Academic journal article Journal of Accountancy

Highlights of IFRS Research

Academic journal article Journal of Accountancy

Highlights of IFRS Research

Article excerpt

Conversion from U.S. GAAP to IFRS is a heavily discussed topic in the corporate world. Expected benefits of adoption include reporting consistency, enhanced global competition and improved financial reporting transparency While many countries worldwide have already adopted IFRS, many other countries are closely examining its effects before adoption, not only from an economic perspective but also from a reporting quality position.



Researchers Elaine Henry, Stephen Lin and Ya-Wen Yang evaluated the difference between financial results under U.S. GAAP compared to IFRS. Their results show that convergence between U.S. GAAP and IFRS is occurring. Using 2004 to 2006 reconciliation disclosures, the authors found that the calculated difference between shareholders' equity under U.S. GAAP and under IFRS declined from 2004 to 2006. In addition, the difference between U.S. GAAP and IFRS reported net income during this period also declined but remained significantly different. Pensions and goodwill appeared to be the dominant reconciliation items.

Reconciliation amounts varied by industry and country, raising questions about consistency between region and industry. Additionally, more than 70% of the companies examined in 2004 through 2006 had a higher return on equity under IFRS compared to U.S. GAAP. The 2007 SEC elimination of the IFRS-to-U.S. GAAP reconciliation for non-U.S. companies with securities listed in the United States suggests a need for users of financial statements to be aware of the potential for differences resulting from the two sets of standards."

"The European-U.S. 'GAAP Gap': IFRS to U.S. GAAP Form 20-F Reconciliations" was published in the June 2009 issue of Accounting Horizons.


Researchers Holger Daske, Luzi Hail, Christian Leuz and Rodrigo Verdi examined 3,100 firms in 26 countries mandated to adopt IFRS in "Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences." The study examines the economic effects of IFRS, for both early and mandated adoption.

The authors concluded that a company's adoption of IFRS creates strong economic benefits in countries with rigid regulation over financial reporting. These benefits include an increase in the stock's market value, an increase in market liquidity, and a lower cost of capital. Companies with major differences between GAAP and IFRS standards show the greatest benefit when supported by a strong regulatory environment.

Additionally, the researchers found that in firms that adopt early, benefits are not only strong in the year of the change to IFRS, but also in the year that reporting is officially mandated. Results reinforce the view that strong enforcement of reporting standards not only enhances transparency for investors but also increases the market position of adopters.

The paper also investigates possible contributing factors unrelated to IFRS adoption that may have caused these economic benefits to occur. Self-selection appears to be a primary reason; firms voluntarily changing to IFRS had factors unrelated to the accounting standard change that gave them an economic advantage.

The article, appearing in the December 2008 issue of the Journal of Accounting Research, reinforces the economic benefits of voluntary early adoption of IFRS, combined with a strong regulatory environment emphasizing transparency and financial reporting quality.


French authors Thomas Jeanjean and Herve Stolowy examined the effect of IFRS conversion on earnings quality--specifically on management manipulation of earnings to avoid recognition of losses. Their work examined more than 1,100 firms in three countries to determine whether the earnings management appeared to increase or decrease after implementation of IFRS.

The authors measured financial reporting quality as a reduction in earnings management. …

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