How different GAAPS affect performance of valuation models: Evidence from Asia-based companies

Use of accounting information to assess a firm's value is a very important subject for financial analysts, investors, lenders, policy-makers, and other market participants. Given the current worldwide movement toward adoption of IFRS, understanding how it compares to other GAAPs and affects valuation models is an important matter. This study compares the relative performance of three valuation models based on a sample of all relevant American Depositary Shares (ADRs) from selected Asian countries and a matched sample of US counterparts, using accounting variables reported under International Financial Reporting Standards (IFRS), US generally accepted accounting principles (GAAP), and non-IFRS/US GAAP. Results indicate that there are substantial differences between the three models' explanatory power and that the dominant (most explanatory) valuation model will vary depending on which GAAP (IFRS, US GAAP, and non-IFRS/US GAAP) is used.     

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.     

The Value Relevance of Accounting Numbers Under International Financial Reporting Standards

We study the market reaction to the mandatory adoption of International Financial Reporting Standards (IFRS) in Spain by examining the value relevance of the information contained in the IFRS reconciliation adjustments in relation to the local generally accepted accounting principles (GAAP). The two‐staged IFRS disclosure in the transition period is specific to Spain: the aggregated numbers of accounting differences are disclosed in stage 1, and the IFRS individual adjustments on book value of equity and earnings are disclosed in stage 2. This unique reporting timeline provides an opportunity for the market both to assess the impact of those new accounting policies adopted by firms and to assess differences when compared to the previous GAAP. We find no evidence of increased value relevance after IFRS adoption. However, our results from the incremental value relevance test show that investors consider the individual reconciliation adjustments in the second stage to be valuable and significant, specifically in relation to marked‐to‐market adjustment to financial instruments, adjustments to intangibles, provisions and impairment adjustments to property, plant and equipment, adjustments to inventories, and adjustments to pension benefits. Moreover, the results are significantly higher for low leverage firms. Our findings indicate that the market prices the informativeness of the reconciliation adjustments once the transition to IFRS disclosure cycle is complete.     

IFRS within the Multi‐GAAP Canadian Reality: A Teaching and Learning Imperative for Intermediate Financial Accounting

Intermediate accounting instructors need to be engaged in the specific complexities and challenges of the new international financial reporting standards (IFRS) reality within the Canadian multi‐GAAP environment. Intermediate accounting courses are directly affected because they represent substantive coverage of the corporate reporting environment. In this article I make the case that these courses should primarily reflect IFRS standards in order to entrench IFRS competencies in students who wish to pursue a professional designation, to prepare students for the global environment, and to concentrate IFRS expertise issues in a robust instructor group. The competency maps of each of the three Canadian professional accounting bodies clearly reflect IFRS. Students can analyze the implications of major areas of policy differences between IFRS and private enterprise GAAP (PEGAAP) through specific targeted course coverage, but also through active learning elements, particularly research elements. This commentary reflects some of the active debate occurring regarding postsecondary curriculum as Canada adapts to IFRS and PEGAAP, and encourages action.     

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 framework-based case study: DaimlerChrysler – Adopting IFRS accounting policies

This instructional case applies a framework-based approach to explore the concept of comparability in financial reporting and retrospective application of new accounting policies. The DaimlerChrysler (DC) case provides an opportunity for you to research key financial reporting concepts, analyze accounting policy differences between U.S. GAAP and IFRS, determine adjustments necessary to convert financial statements from U.S. GAAP to IFRS, and compute and discuss key ratio impacts following financial statement conversion. This case demonstrates that transitioning to IFRS is more than an accounting issue; it provides opportunities for financial restructuring (e.g., Daimler’s amendments to pension plans and its 2007 sale of Chrysler). It also illustrates the importance of professional judgment when initially adopting IFRS accounting policies. Also, despite FASB and IASB convergence efforts, you learn that most of the key differences between U.S. GAAP and IFRS identified in DC’s reconciliations continue today. This case helps you to: (1) develop skills to interpret and apply the requirements on first-time adoption of IFRS to a real-world setting; (2) research key differences between U.S. GAAP and IFRS and their effects on the financial statements and ratios; and (3) understand significant impacts of the transition to IFRS on businesses and financial statements. Completing the case develops your critical thinking and research/technological skills.     

