An Investigation into the Potential Adoption of International Financial Reporting Standards in the United States: Implications and Implementation

International Financial Reporting Standards (IFRS) have been adopted by most of the G20 countries. Given the broad worldwide acceptance of IFRS and significance of attaining comparability to facilitate free flow of capital, the US standard setter, the Financial Accounting Standards Board (FASB) made a commitment to jointly work with the International Accounting Standards Board (IASB) to explore the possibilities of convergence of US Generally Accepted Accounting Principles (GAAP) with IFRS. In 2007, the US Securities and Exchange Commission (SEC) eliminated the requirement that foreign companies listed on the US stock exchanges reconcile their IFRS‐based financial statements with the US GAAP. In the same year the US SEC issued a concept release to the public requesting comments on a proposal to allow US issuers to prepare financial statements in accordance with IFRS. Following these initiatives by the FASB and SEC, the aim of the present study is to investigate the implications of a potential full adoption of IFRS by the US. The present study details the challenges and benefits of adoption and outlines the steps required for a successful outcome of this process.     

Eliminating the 20-F reconciliation from IFRS to U.S. GAAP: Short-term and long-term liquidity effects

This paper examines the effects of the SEC’s 2008 decision to no longer require foreign private issuers using IFRS and trading on U.S. exchanges to reconcile their financial statements to U.S. GAAP. Extant research has found conflicting results using short event windows, while studies using longer event windows have found limited capital market impact from eliminating the reconciliation. Motivated by the SEC’s interest in understanding how disclosure rules impact market liquidity, we examine changes in effective bid-ask spreads, the price impact of trades, and quoted depth around 20-F filing dates for a sample of foreign private issuers. We find that effective spreads increase more around 20-F filing dates for filers using IFRS than for filers using U.S. GAAP, suggesting the 20-F report is more informative for filers using IFRS. We then find, in a subsample of filers using IFRS, that the increase in effective spreads for IFRS firms around 20-F filing dates is directly related to the magnitude of differences in book values between IFRS and U.S. GAAP. In sum, our results suggest a loss of useful information after the SEC’s rule change.     

Have ‘European’ and US GAAP measures of income and equity converged under IFRS? Evidence from European companies listed in the US

The EU's adoption of IFRS, combined with the SEC's removal of the US GAAP reconciliation requirement for non‐US registrants reporting under IFRS, signifies a major shift towards the acceptance of global standards. Based on 20‐F reconciliations provided by the population of US listed European companies filing IFRS‐based statements with the SEC in 2005, we examine whether ‘European’ and US GAAP measures of income and equity converged under IFRS. We find that during the period immediately preceding IFRS, for our sample companies, European and US GAAP measures are generally comparable in respect of income and equity. However, as an exception to the latter, we find that UK GAAP yielded significantly lower measures of equity than US GAAP For companies adopting IFRS for the first time in 2005, we find a significant gap between IFRS and US GAAP measures of income, thereby, signifying de facto divergence from US GAAP in regard to income determination. Furthermore, we find that, following IFRS adoption, significant differences with US GAAP equity persisted for companies that previously reported using UK GAAP. Our findings, thus, support critics’ claims that standard‐setters, most notably the IASB and FASB, have more work to do to achieve a sufficient degree of convergence between IFRS and US GAAP that will convince the SEC to require US companies to use IFRS.     

IFRS in the United States – Developments and Current Status

International Financial Reporting Standards (IFRS) are now required or permitted for use by companies in more than 100 countries, including the majority of the G20 members. However, domestic public companies domiciled in the United States (US) continue to be required to file financial statements with the Securities and Exchange Commission (SEC) in accordance with US Generally Accepted Accounting Principles (US GAAP), and are prohibited from preparing them based on IFRS. This article describes the developments of IFRS‐related activities and initiatives in the US over the period 2007–2012, and provides an overview of the current status regarding potentially incorporating IFRS into the US financial reporting system based on recently issued reports by the SEC.     

Trabeck prepares for IFRS: An IFRS case study

The growing acceptance of International Financial Reporting Standards (IFRSs) as a basis for US financial reporting represents a fundamental change for the US accounting profession. IFRS and US generally accepted accounting principles (GAAPs) both are based on principles; however, US GAAP largely uses rules to apply the principles. In contrast, IFRS relies heavily on the use of judgment in deciding how transactions should be recorded. This fictional case is designed to help students identify some fundamental differences between US GAAP and IFRS and apply this knowledge to general-purpose financial statements.     

