Have 'European' and Us Gaap Measures of Income and Equity Converged Under Ifrs? Evidence From European Companies Listed in the Us

Accounting and Business Research › Vol. 39 Nbr. 5, September 2009

Author: Gray, Sidney J

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Summary

The EU's adoption of IFRS, combined with the SEC's removal of the US GAAP reconciliation requirement for non-US registrants reporting under IFRS, signifies a major shift towards the acceptance of global standards. Based on 20-F reconciliations provided by the population of US listed European companies filing IFRS-based statements with the SEC in 2005, we examine whether 'European' and US GAAP measures of income and equity converged under IFRS. We find that during the period immediately preceding IFRS, for our sample companies, European and US GAAP measures are generally comparable in respect of income and equity. However, as an exception to the latter, we find that UK GAAP yielded significantly lower measures of equity than US GAAP For companies adopting IFRS for the first time in 2005, we find a significant gap between IFRS and US GAAP measures of income, thereby, signifying de facto divergence from US GAAP in regard to income determination. Furthermore, we find that, following IFRS adoption, significant differences with US GAAP equity persisted for companies that previously reported using UK GAAP. Our findings, thus, support critics' claims that standard-setters, most notably the IASB and FASB, have more work to do to achieve a sufficient degree of convergence between IFRS and US GAAP that will convince the SEC to require US companies to use IFRS.

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Extract

Have 'European' and Us Gaap Measures of Income and Equity Converged Under Ifrs? Evidence From European Companies Listed in the Us

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The European Union's (EU) adoption of International Financial Reporting Standards (IFRS) for the consolidated accounts of listed companies from 2005 marked a major shift from the use of numerous national accounting standards towards the acceptance of global standards established by the International Accounting Standards Board (IASB). Today, more than 100 countries have adopted, or are in the process of adopting or converging with IFRS (IASB, 2009).

While the US has not adopted IFRS for use by domestic companies, the Securities and Exchange Commission (SEC) voted unanimously in November 2007 to permit non-US registrants to report under IFRS.1 This decision eliminated a long-standing rule requiring non-US registrants not filing US GAAP financial statements to alternatively provide a reconciliation in Form 20-F from non-US to US GAAP (SEC, 2007a). The SEC proclaimed the new rule as an important step in support of a 'common set' of high quality global accounting standards. Even more significantly, the Commission issued a 2007 concept release posing questions aimed at determining whether US registrants should be given the option to report under IFRS (SEC, 2007b). In August 2008, the SEC announced a Roadmap, including a timetable for permitting the use of IFRS by select, large US companies in 2009, and a timetable for the required use of IFRS by all US-domiciled registrants by 2014. The proposed Roadmap was posted to the Federal Register in November 2008, thereby initiating a 90-day comment period.2 The 2009 change in administration in the US lead to a 60-day extension of the comment period. Milestones set forth in the Roadmap will assist the SEC in 2011 in determining whether to move forward with the Roadmap timetable for adoption of IFRS in the US.

While the general view is that IFRS will eventually come to the US, many aspects of the convergence of US GAAP with IFRS require further debate (FEI, 2008). Thus, even though the SEC Roadmap sets anticipated dates for all US registrants to switch to IFRS (i.e. between 2014 and 2016), a SEC representing the new US administration will determine whether the milestones set forth in the Roadmap are met (Walter, 2008). Some investor advocates and key US lawmakers oppose the SEC plan. Notably, Senate Banking Committee Chair Dodd and Senator Reed (who heads the securities subcommittee) are critical of the SEC plan (Gordon, 2008). Dodd and Reed contend that the SEC proposal is premature because the convergence of US GAAP and IFRS is not expected to be achieved until at least 2011. Perhaps most important are concerns expressed by the new SEC Chair, Mary Schapiro. During her Senate confirmation hearings, Schapiro expressed concerns about IFRS and indica...

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