In my last post, I discussed the importance of setting broad public-policy goals with regard to financial reporting standards in general before we attempt to make any public-policy decisions specifically with regard to IFRS. To set appropriate goals, we must first reach consensus on the desirable attributes of such goals. That is, we must seek agreement on criteria that will help us assess proposed goals and identify which goals would be better for us to embrace than others. I've developed a set of such goal-setting criteria, and in this post I'll share those criteria with you. More importantly, I'll also be sharing a few thoughts on how we must apply the criteria in order to ensure that the public-policy goals we set are truly appropriate.
When assessing any proposed public-policy goal related to financial reporting standards, I believe there are five key goal-setting criteria that we should consider:
- Benefits: The magnitude and timing of expected gross benefits of the proposed goal.
- Costs: The magnitude and timing of expected gross costs of the proposed goal.
- Risks: The likelihood that benefits and/or costs of the proposed goal will be better than or worse than expected.
- Feasibility: Whether the proposed goal is likely to satisfy practical constraints (resource constraints, legal constraints, etc.).
- Priority: The importance of attaining the proposed goal relative to other public-policy goals.
Good goal-setting requires us to look at the "big picture"—something that we in the United States don't do very well. Individual stakeholders often focus on only one criterion or even just one aspect of one criterion. But unless we apply all of the criteria all of the time, we're likely to set inappropriate goals or to not set any goals at all.
Another of our problems is that we've largely failed to recognize that the benefits, costs, risks, feasibility, and priority of a particular proposed goal can and do vary among countries. Thus, an appropriate goal for the United States may be inappropriate for another country and vice-versa. For example, Canada has established a goal of having all listed Canadian companies switch from Canadian GAAP to IFRS by January 1, 2011. But the benefits, costs, risks, feasibility, and priority of switching listed companies to IFRS could be completely different for the United States than for Canada—which means the decision to switch to IFRS could be appropriate for Canada and at the same time inappropriate for the United States. But we won't know for sure unless and until we apply all of the criteria from a U.S. perspective.
Similarly, people often fail to recognize that the benefits, costs, risks, feasibility, and priority of a particular proposed goal can change over time. For example, if today we apply the criteria to a proposed goal (say, having listed U.S. companies switch from U.S. GAAP to IFRS) and find that it would be an inappropriate goal, that doesn't necessarily mean that applying the same criteria to the same proposed goal in the future would lead to the same conclusion. Because benefits, costs, risks, feasibility, and priorities can change over time for any given goal, a goal that is appropriate in the long-term may be inappropriate in the short-term and vice-versa—which means our "big picture" view needs to encompass both the short-term and long-term. It also means we shouldn't be foolish enough to stick with a goal when it becomes obvious that the goal is no longer as appropriate as it once was—our goals may change over time without invalidating the prior appropriateness of prior goals.
With regard to financial reporting standards in general and IFRS in particular, there are far more possible public-policy goals than most folks have assumed, and a proper assessment of each possible goal requires far more thought than most people have been willing and/or able to invest to date. In my next post, I'll continue to explore the complexities of the challenges before us and make a case that financial reporting standards—IFRS, GAAP, or whatever—are themselves just part of the "big picture" we should be looking at.