A content analysis of the comment letters to the FASB and IASB: Accounting for contingencies

In this study, we read and analyze 369 comment letters written in response to the IASB's Exposure Draft (ED) of Proposed Amendments to IAS 37 and the FASB's Exposure Draft of Proposed Amendments to FASB Statement No. 5. We also examine how responses to the IASB ED are affected by whether or not the use of IFRS is mandated or permitted by the respondent's country. Although responses were overwhelmingly unfavorable to both EDs, more support was shown for the IASB's proposal to eliminate the probability recognition criterion than for the FASB's proposal to amend the U.S. GAAP disclosure rules. Users responding to the FASB ED provided significantly more intense support than corporate preparers, financial preparers, and legal practitioners. Significantly more respondents to the IASB ED were from countries required or permitted to use IFRS than from countries required to report under their national GAAP. In addition, constituents required or permitted to use IFRS were significantly more likely to express an unfavorable response to the ED and to cite relevance to support their position.     

The Implementation of IAS 16 and IAS 41 at Andrew Peller Limited

This case asks students to play the role of Doug Grodeckie, Manager of Financial Reporting at Andrew Peller Limited (APL). Doug was asked to prepare a report analyzing Andrew Peller Limited's current tangible long-lived assets disclosures and making recommendations on how best to comply with International Accounting Standard (IAS) 16 Property, Plant and Equipment and IAS 41 Agricultural Property by APL's Chief Financial Officer (CFO), Peter Patchet, and Controller, Gary Laufman. Students are provided with background information on APL, the Canadian wine industry, the implementation of International Financial Reporting Standards (IFRS) in Canada and the implementation of IFRS at APL. The case is based on field research from interviews with Doug Grodeckie, Gary Laufman and Peter Patchet, and on publicly available information from various sources.     

Relevance of Differences between Net Income based on IFRS and Domestic Standards for European Firms

Net income adjustments resulting from mandatory 2005 IFRS adoption in Europe are value relevant for financial and non‐financial firms. Differences in relevance of the aggregate adjustment and adjustments related to several IFRS standards, for financial and non‐financial firms and across country groups, suggest differences in domestic standards and institutions affect investors’ assessment of the relevance of IFRS accounting amounts. Despite these differences, except for French/German non‐financial firms, investors view net income measured using IAS 39 Financial Instruments: Recognition and Measurement as more relevant than that measured using domestic standards, which is notable because IAS 39 was highly controversial in Europe.     

Floriculture du Suroît inc.*

Floriculture du Suroît inc. is a SME in the horticulture field. It cultivates and sells geraniums, but a new subsidiary, Les Roses de Caroline, recently start the culture of roses. Floriculture has just obtained a governmental subsidy and, for the first time, the company will have to produce audited financial statements prepared in accordance with GAAP. Thus, the two owners will have to choose between two accounting frameworks, that is, International Financial Reporting Standards (IFRS) or Canadian Accounting Standards for Private Enterprises (ASPE). Many differences exist between these two frameworks. More specifically, IFRS provide specific standards related to agricultural activity and investment properties, while ASPE do not. In addition, ASPE permit many choices between accounting treatments, which should be carefully analyzed. The owners are neophytes in accounting matter. Thus, they need help for accounting issues.     

Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and UPS

This case illustrates the effects of the proposed new lease standard by the Financial Accounting Standards Board and the International Accounting Standards Board on existing outstanding operating leases. Specifically, the case examines the effects of the proposal that all firms report existing operating leases as capital leases upon the initial adoption of the proposed standard. By applying a constructive capitalization model to two firms who rely on operating leases for financing, FedEx and UPS, we found that both companies would have to record billions of dollars of liabilities that had only appeared in the footnotes of their financial statements under the current lease standards. In addition, the firms would experience a decline in retained earnings and key financial ratios, such as the debt‐to‐equity, return‐on‐assets, and interest coverage ratios, by reporting operating leases as capital leases under the new proposed standard. Furthermore, the magnitude of the lease capitalization impact is much smaller for UPS than for FedEx.     