Institutional Investors’ Reaction to SEC Concerns about IFRS and US GAAP Reporting

For the period of 2006 to 2008, we collect Comment Letters issued by the SEC that question the application of US GAAP by US firms or the application of IFRS by European firms registered with the SEC. We investigate whether institutional investors react to the letters by changing their holdings and whether their responses vary for US registrants and European registrants. We do this via a treatment‐effects model in which we test the hypothesis that institutional investors rebalance their portfolio holdings because they view Comment Letters as informative public signals. We find that institutional investors reduce their equity holdings when firms receive SEC Comment Letters, and their negative reactions are most marked for low turnover institutional investors, who we use to represent those informed investors most prepared to incur costs to closely monitor firms. Next, while noting that the number of Letters questioning application of IFRS are smaller in number relative to those questioning application of US GAAP, we investigate whether there are different reactions to Comment Letters questioning different standards. We show that there is a higher probability of the SEC questioning the application of IFRS as compared to US GAAP. After controlling for firm‐specific conditions that impact the issuance of a Comment Letter, we show that this higher probability has economic significance because institutional investors’ react more negatively to Comment Letters that question the application of IFRS as compared to US GAAP. A content analysis confirms the economic importance of the Comment Letters. We find that in almost half of all IFRS cases the Comment Letters request amendments to financial statements.     

Changing from German GAAP to IFRS or US GAAP: A Survey of German Companies

Since 1993 an increasing number of listed German companies have been publishing their consolidated financial statements in accordance with either IFRS or US GAAP. In 1998 this was approved as a substitute for the consolidated German GAAP financial statements of listed companies (§292a HGB). Our study surveys the motives that led these companies to opt for international reporting systems (IFRS or US GAAP) rather than German GAAP and considers whether these objectives have been achieved. Rather surprisingly, we find that even though companies state that their overall expectations have been met to a satisfactory degree, a detailed analysis shows that several of the ex-ante objectives have not been achieved from an ex-post point of view. Additionally, we use logistic regression analysis to show that companies choosing IFRS rather than US GAAP and vice versa differ distinctly in the objectives they pursue with their choice of international GAAP.     

The Rigour of IFRS Education in the USA: Analysis,Reflection and Innovativeness

Abstract

International Financial Reporting Standards (IFRS) are accepted throughout the world, particularly in the European Union, Australia, New Zealand and Canada. Emerging economies are also are aligning their practices with IFRS. Historically, the USA has been cautious about accepting IFRS. However, following acceptance of IFRS worldwide, the US Securities and Exchange Commission has recently allowed the filing of IFRS-based financial statements from foreign issuers and is presently considering the same from domestic issuers. Owing to lack of IFRS education and training in the country, concerns have been expressed about such moves of the USA towards IFRS. Following such concerns, the aim of the present study is to review previous literature on IFRS education to reflect on the present status of IFRS education in the USA. The research method includes a review of past literature on IFRS education in the Business Source Complete database from 2001 to 2012. In line with the review, this study reports that active learning approaches that stimulate critical thinking and judgement skills of students are the best methods to teach IFRS. The studies reviewed also report the lack of teaching materials, including software and technologies, to effectively teach IFRS. The only active learning strategies advocated in previous studies were the use of case studies and real life examples. Additionally, this study advocates the use of problem-based learning strategies. This study also reports the lack of research investigating students’ and educators' perceptions of available resources and approaches. Future studies are suggested in this direction, employing surveys and interviews.     

Raleigh building products: A teaching case that highlights the differences between IFRS and US GAAP

Within 5 years, the United States will join the rest of the world’s industrialized countries and many emerging economies in adopting International Financial Reporting Standards (IFRS). However, many educational programs have not yet developed full curricula or integrated case studies in existing programs to compare and contrast how US GAAP and IFRS would record and present major accounting transactions.Based on events that reflect real world scenarios, this study presents a series of three Raleigh Building Products cases as an instrument to fill the current IFRS education void. The first case in the series discusses US GAAP acquisition and consolidation activities, the second case examines asset and intangible impairment under US GAAP and IFRS, and the last case adds components that differ significantly between US GAAP and IFRS. The series of cases can be used stand alone or build upon each other throughout the semester. The combined cases focus on the following key concepts: (1) calculating acquisition price; (2) preparing combination financial statements including deleting LIFO reserves; (3) measuring goodwill and other intangibles; (4) determining the impairment of goodwill due to economic declines; and (5) comparing fundamental differences between US GAAP to IFRS. The attached teaching notes detail these matters and discuss the statements of cash flows under US GAAP and IFRS.Results from classroom use indicate that this case will benefit accounting students and practitioners as IFRSs become effective in the US.     

IFRS adoption,reporting incentives and financial reporting quality in private firms

This study examines financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Our findings indicate that failure to identify earnings quality changes around IFRS adoption cannot be automatically interpreted as IFRS adoption having no effect on the FRQ of (private) firms. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ.     

