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Choose adoption not condorsement!

January 22, 2011

There have been a few articles and blog posts favoring a blend of IFRS convergence and endorsement (dubbed “condorsement” by some). Is this really a good idea? We started down the road to IFRS in order to achieve a “high quality global accounting standard”. Would ‘condorsement” lead the largest capital market in the world to a high quality global accounting standard?

One of the criticisms of IFRS acceptance around the world has been the emergence of national IFRS “flavors”. A condorsement approach would undoubtedly lead to a US flavored accounting standard. The resulting somewhat similar global accounting standard would never allow multinational companies to achieve the economies of scale that could be achieved by with a truly global accounting standard. Similarly, simplifying comparisons of global investment options would be hindered. If we are serious about improving global financial reporting transparency then we should adopt a high quality global accounting standard.

In addition to achieving high quality and global acceptance our further goal is to improve financial reporting transparency. The best way to obtain transparency in financial reporting is through a principles based approach. US GAAP is primarily rules based. Pursuant to US GAAP, different industries report similar transactions differently because of the rules they must follow. Under a principles based approach, financial reporting professionals determine the best representation of a transaction based on well established principles. Some say we can’t adopt a principles based approach because we live in a litigious society. I say people who follow rules have no defense when they inadvertently break that rule, but people who follow principles can easily defend themselves based on the principles followed.

Like it or not, IFRS is the de facto (i) principles based (ii) globally accepted and (iii) high quality accounting standard. Over 100 countries have adopted IFRS. Nine of the ten largest capital markets have adopted IFRS. Want to guess which country is the IFRS adoption hold out? As for the countries that have adopted national flavors of IFRS, how can we expect them to move to full IFRS adoption if we don’t do adopt IFRS as issued by the IASB?

Choose adoption not condorsement!

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