International Convergence of Accounting Standards: An Investigation of the Use of Ias "Options" Not Acceptable under Us Gaap

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This study investigates the use of accounting policies contained in national standards or IAS that are not acceptable under US GAAP. Four policy areas (measurement of tangible assets, available-for-sale marketable securities and intangible assets; and the treatment of research and development expenditure) were considered for 506 listed firms from the United Kingdom (UK), Australia, France, Germany and Japan at 1999/2000. The main use of policies equivalent to IAS "options" was among firms from the UK and Australia. The study outlined how IAS adoption in 2005 (in the UK, France, Germany and Australia) and further IASB/FASB convergence activities will impact on policies currently used by firms from the sample countries.

Keywords: International accounting convergence; international accounting standards; IAS; US GAAP; accounting policy choice; measurement of tangible, intangible and financial assets, research and development (R&D) expenditure.

I. INTRODUCTION

International convergence of accounting standards has emerged as a common goal of standard setters for financial reporting, with the International Accounting Standards Committee (IASC), and subsequently the International Accounting Standards Board (IASB), as the focal point for harmonization initiatives (McGregor 1999). The IASC has worked for many years to develop one set of standards suitable for use by companies throughout the world (IASB 2003a). The importance of the international standard setter in the global community setting increased significantly with IOSCO1 recommending the use of IAS2 for cross-border listings (IOSCO 2000) and the announcement by the Commission of the European Union (EU) that listed companies from all member states must use IAS in their consolidated financial reports from 2005 (IASC 2000a). The influence of IAS has also increased following corporate collapses in the United States of America (US) in 2001 - 2002. Company failures such as Enron and WorldCom have prompted a re-evaluation of the so-called rule-based approach of US GAAP1 and consideration of the principles-based approach of IAS (Schipper 2003).

There has been considerable progress in recent years in harmonizing IAS and US accounting standards and practices (see Deloitte Touche Tohmatsu 2003a). The US has become more involved with international standard setting following the creation of the IASB in 2000 (IASC 2000b). The US's standard setting agency FASB4 is one of the IASB's eight liaison standard setters. FASB commenced the IAS/US GAAP convergence project to address outstanding differences between the two sets of accounting standards (IASB 2002) and to work towards common requirements in IAS and US GAAP. Some of the remaining key differences between IAS and US GAAP are the focus of this study. A number of IAS require a policy, or allow the use of an optional treatment (that is, they allow a choice of accounting policy), that is not acceptable under US GAAP. To achieve uniform global standards these differences must be reconciled. They present a challenge to the FASB and IASB who seek to produce standards that are conceptually sound and are acceptable to preparers and users of financial statements.

The aim of this study is to investigate the use of accounting policies in national standards and IAS that are not acceptable under US GAAP to determine the extent to which policies equivalent to IAS "options" are used among an international sample of firms. Thus the study shows the number of firms which use policies that are harmoni/ed with both US GAAP and IAS, effectively using an "international benchmark" policy. In some cases, harmonization reflects national requirements that arc consistent with the common US GAAP/IAS policies. In other cases, firms can exercise policy choice so it is possible to observe the extent to which firms choose a policy that is consistent with both US GAAP and IAS as Barth and Clinch (1996) suggested they might.

The topic of the study is important because of the resources being devoted to international convergence of accounting standards and the impact that changes in standards have on firms' reported earnings. …