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E-MailThis post comes to us from Mary Barth, Professor of Accounting at Stanford University, Wayne Landsman, Professor of Accounting at the University of North Carolina at Chapel Hill, Mark Lang, Professor of Accounting at the University of North Carolina at Chapel Hill, and Christopher Williams, Assistant Professor of Accounting at the University of Michigan.
In our paper, Are International Accounting Standards-Based and US GAAP-Based Accounting Amounts Comparable? which was recently made publicly available on SSRN, we seek to determine the extent to which application of International Financial Reporting Standards (IFRS) as applied by non-US firms (hereafter, IFRS firms) results in accounting amounts that are comparable to those resulting from application of US Generally Accepted Accounting Principles (GAAP) by US firms. We do this by addressing two questions. The first is whether comparability is higher after IFRS firms apply IFRS than when they applied non-US domestic standards. The second is whether after IFRS firms adopt IFRS comparability differs depending on whether a firm adopted IFRS mandatorily, depending on the legal origin of an IFRS firm’s country, and for more recent reporting years. Although there is a growing literature examining whether application of IFRS affects quality of accounting amounts and has economic implications in capital markets, no study directly examines the extent to which application of IFRS by IFRS firms results in accounting amounts that are comparable to those based on application of US GAAP by US firms.
We operationalize comparability by assessing accounting system comparability and value relevance comparability. For both accounting system comparability and value relevance comparability, we find that IFRS firms have higher comparability with US firms when IFRS firms apply IFRS than when they applied non-US domestic standards. In addition, comparability is significantly higher for IFRS firms that adopted IFRS mandatorily, for firm-year observations after 2005, and for IFRS firms domiciled in countries with common law legal origin. Additional findings indicate that although US firms’ accounting amounts generally have higher value relevance than those of IFRS firms, IFRS-based accounting amounts are comparable to US GAAP-based accounting amounts based on value relevance for firms that adopt IFRS mandatorily and for firms from common law countries.
These findings suggest that efforts to converge accounting standards, the increasing mandatory use of IFRS throughout the world, the development of international auditing standards, and the increasing coordination of international securities market regulators have increased comparability of accounting amounts. Overall, although widespread application of IFRS by non-US firms has enhanced financial reporting comparability with US firms, differences remain for some firms.
The full paper is available for download here.
