Until recently, all foreign entities that are traded on United
States (U.S.) stock exchanges were required to include a reconciliation
to U.S. generally accepted accounting principles (U.S. GAAP) if the
financial statements were not prepared in accordance with U.S. GAAP. The
firms provided this information on the Securities and Exchange
Commission (SEC) Form 20-F. This is a very expensive exercise that cost
some companies millions of dollars annually (Scannell and Reilly 2007a).
This burden, in conjunction with the additional costs associated with
Sarbanes-Oxley compliance, has led to many U.S. de-listings by foreign
entities (Uhlfelder 2007).
In an effort to combat these de-listings, coupled with concerns
that the U.S. financial markets are losing their competitive edge to
London and Hong Kong (Scannell and Reilly 2007), the SEC proposed that
certain foreign entities be allowed to file financial statements under
either U.S. GAAP or under the English language version of International
Financial Reporting Standards (IFRS) published by the International
Accounting Standards Board (IASB) without reconciliation to U.S. GAAP
(SEC 2007). On November 15, 2007, the SEC voted unanimously in favor of
the proposal. On December 21, 2007, the SEC issued the final rule which
was entered into the Federal Register on January 4, 2008 (SEC 2008a).
The rule applies to financial statements ending after November 15, 2007.
The IFRS promulgations to be used in lieu of U.S. GAAP are referred
to as "full" IFRS. An analysis of the comment letters by LaFon
(2007) to the SEC proposal revealed that most of the commenters endorsed
the proposal. A few opposed it, however, with the most vehement
opposition originating from the Investors' Technical Advising
Committee (ITAC), a body whose charge is to render technical advice to
the Financial Accounting Standards Board (FASB) from an investor's
perspective. In the letter, the Committee stated that it would like to
see "concrete evidence" that U.S. GAAP and IFRS standards are
"substantially equivalent" before the reconciliation
requirement is eliminated. The Committee went on to state, "We
suggest that the Commission undertake an evaluation of the IFRS/U.S.
GAAP differences commonly found in the reconciliations, and periodically
publicly disseminate and report upon such an inventory." (ITAC
Given this background, our research, in part, is intended to
accomplish this challenge. Another objective is to ascertain if the SEC
roadmap for the adoption of IFRS is appropriate. As we will indicate in
an ensuing section, the incoming SEC Chairperson is apprehensive about
the proposed schedule. Our results should be of interest to financial
statement users, especially financial analysts and accounting standard
setters. Our paper begins with a discussion of the background of the
topic, continues with a literature review and our research questions,
and then our methodology, summary and conclusions.
The SEC first required listed foreign entities that did not employ
U.S. GAAP to submit supplementary information in 1967. The instructions
associated with Form 20-F did not specifically require a reconciliation,
but rather, the financial statements, audit report, and other schedules
that domestic issuers were required to file. Prior to 1967, the foreign
entities only had to file a balance sheet and income statement, with no
requirement for this information to be certified. In 1982 the Commission
implemented the current reconciliation requirement (SEC 2007).
Although the Commission has required this information for the past
twenty-five years, the agency has long advocated reducing differences in
accounting principles between the U.S. and other countries in an effort
to facilitate cross-border capital formation. In 1994, it accepted the
cash flow statement prepared in accordance with International Accounting
Standard No. 7 (IASB 2004b) without reconciliation.
In 1997, at the direction of Congress, the Commission examined the
initiatives undertaken to develop "high-quality, comprehensive
global accounting standards." (SEC 2007, 20) Towards that end, the
SEC encouraged the International Accounting Standards Committee's
(IASC) efforts to develop such standards that could be used for
cross-border offerings. These standards would presumably reduce
compliance costs and inefficiencies that exist under the current system.
Subsequently, in 2003, under a Congressional mandate contained in
the Sarbanes-Oxley Act, the SEC released a study on the feasibility of a
principles-based accounting system. Its conclusion was that the optimal
approach would be based on objectives associated with a conceptual
framework rather than relying solely on either principles or rules. This
approach would also be used for the convergence of U.S. and
international accounting standards. The FASB and the IASB have since
established a formal plan for the convergence of U.S. GAAP and IFRS.
While the preceding discussion is of an optimistic tone, there are
both very formidable obstacles and arguments involving both the
elimination of the Form 20-F requirement and the acceptance of the
international set of accounting standards as a substitute. The ensuing
section includes a review of the literature that addresses these
concerns and the research questions that they engender.
