Tweedie had the insight to involve the Chinese Ministry of Finance. China is a leader in the emerging economies world and we hit on a structure that would include a standard-setter as a permanent member and then an outside member from each jurisdiction who is a topic expert. So, for example, at our first meeting in Beijing we had standard-setters and then each of them brought along a valuation specialist, so we had a mix of people who knew accounting and people who knew valuation. And I think that meeting was very successful.

ROBERT BRUCE: Who is now involved?

WAYNE UPTON: The membership of the group right now is the members of the G20 who are emerging economies. That means around eleven or twelve nations, and Malaysia. You might then ask: ‘Why Malaysia?’, and the simple answer is because they have done such excellent work and been such an excellent contributor to the process. What the group does not include right now, and I think this is a major challenge, is the next group of emerging economies, which have less experience of working with the IASB, such as Cambodia, , the Philippines, Thailand and Vietnam—countries that have less experience and have yet to develop the same degree of IFRS competence that the G20 members tend to have. So that will be the next challenge, figuring out how to broaden representation of the group.

We have scheduled our second meeting of the EEG for Delhi in December 2011 and the subject will be foreign currency accounting, which is an accounting topic about which the members hold widely diverging views, so I expect it to be a very spirited discussion.

ROBERT BRUCE: How is the group organised? And who runs the secretariat?

WAYNE UPTON: The Chinese Ministry of Finance kindly offered to provide secretariat services. A couple of members of the Ministry of Finance staff do top notch work in supporting the work of the group. The permanent Vice Chair of the group is Madam Yang Min from the Ministry of Finance. The arrangements seem to work very well.

ROBERT BRUCE: How do you see this work developing in the future?

WAYNE UPTON: It has to move beyond just the G20. I think the EEG membership has to reflect the spectrum of emerging markets, not just the largest and best resourced members. That is going to be difficult because some of those countries do not have direct access to the resources that are really necessary to participate in some of these discussions. By that I mean that their regulatory infrastructure or standard-setting capabilities are not as well developed as other, larger emerging markets. They don’t tend to have such a well-developed accounting profession as, say, Indonesia. We need to find a way to involve them effectively. I do not know what that is yet but it is early days for the group.

ROBERT BRUCE: You are also Director of International Activities. Across the board, looking at nations large and small, how is all of that working and how is the whole IFRS world developing?

WAYNE UPTON: I think pretty well. Sometimes it is hard to say how you define success. I don’t tend to do it in terms of counting scalps and counting however many countries that we want to put on our map, that is just not me. I think that countries are making a serious effort to participate, not just in the adoption process, but in the process of standards formulation through our due process and comment letters. The regional groups, such as the Asia-Oceania Standard-Setters Group (AOSSG), have been remarkably effective. This group really should be the model for gathering people in one place. There isn’t a single Asia-Oceania view on most issues. It’s highly unlikely that you can pick any two random members of that group and get the same opinion. For example, on foreign currency, Australia and Korea have very different views.

So the purpose is not to attempt to boil down a single view but to get people together and talking about issues. You find that thought leaders will emerge and the quality of the response will be much better. For example, the AOSSG now includes an Islamic appendix with most of their comment letters, talking about the implications for Islamic or Shariah-based accounting, primarily for financial instruments. It helps us to identify and understand problems that, in the past, we didn’t even know existed. And without the work of a group like the AOSSG, and in particular the Malaysians, we wouldn’t have that.

ROBERT BRUCE: Wayne, thank you for your time.