Mandatory IFRS adoption and the cost of debt in Italy and UK

This paper analyses the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) within the EU on the cost of corporate debt. In order to avoid the imprecision involved in a large-scale cross-country study, we examine the impact of IFRS in two very clearly different institutional settings, the UK and Italy. The UK is a common-law country characterised by strong enforcement and national generally accepted accounting principles (GAAP) which are equivalent to IFRS. Italy is a typical European code-law country, characterised by a weak outside investor protection system, and national GAAP significantly different from the IFRS model. No IFRS effect is observed in the UK, consistent with it having standards which are close to IFRS. During the post-IFRS period, in Italy more weight is placed on the accounting numbers to assess the cost of debt. We also find that accruals quality improves in Italy, thus suggesting that public financial reporting data are enhanced relative to privately held information about borrowers' credit ratings.     

Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market

Using a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors, and whether International Financial Reporting Standards (IFRS) are more value-relevant than domestic generally accepted accounting principles (GAAP). These issues are key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements. The study provides evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP financial statements are more value-relevant than IFRS. Finally, this paper documents the important role of model specification in value-relevance studies.     

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.     

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.     

Evolving Connections Between Tax and Financial Reporting in Italy

We analyze the evolution of the relationship between tax and financial reporting in Italy after the mandatory introduction of International Financial Reporting Standards (IFRS) in 2005. Italy represents an interesting case study among European countries, with domestic generally accepted accounting principles (GAAP) oriented towards creditor protection and characterized by a close connection of financial and tax accounting. Unusually, the adoption of IFRS is compulsory for the unconsolidated financial statements of listed companies, but the process of alignment of domestic GAAP to IFRS, that has affected some countries, has had little effect on Italy. Thus, two accounting systems, IFRS and Italian GAAP, are used for the preparation of unconsolidated financial statements by different categories of companies and, as a consequence, two different linkages between tax and financial reporting emerge. In order to assess the degree and the direction of the book-tax linkages we use the methodology developed by Lamb, Nobes and Roberts (1998. International variations in the connections between tax and financial reporting, Accounting and Business Research, 28(3), pp. 173–188). IFRS and tax reporting show a high degree of disconnection, while Italian GAAP, in line with the accounting tradition of most continental European countries, are closely related to tax rules. The analysis points out a rapidly evolving situation, with links between accounting systems and taxation becoming tighter, mainly because of the changes in tax law introduced during the last few years.     

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.     

LARGE ACCOUNTING FIRMS’ SURVEY REVEALS EMERGENCE OF “TWO STANDARD” SYSTEM IN THE EUROPEAN UNION

Convergence with International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) is receiving great attention. In 2005, all listed companies domiciled in the European Union (EU) will be required to prepare consolidated accounts based on IFRS. Individual EU member states are, however, permitted to decide whether IFRS will be required or allowed for non-listed companies or for listed companies’ individual accounts. Based primarily on data collected by the six largest international accounting firms during their most recent convergence survey, this paper examines each of the 15 EU member states’ convergence plans and their perceived barriers to convergence.The findings indicate that most EU members do not plan to converge national GAAP with IFRS, thereby highlighting the great significance of the large firms’ concerns regarding emergence of a “two-standard” system in the EU. The survey indicates the majority of EU countries will continue to require or allow national GAAP for individual accounts. While Belgium is considering requiring IFRS for all consolidated accounts, other EU countries have decided to allow or are considering allowing non-listed companies to prepare IFRS consolidated accounts.In most EU countries, the link between financial accounting and tax accounting represents a major barrier to convergence. Other frequently cited barriers include disagreement with certain IFRS and the complicated nature of certain IFRS. International requirements for financial instruments are viewed as particularly problematic.     

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.     