RELEVANT LITERATURE AND RESEARCH QUESTIONS
In addition to the new 20-F initiative, in 2007 the SEC issued a
related recommendation that would allow U.S. companies to utilize IFRS
as a basis for their financial reporting. (SEC 2008b) At that time some
individuals suggested that allowing U.S. firms a choice between U.S.
GAAP and international standards would be the end of U.S. GAAP. The
reason given is that international rules are more principles based, and
would allow companies more flexibility. In fact, Don Nicolaisen, a
former SEC chief accountant responsible for developing the SEC's
"road map" for the convergence of global accounting standards,
stated that the SEC should eventually abandon U.S. GAAP and require the
use of international rules. (Reilly 2007) However, in a recent study of
589 U.S. CFOs, only 14 per cent stated that they are very familiar with
IFRS and fewer than 10 per cent stated that they are very likely to file
under IFRS if given the choice. (Duke 2007)
John White, the SEC's director of corporate finance, argues
that since foreign firms will have their choice of U.S. or IFRS
reporting standards, U.S. entities should also be given the option:
"We are asking a question. Why shouldn't we let a U.S. company
choose?" However, Lynn Turner, form SEC chief accountant, states
that this option will only work if the two sets of standards are
comparable, and that "holes" currently exist in certain
industries, especially insurance. Turner goes on to state that the two
sets of accounting standards, "must result in comparable,
consistent accounting across the universe of companies that have similar
transactions." Arthur Levitt, the former SEC Chairman, is a long
time proponent of one set of international standards, and also against
the choice option, stating, "The menu, system, I believe, leads to
earnings management and that should be avoided." (Greenberg 2007,
On August 27, 2008, the SEC laid out its proposal to eventually
require all U.S. companies to use IFRS. The proposal would allow some
U.S. large multinationals to use IFRS for the financial statements for
the year 2010. The SEC estimates that 110 U.S. companies would qualify
(Scannel and Slater 2008, A1). This would represent approximately 2.5
trillion in U.S. market capitalization (Rodriguez, 2009). All U.S.
companies would then be required to use IFRS in lieu of U.S. GAAP
beginning in 2014. More recently, on November 14, 2008 the SEC released
its "Roadmap" involving the use of IFRS and reiterated the
2014 date "... if it is in the public interest and for the
protection of investors to do so." (SEC 2008b, 10) The Commission
listed six "milestones" that should occur before the mandatory
implementation of the IFRS. On February 3, 2009, the SEC extended the
comment period which was scheduled to end on February 14, 2009 to April
20, 2009 (SEC, 2009).
Although some U.S. companies gave the proposal a "qualified
welcome," there are still reservations and "issues to be
worked out," according to one U.S. controller (Scannel and Slater
2008, A1). Barbara Roper, Director of Investor Protection at the
Consumer Federation of America, stated that allowing some companies to
use IFRS before others would impose a burden on investors to be familiar
with both sets of rules. Furthermore, she stated that allowing them to
choose which accounting model will establish a situation where
"they'll choose the language that paints their financials in
the rosiest light." (Scannel and Slater 2008, A12) Recently, Mary
Schapiro, newly appointed Chairperson of the SEC indicated that she
could delay the roadmap's transition to IFRS. Schapiro is worried
about the high cost of the transition, which the SEC estimates to reach
up to $32 million for some companies. She is also concerned about the
independence of the IASB, and the "looser" nature of the IFRS
principles-based standards. "I will take a deep breath and look at
this entire area again careful and I will not necessarily feel bound by
the existing roadmap that is out for public comment," she informed
the U. S. Senate Banking Committee. (WEBCPA, 2009, 1)
In the U.S. there are famous cases where politicians became
involved in the accounting standard-setting process to the extent that
they succeeded in either aborting the proposed standard (the investment
credit) or modifying it to their satisfaction (stock options). This same
phenomenon also exists in the issuance of IFRS. Although the IASB
promulgates the accounting standards, each country decides how to
utilize them. Some countries adopt them verbatim; however, others modify
them to some extent. In the case of the European Union (EU), each
accounting standard must be approved by the European Parliament. The
adopted standards are then referred to as "endorsed IFRS"
(ITAC 2007, 3). One drawback of this EU review process is that there can
be considerable lag time between the date that the IASB releases the
standard and the date that the EU firms are required to use it. A more
serious problem is that parliament can change the standard. This was the
case of IAS 39 (IASB 2005d), which involved lobbying that extended to
the level of the French president. Accordingly, in a "technical
sense, Europe does not employ 'full' IFRS." (Hughes
2007a) However, the SEC insists that it will only accept
"full" IFRS (SEC 2008a, 993), which could have potentially
excluded the European Union countries and create a dispute between the
U.S. and the European Union (Hughes 2007). The SEC reiterated its
position and stated that the firm must explicitly state that the
financial statements are in compliance with IFRS as issued by the IASB.