The use of International Accounting Standards terminology, a survey of IAS compliance disclosure

This study examined where and how companies that purport to be using International Accounting Standards (IAS) are referring to IAS in their financial statements. Virtually all firms surveyed referred to IAS in the footnotes but referred to IAS in the audit report just under 50 percent of the time. The largest group of companies uses a combination of home-country and IAS standards. A significant number of firms report the use of IAS standards with exceptions. The majority of these firms do not discuss the dollar impact of those exceptions. Referencing IAS with home country standards or exceptions reduces comparability and transparency of financial statements. The International Accounting Standards Committee (IASC) is referenced as the source of IAS in about half of the cases. Failure to reference the IASC as the source of IAS may result in ambiguity concerning what IAS means     

The Impact of IFRS 8 Adoption on the Usefulness of Segment Reports

We analyze the impact of IFRS 8 on the usefulness of segment reports from an investor's perspective. The analysis comprises three steps. First, we compare the value relevance of segment reports before and after the introduction of IFRS 8. Second, we analyze a treatment group of firms that had to change their segmentation upon IFRS 8 adoption and a control group that was unaffected by its introduction. Third, the requirement to report financial information for the current and previous year under current accounting rules allows us to analyze a unique data set of segment reports for the same company and the same year under two different standards. Our results based on German listed firms show superior value relevance of segment reports according to IFRS 8 compared to IAS 14 in all three steps. Additional analyses suggest that the adoption of IFRS 8 is also related to a decline in information asymmetry. Our findings are robust to a number of alternative specifications.     

Observations on measuring the differences between domestic accounting standards and IAS: A reply

In the commentary that precedes this reply, Nobes makes several comments on our article published in this journal (Ding, Y., Hope, O.-K., Jeanjean, T., Stolowy, H., 2007. Differences between domestic accounting standards and IAS: measurement, determinants and implications. Journal of Accounting and Public Policy 26, 1–38). In our reply, we start with the key issue raised: the comment on the distinction between accounting practices (de facto) and accounting regulations (de jure). We then discuss the IAS bias in the “GAAP 2001” study, before presenting our reply on the endogeneity issue and on the robustness check for the “divergence” score. We conclude with a discussion of the separate dimensions of absence vs. divergence.     

The information compliance indexes. The illustrative case of income taxes

The adoption of IASB’s standards has represented, in the European Union, an important effort of harmonization towards the financial reporting comprehensiveness, reliability, relevance and comparability. This paper seeks to highlight the importance of Information Compliance Indexes (ICI), based on the accounting standards, as a proxy for reporting quality awareness. This approach is evidenced through an illustrative example about disclosures on deferred taxes, as required by IAS 12. This standard prescribes the accounting treatment for current taxes, deferred assets and liabilities. These issues are usually perceived by stakeholders as indicators of companies’ continuity and potential future returns. Based on non-financial listed companies of Euronext Lisbon regulated market, with reference to the end of fiscal years 2008 and 2012, an information compliance index was performed, based on that accounting standard. Then, this index was regressed with a set of performance and control indicators. Evidences have provided several statistical significant insights, which corroborate the findings that information compliance and disclosure levels depend from several performance and control indicators.     

IAS Versus U.S. GAAP: Information Asymmetry–Based Evidence from Germany's New Market

Motivated by the debate about globally uniform accounting standards, this study investigates whether firms using U.S. generally accepted accounting principles (GAAP) vis‐à‐vis international accounting standards (IAS) exhibit differences in several proxies for information asymmetry. It exploits a unique setting in which the two sets of standards are put on a level playing field. Firms trading in Germany's New Market must choose between IAS and U.S. GAAP for financial reporting, but face the same regulatory environment otherwise. Thus, institutional factors such as listing requirements, market microstructure, and standards enforcement are held constant. In this setting, differences in the bid‐ask spread and share turnover between IAS and U.S. GAAP firms are statistically insignificant and economically small. Subsequent analyses of analysts' forecast dispersion, initial public offering underpricing, and firms' standard choices corroborate these findings. Thus, at least for New Market firms, the choice between IAS and U.S. GAAP appears to be of little consequence for information asymmetry and market liquidity. These findings do not support widespread claims that U.S. GAAP produce financial statements of higher informational quality than IAS.     

