Analyzing Financial Statements after Converging International Financial Reporting Standards and Us Financial Accounting Standards for Publicly Traded Companies in the USA

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The most significant event in nearly a century affecting the professions of accounting and financial analysis is the planned adoption of International Financial Reporting Standards (IFRS) scheduled for full implementation on the SEC roadmap by 2014. The technical convergence between Generally Accepted Accounting Principles (GAAP) and IFRS will be cumbersome and the interpretations and analyses by financial analysts will require a great deal more research.

While this paper cannot fully address all differences or give justice to their corollary issues, it can possibly render some perspective on the effects upon financial statement analysis such as comparability, consistency, and transparency. The objective is: fair presentation of a company's financial position, its financial performance, and its cashflows.


The desirability of accounting harmonization across countries and continents has been discussed and debated for many years. The potential benefits and costs of accounting harmonization have been debated with equal zest. The evidence is equally lacking of conclusion one way or other. Bae (2008) suggest Generally Accepted Accounting Principles (GAAP) differences are associated with economic costs for financial analysts. Ball (2003) suggest that there is little if any empirical evidence of the existence of magnitude of the benefits form or costs imposed by differences in accounting standards around the world. It seems to defy common understanding that there would not be benefits and costs savings of accounting harmonization across countries and continents for firms and financial analysts. Often heard arguments from the proponents of accounting harmonization include expectations that harmonization helps reduce information asymmetries, lowers the cost of capital, and increase capital flow across borders.

The EU parliament approval of regulation in 2005 requiring EU-registered companies to adopt International Financial Reporting Standards (IFRS) taking full effect in 2009 and the Securities and Exchange Commission (SEC) announcement that it will accept financial statements prepared accordance with the IFRS from foreign filers in the U.S.A. without reconciliation to the GAAP commencing 2007. This paper is an attempt to describe some issues facing financial analysts following the convergence. The paper further is an attempt to quantify how the implementation of these changes affects certain financial ratios used by financial analysts internationally in analyzing non-financial firms. Assessment of the effects of harmonized financial statements of accounting standards on both investors and analysts is likely to offer valuable insight how investment decisions are made. Investment decisions by investors may well be of greater economic importance than analysts' forecasts and recommendations. However, investors have arguably more sources for information to formulate investment strategies, but analysts almost invariably utilize financial statements when formulating forecasts and recommendations. The next section describes the pertinent developments toward harmonization of accounting standards during the last decade.


Six major international organizations have been key players in setting international accounting standards and in promoting harmonization of international accounting standards: IASB, EU, IOSCO (International Organization of Securities Commission, IFAC (International Federation of Accountants), United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR). ISAR is part of the United Nations Conference on Trade and Development (UNCTAD), and OECD working Group (Organization for Economic Cooperation and Development Working Group on Accounting Standards. The international effort in harmonizing accounting standards formally began in 1973 with the establishment of the International Accounting Standards Committee (IASC). …


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