A Proposal for Teaching Introductory and Intermediate Accounting in an Environment of International Financial Reporting Standards and Generally Accepted Accounting Principles for Private Enterprises*

Teaching introductory and intermediate financial accounting in an environment of international financial reporting standards (IFRS) and generally accepted accounting principles for private enterprises (GAAP for PEs) is an issue facing faculty at Canadian universities and colleges. We present a number of options and then propose an approach that we believe provides a balanced treatment of accounting standards for both publicly accountable and private enterprises. This approach focuses on the concepts and principles that are common to both IFRS and GAAP for PEs. We argue that this approach encourages deep learning resulting in students’ better understanding of accounting standards and their application.     

Implications of the mandatory transition from national GAAP to IFRS — Empirical evidence from Germany

This paper analyses the differences between German GAAP and IFRS by quantifying the effects of the first-time adoption of IFRS of German companies in their reporting practices. Due to the IAS Regulation EC No.1606/2002, all publicly traded European companies (including those in Germany) are required to prepare their consolidated financial statements in accordance with IFRS for accounting periods beginning on or after January 1, 2005. This paper measures the effect of the transition from German GAAP to IFRS by using indices of comparability that were developed by Gray (1980). Therefore, the impact on equity and net income is quantified by examining the reconciliations of 103 German companies which had to adopt IFRS for their consolidated financial statements in 2005. On average a significant increase in stockholders' equity and in net income could be observed. The increase in stockholders' equity is primarily due to the adoption of IAS 11, IAS 16, IAS 37, IAS 38 and IFRS 3. Concerning net income, the increase especially results from the adoption of IFRS 3.     

Does accounting quality change following a switch from U.S. GAAP to IFRS? Evidence from Germany

This study examines whether accounting quality changed following a switch from U.S. GAAP to IFRS. Using a sample of German high tech firms that transitioned to IFRS from U.S. GAAP in 2005, we find that accounting numbers under IFRS generally exhibit more earnings management, less timely loss recognition, and less value relevance compared to those under U.S. GAAP. In addition, after analyzing the accounting quality of firms that applied IFRS throughout the entire sample period, we find that, for the metrics suggesting a decline in accounting quality for both groups of firms, the change is significantly more pronounced for firms switching to IFRS from U.S. GAAP. Overall, our findings indicate that the application of U.S. GAAP generally resulted in higher accounting quality than application of IFRS, and a transition from U.S. GAAP to IFRS reduced accounting quality. Our findings provide the first evidence on the potential consequences of a switch from U.S. GAAP to IFRS.     

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.     

The predictive ability of loan loss provisions in banks – Effects of accounting standards,enforcement and incentives

In this study we compare the predictive ability of loan loss provisions with respect to actual losses under IFRS and local GAAP. The ‘incurred loss model’ of IAS 39 is a model that requires a relatively low level of judgment by preparers compared to alternative models that exist under local GAAP. We find that loan loss provisions in IFRS bank years predict future credit losses to a lesser extent than in local GAAP bank years, consistent with the incurred loss model reducing the timeliness of provisions. We also examine the interaction of standards with enforcement of financial reporting and with preparer incentives. In testing the role of enforcement from, e.g., banking supervisory authorities, we find that the benefits of local GAAP are largely limited to high-enforcement settings. Local GAAP also performs relatively better than IFRS in large and in profitable banks. This has implications for the IASB and the FASB as they prescribe the adoption of the more judgment-based expected loss model in IFRS 9 and the corresponding US GAAP standard (ASC topic 326), as well as for supervisory authorities that will enforce these standards.     

Gemini Communications: A case applying revenue recognition standards

Gemini Communications (Gemini) is a case study on revenue recognition criteria. You will take on the role of an audit manager for the public accounting firm that audits Gemini. Your client, Gemini, is a US company that recently expanded operations into China through the acquisition of Apollo Man. Gemini prepares its financial statements in accordance with US Generally Accepted Accounting Principles (US GAAP) while Apollo Man prepares its financial statements in accordance with International Financial Reporting Standards (IFRS GAAP). Your assignment is to research, compare and contrast the technical criteria for revenue recognition under US GAAP, IFRS GAAP, and the proposed revenue standard. You will apply the various criteria to an Apollo Man sales transaction to determine the timing and amount of revenue Apollo Man should recognize. The case is designed to develop your research and written communication skills.