A Single Sandbox for Standard-Setters (Part 2)

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This blog post is the second of a series that explains the rationale for the United States and other countries to collaborate in creating a single, global registry of financial reporting standards rather than a single set of standards emanating from a single standard-setter. In my last post, I explained how the "single-sandbox" approach would significantly enhance the comparability of financial statements prepared in accordance with registered financial reporting standards without imposing a one-size-fits-all solution on reporting entities. In this post, I'll explain four ways in which the single-sandbox approach would drive non-value-adding costs out of the financial reporting supply chain.

The most significant cost-reduction benefit to result from the single-sandbox approach would be a reduction in the cost of capital for business entities. Specifically, an increase in the comparability of financial statements across companies that use different standards in preparing their financial statements (as I described in my last post) would reduce capital providers' analysis costs and/or reduce the risk premiums that result from capital providers not fully understanding the basis on which "foreign" financial statements have been prepared. Both of those effects would be reflected in lower expected rates of return, and therefore, lower costs of capital. Ask any economist—lowering the cost of capital is a very good thing for everyone.

A second major benefit of the single-sandbox approach would be the lowering of operating costs for reporting entities having multiple business units throughout the world that must adhere to multiple sets of financial reporting standards. Translation and reconciliation of financial statements prepared under different standards would be easier and less-costly thanks to the distinguishing characteristics of the global registry of standards, which I have described in previous posts.

Third, lower costs would result from the elimination of redundancy in the world's standard-setting infrastructures. Areas of agreed-upon commonality among registered sets of standards (i.e., conceptual framework, core standards, and codification) would be maintained by the single standards registrar rather than each standard-setter bearing the cost of maintaining essentially the same things.

Finally, the single-sandbox approach would lower the costs of training and developing financial-reporting talent, i.e., individuals capable of doing financial accounting and reporting for any company in the world from anywhere in the world.

While many of these cost-reduction benefits have been cited in arguments supporting the global adoption of a single set of standards, the improbability of getting the entire world to agree on what standards they will use and on who will set the standards means that we need a more realistic approach if we are to have any hope of capturing any of the benefits. In particular, the single-sandbox approach would be far more beneficial and far more feasible than if the United States were to attempt to switch to using current International Financial Reporting Standards (IFRS) instead of U.S. GAAP. To be clear, the single-sandbox approach is not an outright rejection of IFRS; rather, the approach acknowledges and builds upon the successes of the International Accounting Standards Board (IASB), many of which have resulted from collaboration between the IASB and national standard-setters such as the U.S. Financial Accounting Standards Board.

In my next post, I'll explain how the single-sandbox approach would maximize the quality of the financial reporting standards used throughout the world.


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