Furthermore the independent auditor must provide an unqualified opinion
as to this compliance (SEC 2007, 39; SEC 2008, 993).
As we mentioned previously, the ITAC released a comment letter that
was very critical of the SEC proposal (ITAC 2007). Some of the
committee's concerns are listed as verbatim bullet points below.
* We ... do not believe there is sufficient current symmetry
between the IFRS literature and U.S. Generally Accepted Accounting
Principles (GAAP) to warrant the elimination of the required
* While we would agree that progress has been made towards
convergence of the two systems, it is not yet at the point where most
reconciliations in SEC statements are labeled 'Not Applicable.
* If such a result were to occur, it would indicate the achievement
of convergence- or at least a substantial harmonization, with the
exception of items bearing inconsequential significance to investors
* We would prefer to see concrete evidence that the two sets of
standards are substantially equivalent before the reconciliation is
eliminated. We suggest that the Commission undertake an evaluation of
the IFRS/U.S. GAAP differences commonly found in the reconciliations,
and periodically publicly disseminate and report upon such an inventory.
We also suggest the development of a separate inventory of all the
differences between the two sets of standards. The reconciliation
requirement should be dropped only when the inventory of all identified
differences has been satisfactorily resolved. "(p. 2)
* The differences among accounting standards are not our only
concern. We are not yet certain that there is consistent auditing and
enforcement of the application of IFRS. We understand that the
international accounting firms currently assign highly experienced U.S.
GAAP-trained practitioners to review the SEC filings of foreign issuers
and the accuracy of the reconciliation as a matter of due course.....we
view this process as critical in ensuring consistent application of
accounting and auditing disciplines among international peers and the
completeness of financial disclosures provided to U.S. investors. (p. 2)
(The ITAC then suggested that the SEC compare the differences in the
auditing and enforcement procedures between the IFRS and U.S. GAAP.)
* "While we respect the work of the IASB and its staff, we are
concerned that the substance of the Proposed Rule is to recognize the
IASB as a standard setter for purposes of the U.S. public capital
markets, on virtually the same level as the FASB." (p.2)
Some other points in the letter referred to "the potential to
inject a political, Euro-centric bias into standards set by the
IASB" (p.3), the need for U.S. investors to learn IFRS, and the
hindrance the proposal will have on the convergence process.
More recently, Charles Niemeier, a member of the Public Company
Accounting Oversight Board (PCAOB) delivered a rather comprehensive
address to the New York Society of CPAs in which he criticized both the
elimination of the reconciliation requirement and the proposal to allow
U.S. firms to employ IFRS. (Niemeier 2008) Some of his arguments echo
the concerns of the IATC regarding the 20-F elimination. Niemeier avers
that, based on the evidence he has reviewed, the reconciliation captured
"value-relevant information" and that IFRS reporting has not
yet resulted in convergence with, or comparability to U.S. GAAP."
(Niemeyer 2008, 2) He stated that the move towards IFRS represented a
capitulation. He summarized his position by quoting FASB Chairman Bob
Herz, who stated, "We do have the best reporting system, but the
rest of the world won't accept it." (Niemeier 2008, 2)
Niemeier also discussed (2008, 2) what he referred to as
"myths" involving the adoption of IFRS, including that:
* IFRS are superior to U.S. GAAP because they are principles-based.
Niemeier countered that IFRS are merely "younger" than U.S.
GAAP and that over time it is likely to become more
"rules-based". Furthermore, he warned that U.S. managers who
employ IFRS for their flexibility will not have a defensible position if
they mislead investors.
* Switching to IFRS will enhance financial reporting comparability.
In a similar vein of the "Full IFRS Issue" discussed
previously, Niemeier cited the case of certain French companies, who
despite being required to employ IFRS, did so "in name only"
and continued to use their home country standards for their financial
reports, a term referred to by the French as "nostalgic
accounting" and encouraged by local regulators.
