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A Single Sandbox for Standard-Setters (Part 1)

Feb 2nd 2010
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I previously suggested in this blog that the Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), and other standard-setters throughout the world should establish a single, global registry of financial reporting standards. The fundamental premise of my suggestion is that having a global registry would accelerate the elimination of differences in financial reporting standards among countries while maximizing the benefits that we would derive from more-similar standards, without expecting anyone to give up quality, sovereignty, or anything else they're reluctant to give up. This post is the first of many that will describe why a "single sandbox" approach makes more sense than expecting the whole world to agree on a single set of standards or a single standard-setter.

As I described in my previous post, this single sandbox in which I'm suggesting the world's standard-setters play would have three key characteristics:

  • A common conceptual framework
  • A common codification system
  • A common set of core standards

A major benefit of the single-sandbox approach is that it 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.

Aren't there aspects of financial reporting that are more important than comparability? Sure there are, but comparability is still pretty darn important. And if you don't believe that comparability is a good thing, all I can do is encourage you to review some fundamental economic principles about the efficient allocation of capital and the effect of comparability thereon.

Some folks have a hard time understanding how financial statements could be sufficiently comparable if reporting entities aren't forced to use the exact same set of standards. Keep in mind that comparability derives from the understandability of the information presented in the financial statements and the transparency of differences among the standards used to prepare the statements at least as much as it derives from the similarity of the standards used. So if user of financial statements can perform meaningful comparative evaluations across different reporting entities, then we have comparability, even with different underlying standards. And in this sense, the three characteristics of the single sandbox can clearly be expected to enhance comparability over our present situation. In short, the single-sandbox approach would be a big step in a positive direction, and well within the bounds of feasibility.

In my next post, I'll talk about how the single-sandbox approach would drive non-value-adding costs out of the financial reporting supply chain.


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