The Australian Differential Reporting Debate: A Survey of Practitioners

This paper reports the findings of an investigation into issues surrounding the differential reporting debate. This debate was formalised in Australia by the promulgation of the Australian Accounting Research Foundation's Exposure Draft 48—Proposed Statement of Differential Reporting. However, the foundation has chosen not to provide guidance as to the standards considered applicable to non-reporting entities within its differential reporting proposal. A postal survey of practising accountants across Australia examined the respondents' perceptions as to the standards applicable to firms varied by size and legal structure. The paper provides initial empirical results indicating the way in which practitioners will apply standards under the differential reporting provisions proposed in the exposure draft and raises questions for future research.     

Economic Benefits of Adopting IFRS or US‐GAAP – Have the Expected Cost of Equity Capital Really Decreased?

Abstract:   The question of whether the adoption of International Financial Reporting Standards (IFRS) results in measurable economic benefits is of special interest, particularly in light of the European Union's adoption of IFRS for listed companies. In this paper, I investigate the common conjecture that internationally recognised financial reporting standards (IAS/IFRS or US‐GAAP) reduce the cost of capital for adopting firms. Building on Leuz and Verrecchia (2000) , I use a set of German firms that have adopted such standards and investigate the potential economic benefits of this reporting strategy by analysing their cost of equity capital through the use and customisation of available implied estimation methods. Evidence from the 1993–2002 period fails to document lower expected cost of equity capital for firms applying IAS/IFRS or US‐GAAP. During the transition period I analyse, the expected cost of equity capital in fact appear to have rather increased under non‐local accounting standards.     

Hedge Accounting and its Consequences on Portfolio Earnings – A Simulation Study

Abstract

In this paper, I analyze the consequences of cash flow hedge accounting on portfolio earnings of firms focusing on main changes between IFRS 9 and IAS 39. For this purpose, I develop a simulation study which illustrates the quantitative effects on the accounting entries according to the currently applicable hedge accounting methods. It is especially addressed what accounting differences arise and how these distinctions may affect a firm’s earnings. Furthermore, I examine to which firms early switching becomes especially desirable or burdensome. This information is particularly useful to managers and investors. The paper shows that portfolio earnings are affected differently. In the model, IAS 39 may lead to higher or lower earnings for increasing deviations between foreign and domestic interest rates. Additionally, sensitivity to volatility changes varies among the methods. Moreover, a partly ineffective hedging relationship does not necessarily decrease earnings compared to its fully effective counterpart.     

A comparison of value relevance of accounting information in different segments of the Chinese stock market

This paper investigates the difference in the value relevance between the accounting information prepared and audited under the Chinese GAAP for A-share investors and under the international accounting standards (IAS) for B-share investors in the Chinese stock market. The study reports three primary findings. First, accounting information influences the pricing process in both the A-share market and the B-share market. Second, the accounting information in the B-share market is more value relevant than that in the A-share market, as expected. Finally, the value relevance level of accounting information in the A-share market was low in earlier years, peaked in 1996, and then decreased due to changes in the disclosure environment. However, the value-relevance level of accounting information in the B-share market had no substantial changes. Using a constant sample, control variables on firm features, and measures of traders' behavior, we obtain robust results. These findings have implications for policymakers on recent moves toward replacing local GAAP with the IAS.     

Disclosure and the Cost of Capital: Evidence from the Market's Reaction to Firm Voluntary Adoption of IAS

Abstract:  Using a unique international setting where the effects of disclosure on firm value can be measured in a constant regulatory environment and in isolation of other confounding factors, this paper shows that firms can increase their value through their choice of accounting standards. Specifically, we document strong positive abnormal returns at the announcement of voluntary adoption of International Accounting Standards (IAS / IFRS) by a sample of international firms and an economically significant reduction in long-run returns, consistent with a reduction in the cost of capital. Consistent with these results we also document evidence of an upgrade in analyst recommendations after the IAS / IFRS adoption announcement and a reduction in the implied cost of capital. Finally, we find strong evidence that the documented abnormal returns are consistent with signaling and bonding benefits stemming from the reduction in asymmetric information. Our results highlight the importance of increased disclosure on minority shareholder protection and on corporate governance in general.     