German Reporting Practices: An Analysis of Reconciliations from German Commercial Code to IFRS or US GAAP

This paper presents the results of research analyzing reconciliations of net income and stockholders’ equity from reports prepared according to Germany's Commercial Code (HGB) to either International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (US GAAP). We describe the distribution of the reconciling items and assess their value relevance to firm market values 3 months after the financial statement date. The work helps to identify many issues not apparent from research that focuses only on promulgated accounting standards. Among other things, the research presented in this paper demonstrates that, when reconciling to IFRS or US GAAP, German companies must reverse significant software and film licensing revenue. Other areas of significant difference, not surprisingly, show greater conservatism in reporting under HGB than IFRS or US GAAP, particularly in asset capitalizations and write-offs as well as in accruals of provisions and reserves. The latter category is value relevant to the firms’ market values after controlling for all other categories of reconciling items from HGB to either IFRS or US GAAP, indicating that German markets value these companies’ provisions and accruals under the German reporting system.     

Using Form 20-F reconciliations to internationalize an accounting course

Accounting courses and textbooks in the United States focus on US generally accepted accounting principles (GAAP). As a result, US accounting students have little exposure to International Financial Reporting Standards (IFRS) and to differences between these standards and US GAAP. To familiarize students with the differences between IFRS and US GAAP, accounting instructors can develop assignments based upon the reconciliation of IFRS to US GAAP net income included in Form 20-F, the annual document submitted to the SEC by non-US firms. The course assignment described in this paper provides students with a “road map” of the differences underlying specific company financial reporting, and helps instructors identify where these differences occur. The assignment represents an innovative way of integrating international financial reporting standards and SEC reporting requirements into a higher level undergraduate or graduate accounting course.     

Analyst Following and Forecast Accuracy After Mandated IFRS Adoptions

This study investigates how accounting harmonization affects one particular group of financial statement users—financial analysts. We find that mandatory International Financial Reporting Standards (IFRS) adoption attracts foreign analysts, particularly those from countries that are simultaneously adopting IFRS along with the covered firm's country and those with prior IFRS experience. We also find that mandatory IFRS adoption improves foreign analysts’ forecast accuracy. The change in analyst following increases with the distance between prior local Generally Accepted Accounting Principles (GAAP) and IFRS and with the extent to which IFRS adoption eliminates GAAP differences between the firm's country and the analyst's country. IFRS adoption also attracts more local analysts, particularly those with prior IFRS experience and with an international portfolio prior to mandated IFRS adoption in their home country. Local analysts’ forecast accuracy is not affected by IFRS adoption. Overall, our results suggest that accounting harmonization brings comparability benefits that enhance the usefulness of accounting data.     

Auditors' Affirmations of Compliance with IFRS around the World: An Exploratory Study*

It is widely believed that international financial reporting standards (IFRS) have been adopted in many countries, at least for the consolidated reporting of listed companies. However, in nearly all cases, what the rules require is some national or supranational version of IFRS. This might create problems for investor confidence and comparability. We examine what companies and auditors report concerning compliance with IFRS, focusing on the first full year of IFRS reporting by companies in the stock market indices of four major European countries and Australia. We find that, even when companies were complying with IFRS, they were generally not saying so, which seems to miss part of the point of the 35‐year project on international harmonization. In a small number of cases, auditors provided dual reports: on full IFRS in addition to the mandated reference to national GAAP where the latter corresponds with full IFRS. These cases were found only in Germany and the United Kingdom, and mainly related to companies that filed with the Securities and Exchange Commission as foreign private issuers. We propose explanations for the general lack of dual reports and for the exceptions. We call for widespread adoption of dual reporting where a plain report on IFRS is not yet possible.     

IFRS in the United States: If,When and How

This paper provides an overview of the convergence efforts of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board. It begins with their 2002 Memorandum of Understanding and traces developments up to the December 2011 announcement by the IASB Chair that convergence has come to a close, and it is now time to incorporate IFRS into the US financial reporting system. The paper then assesses approaches being considered by the SEC for incorporating IFRS into the US financial reporting model. The conclusion calls on the SEC to ‘make a decision’ and set a date for US adoption of IFRS. Otherwise, the SEC effectively will have abandoned its goal of a single set of high quality global accounting standards.     

