As I've discussed in my previous posts, anyone who's asking whether the United States should stick with current U.S. Generally Accepted Accounting Principles (GAAP) or switch to current International Financial Reporting Standards (IFRS) is asking the wrong question. That's because we have more and better options to choose from in determining the future of financial reporting in the United States. In this post, I'll describe another alternative for us to consider—a realistic, practical approach that has a better chance of maximizing the economic welfare of both the United States and the rest of the world.
Instead of us continuing to waste time playing the "irresistible force meets an immovable object" game (i.e., IFRS vs. U.S. GAAP), the United States would be better off working to establish a single, global registry of financial reporting standards.
The single, global registry of financial reporting standards would be based on a single, global conceptual framework. This is hardly a pipe dream; the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are intensely committed to and have already made significant progress toward defining just such a framework.
In order to participate in the registry, a financial reporting standard-setter would be required to endorse the common framework. In doing so, the standard-setter would gain a say in the due process of maintaining the framework over time.
After agreeing to endorse the common conceptual framework, a standard-setter could contribute one or more sets of financial reporting standards to the global registry. Each registered set of standards would be codified according to a common codification scheme. Fantasy? No—the FASB recently codified U.S. GAAP based on the topical structure inherent in IFRS. And the FASB's codification already robustly incorporates guidance from another major standard-setter: the U.S. Securities and Exchange Commission (SEC). So not only has the FASB codification managed to organize what is indisputably the most complex set of financial reporting standards in existence, its structure is already harmonized with the two most-significant sources of financial reporting guidance other than U.S. GAAP.
Now here's where the idea of a global registry really gets interesting. Because many specific provisions of U.S. GAAP, IFRS, and other major sets of financial reporting standards are the same across the sets of standards (and increasingly so), it would be possible to identify and separate out the common provisions among registered sets of standards. Collectively, the common provisions would be viewed as the "core" standards for all sets of standards in the registry, and therefore, each registered set of standards would need to consist of only those exceptions and/or extensions deemed appropriate by the contributing standard-setter.
Is the idea of a common, core set of standards far-fetched? Not at all. In fact, the IASB's recently issued IFRS for Small and Medium-sized Entities (SMEs) is basically it.
So the idea of a global financial reporting standards registry is pretty simple. Not coincidentally, it's also grounded in today's realities, all of which stem from efforts of the FASB and IASB. But what advantages does this approach offer over simply sticking with U.S. GAAP or switching to IFRS? It's going to take me several posts to describe all of the ways in which this approach would benefit the preparer, auditor, academic, regulator, and investor communities, so stay tuned.