Do accounting standards matter to financial analysts? An empirical analysis of the effect of cross-listing from different accounting standards regimes on analyst following and forecast error

This paper explores whether the effects of cross-listing on analyst following and forecast error differ among firms with different accounting standards. The results reveal a higher increase in the number of analysts for cross-listed firms that follow their home country's GAAP prior to cross-listing and reconcile or switch to IAS/US GAAP or UK GAAP after cross-listing, compared to those that adopt IAS or US GAAP prior to cross-listing. We find that firms that switch to IAS/US GAAP have a higher increase in analyst following after cross-listing compared to firms that reconcile to IAS/US GAAP. In addition, we find a higher increase in analyst following after cross-listing for firms from low-level accounting standards environments compared to firms from high-level accounting standards environments. Our results show evidence of an increase in the magnitude of analysts’ forecast error after cross-listing for firms that follow their home country's GAAP pre-cross-listing but reconcile post-cross-listing to IAS/US GAAP or UK GAAP. On the other hand, we report a decrease in forecast error for firms that switch to IAS/US GAAP.     

The use of accounting information for the valuation of dual-class shares listed on China's stock markets

This study examines whether accounting data are useful in helping explain the market value of listed firms in China. In particular, we focus our investigation on companies that have issued dual-class shares sold to domestic investors (A-shares) and foreigners (B-shares). Domestic accounting standards (DAS) are used for the financial statements of A-shares while international accounting standards (IAS) are used for B-shares. Our results show that IAS earnings information is incorporated in the prices and returns of B-shares. In contrast, A-share investors appear to place most weight on DAS earnings and only recently has there been an association with IAS information. Book values are value relevant for B-share prices but not for A-share prices. Sensitivity tests show that accounting information is more likely to be impounded in share prices and returns for firms with high individual (i.e. non-government) share ownership. Based on our results, we argue that China's move towards the adoption of IAS will be useful for A-share investors, especially in light of the country's recent accession to the WTO and the consequent opening-up of the economy.     

Examining the differences between United States Generally Accepted Accounting Principles (U.S. GAAP) and International Accounting Standards (IAS): implications for the harmonization of accounting standards

Current trends indicate continued movement towards the harmonization of accounting standards, but not without difficulty and concern. At times, the political and financial market pressure, push the movement in opposite directions. The paper discusses the conceptual framework used in establishing Global Generally Accepted Accounting Principles (GAAP) (International Accounting Standards, IAS) and U.S. GAAP. Numerous transactional examples are illustrated under both Global GAAP and U.S. GAAP treatment. Several country specific references are presented demonstrating the difficulty in achieving harmonization. Implications for harmonization of accounting standards include arguments “for” and “against” Global GAAP.     

A Model for the Determination of “Fair” Premiums on Lease Cancellation Insurance Policies

Lease cancellation insurance protects the lessor against early termination of a cancellable operating lease. This paper presents a contingent claims model for determining the “fair” premium for this type of insurance policy. Comparative statics are considered, and some numerical examples are presented to illustrate the model. Among other things, the insurance premium is sensitive to the expected rate of economic depreciation of the leased asset and to the leased asset's systematic and nonsystematic risk.     

Regroupements d'entreprises et IFRS: le cas de GlobeCom Corporation et Synthetics Inc.

This case addresses the accounting for mergers and acquisitions in Canada. Since January 1, 2011, any new transactions from mergers and acquisitions made by a public company must be recorded in accordance with the International Financial Reporting Standards (IFRS). In the case of a partial acquisitions, two theoretical approaches to accounting is allowed under IFRS 3: the approach of a separate entity and the modified approach of the parent entity. For mergers and acquisitions that occurred before this date, firms could either be early adopters to IFRS or firms could apply the Canadian standards that were allowed at the time of reunification. Under Canadian GAAP (CICA, Chap. 1581), partial acquisitions are accounted for using the approach of the parent entity. Canadian public companies that have chosen to recognize their business combinations which occurred before January 1, 2011, according to the approach of the parent entity, may continue to do so even after the enforcement of IFRS. Thus for years to come, we can see in the financial statements of various Canadian public companies business combinations presented in three different ways: according to the separate entity approach, the parent entity approach and, the modified approach of the parent entity. We also include in the case the U.S. GAAP for mergers and acquisitions. In this case, we strongly draw on an acquisition that actually happened, which we adapted to illustrate the three theoretical approaches to account for mergers and acquisitions. In particular, we have changed the name of the company.