Are financial professionals ready for IFRS?: An exploratory study

Despite a move towards convergence between principles-based International Financial Reporting Standards (IFRS) and rules-based U.S. GAAP, and the likelihood that many foreign affiliates of U.S. firms use IFRS, little research has examined whether United States financial managers appropriately record and summarize transactions in accordance with IFRS. This paper investigates the ability of 176 U.S. financial managers to appropriately apply the revenue recognition standard under IFRS when given the relevant guidance. About half of the participants selected the U.S. GAAP answer, and only 40 percent identified the correct answer under IFRS. More experienced financial managers, and financial managers with relevant industry experience were more likely to appropriately apply the standard, but a substantial percentage of them still selected the GAAP choice rather than the correct choice under IFRS. This suggests that more IFRS training in the U.S. is needed prior to IFRS adoption.     

Measuring the impact of international reporting standards on market performance of publicly traded companies

The decision whether to require publicly traded companies to adopt International Financial Reporting Standards (IFRS) remains in flux. In 2008, the US Securities and Exchange Commission proposed a roadmap leading to complete acceptance of IFRS in the US. With the potential replacement of US GAAP with IFRS in the near future, understanding the impact of IFRS on corporate financial reporting is more important than ever. This study examines two factors which are critical considerations in the decision to accept or not to accept IFRS in the US: How different is financial statement information derived under IFRS from information derived under US generally accepted accounting principles (GAAP); and how much incremental information value, if any, is provided by IFRS over US GAAP? The present study extends prior research by examining concurrently both differences and their impact on market performance. Findings of this study support the view that differences on financial statement results between IFRS and US GAAP are not significant, thus, supporting proponents of adoption of IFRS in the US, after which all US publicly traded companies would use IFRS and not US GAAP.     

IFRS Developments in the USA and EU,and Some Implications for Australia

There have been several developments recently, both in the United States (US) and the European Union (EU), which will have consequences in Australia. The two major developments in the US are the decision by the Securities and Exchange Commission (SEC) to drop the reconciliation requirement for foreign registrants that adopt International Financial Reporting Standards (IFRS) and the serious consideration that the SEC is currently giving to allow US publicly traded companies to adopt IFRS. The developments in the EU involve its ever‐lengthening endorsement process and the increasing pressure being brought on the International Accounting Standards Board (IASB) and its oversight body, the International Accounting Standards Committee Foundation (IASCF) trustees, to alter their composition and the character of their operations. At the same time, there has been the FASB's appeal to the EU to accept IFRS without any endorsement process. The developments in the US have been lauded by the IASB and in Europe. They represent an impressive vote of confidence in the IASB and in the efforts being made by national standard setters and securities market regulators around the world. The US has already taken a long stride towards joining the more than 110 countries and other jurisdictions that have committed themselves to allow or require the use of IFRS for some or all reporting entities.     

China's Convergence with IFRS: Analysis of Dual-listed Companies

This study investigates China's convergence towards International Financial Reporting Standards (IFRS) using generally accepted accounting principles (GAAP) differences data disclosed in AH-share companies’ annual reports from 2006 to 2017. We firstly find that 92% of AH-share companies disclosed GAAP differences in 2006, immediately prior to implementation of converged Chinese accounting standards (CAS). This ratio decreased to 88% in 2007, 58% in 2010, and 38% in 2011, respectively. After 2011, less than one third of AH companies disclosed GAAP differences. Secondly, an increasing number of AH companies (35%) have published CAS-based financial statements in Hong Kong from 2014. Thirdly, except for the first few years after 2007, the disclosed GAAP differences have dropped to a very low level; since 2010 the net profit and net assets GAAP differences ratios have been below 0.5%. Fourthly, reduction of the disclosed GAAP differences appears to be the result of efforts by Chinese standard setters and regulators, work related to the International Accounting Standards Board, or changes in China's special socio-economic environment. Distinct from word-by-word comparison between CAS and IFRS, this research shows that China has achieved its original goal, namely an enterprise applying CAS should produce financial statements that are the same as those of an enterprise that applies IFRS. Our findings provide insights regarding China's institutional evolution in terms of the country's IFRS convergence effort, which are useful for further empirical study.     

Commentary: IFRS – The SEC's Roadmap and the Contribution of the Academic Community

In November 2008 the US Securities and Exchange Commission issued a roadmap for the possible adoption of International Financial Reporting Standards (IFRS) by US publicly traded companies. A team of distinguished academics and practitioners discussed the issues raised by the roadmap in a panel session at the American Accounting Association meeting in San Francisco in August 2010. This commentary summarises the discussion. Potential obstacles to US adoption of IFRS include concerns about the International Accounting Standards Board's governance, and the consistency of application of IFRS in different countries around the world. Another key issue is to make sure that there is real agreement on the purpose of financial reporting, which in the US is, by law, for the protection of investors. However, research shows the capital market benefits of IFRS adoption, and at least one study shows a high degree of comparability between US GAAP and IFRS.