The Bruce Column — Making financial instrument valuation safe

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18 Mar 2015

Sir David Tweedie has turned his attention to the problem of valuation, particularly of financial instruments, around the world. Here our resident regular columnist, Robert Bruce, talks to him about his objectives and intentions.

Sir David Tweedie’s appetite for unifying standards around the world continues to be voracious. Having spent a decade of his life sorting out accounting standards in the UK and a decade applying himself to international financial reporting standards, he is now engrossed in trying to bring unity to valuation standards. And, as he says in a new video interview, his motivation and enthusiasm remain undimmed.

'I feel exactly the same way about valuation standards as I did about accounting standards', he says. 'If we have a method of valuing something in Britain why should it be different for the same thing in America, Australia, France, or wherever? We should all do it in the same way'. Without that he sees problems ahead. The objective should be for everyone to follow whichever standards are deemed and accepted to be the best. 'I believe that for accounting and it is exactly the same for valuation. We shouldn’t have different valuation standards. And if we have IFRS worldwide and we are having big differences in valuations we are going to get big differences in accounts for exactly the same transactions'.

It is classic Tweedie. 'Here's the guys with the pointy heads and the whirling eyes, astrophysicists and so on', he remarks. 'We have to say: "Wait a minute. What are you doing in your little black box?" We have to bring this out and shine a light on it and see what is happening'.

And for those who suggest that the existing IFRS should cover the problem he has an admission. 'I was fairly naïve as Chairman of the IASB', he says. 'I assumed with IFRS 13 there was a fair value and people were just going to use it. And then we discover there is one fair value here and another one there, for exactly the same thing. That is where the problem came in. So suddenly you realise that where you think you are standardising with the range of variation you are not really. What IFRS 13 does is say this is how you do a fair value but it doesn't go into the detail that you require to get the numbers shrunk to an acceptable level of agreement'.

This is why he is worried. 'We are finding that financial institutions are getting quite different, wide, variations in the value of these identical instruments', he says. 'That instantly worries you because if some of them are hugely different, and we know they are, you have a situation where you don't know how reliable the balance sheet is, and the balance sheet clearly affects the income statement, so how reliable is the profit number? And then if we talk about financial stability, which is based on the capital buffers, based on balance sheet numbers, are those rubbish, or do they mean something?'

It is a familiar Tweedie argument. 'We just haven't got the numbers', he says. 'There is a lacuna in the regulatory system at the moment'. And that means danger for all. 'It is a danger for the financial system. It's a danger to reputational risk for regulators. And it is also a danger for auditors'. The narrowing of this gap is what he hopes the work of the IVSC can achieve. 'You will never get the values down to three decimal places', he says, 'but if we can narrow it to somewhere around 5 to 10% that would be OK. But it's way, way above that at the moment'.

His plan is to get everyone involved, regulators, auditors, banks and standard-setters. 'Then we could look at what is causing the differences, what are the assumptions, where the data comes from', he says. The aim would be to get to a place where everyone was dealing with the same sort of information in a similar manner and so would be getting similar sorts of numbers. He reckons it will take three years. 'The whole [global] industry needs to come together', he says. And it will need the backing of the authorities to achieve it. 'The regulators', he says, 'will have to say: "You’re all going to do this"'.

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