* IFRS will strengthen investor protection in the U.S. Niemeier
warned that the IFRS initiative would actually weaken regulatory
enforcement by allowing more management discretion. Indeed, the Chairman
of the International Accounting Standards Committee Foundation stated
that stringent enforcement is unique to the U.S. and that "the SEC
realizes that (its) attitude should change."
* The IASB's standard-setting process is protected from
political and other influences. In this case, Niemeier cited Section 108
of Sarbanes-Oxley (SOX) that requires the SEC to determine that a
private accounting standard-setter has satisfied certain criteria before
it will recognize its accounting principles as U.S. GAAP. One of these
is independent funding through, and the IASB's funding mechanism
does not comply with the provisions of Section 108. Furthermore,
although Niemeier states that although there is discussion about the
structure of the IASB, much of it has "focused mainly on
establishing mechanisms to give interested governments influence over
the standard-setting." (Niemeier 2008, 3)
In a survey of individual investors, McEnroe and Sullivan (2006)
found that over 85 percent agreed that foreign countries should be
required to either employ U.S. GAAP or to reconcile to U.S. GAAP in
order to be listed on U.S. stock exchanges. The respondents also
perceived (80 percent) that if foreign firms were not required to comply
with the Sarbanes-Oxley Act or U.S. GAAP to be listed on U.S. exchanges,
that U.S. parties would be less inclined to invest their funds in such
firms. Last, only 27 percent of the investors agreed that a coded stock
symbol indicating compliance with international rather than U.S. GAAP
should be sufficient for a foreign firm to be listed on a U.S. exchange.
Ucieda-Blanco and Osma (2004) studied the 20-F reconciliations to
U.S. GAAP of firms using IASs over the period from 1995 to 2001. They
found there to be an increasing number of adjustments being disclosed,
but overall the materiality of the adjustments declined over this
period. The most frequent adjustments were in the areas of expense
capitalization, business combinations, assets revaluation, employee
benefits, and stock compensation, although only asset revaluations and
business combinations had a significant percentage of material
adjustments. They concluded that although material adjustments still
exist, U.S. GAAP and IASs appear to be converging.
In a more recent study, Henry et al. (2007) examined the 20-F
reconciliations of 75 firms employing IFRS over the period from
2004-2006. They found evidence of convergence, although goodwill and
pensions appeared to be the most dominant reconciliation areas. Their
results also indicated that 28 percent of the firms had net income that
was higher under IFRS than U.S. GAAP, while most of the firms reported
lower stockholders' equity under IFRS as opposed to U.S. GAAP. They
concluded that significant differences still exist and that given the
potential for allowing U.S. firms to use IFRS, stakeholders should be
aware of them.
Jack Ciesielski, an accountant and publisher of the Analysts'
Accounting Observer, studied 137 foreign firms trading in the U.S. for
2006. He found that 63 percent of the companies had higher earnings
under IFRS versus U.S. GAAP and that the median increase was 11.1
percent (Scannell and Slater 2008, A12).
The previous two studies that have involved the differences between
IFRS net income and shareholders' equity and their U.S. GAAP
counterparts examined (1) the size of the gap, (2) whether one measure
was systematically larger or smaller that the other, (3) if the gap was
narrowing over time, and (4) the "value relevance" of the
information provided by the information in the reconciliation using
market-based tests. Our study extends the research by (1) determining
the most significant adjustments reported for the year 2006, (2)
examining the nature of the accounting standards that engendered those
adjustments, and (3) projecting whether those adjustments are likely to
continue to remain significant in the future.
We selected all the companies listed on the New York Stock Exchange
that used an ADR (American Depositary Receipt) for the year ended
December, 2006. From that group we selected all the companies that filed
a Form 20-F reconciliation between International Financial Reporting
Standards and U. S. GAAP. This exercise resulted in a total sample of 57
For each company, we scheduled all the reconciling items reported
between U. S. GAAP and IFRS net income. Based on the similarity among
the descriptive titles used by different companies, we combined some of
the individual reconciling items. We then ranked the reconciling items
based on frequency of occurrence and size of the item compared to the
difference between IFRS and U. S. GAAP income. We decided to focus on
those items that appeared as reconciling items on 20% or more of the
companies selected. This process resulted in an in-depth examination of
the following nine reconciling items:
Pensions and other post employment benefits
Impairment, Goodwill, Intangibles
Employee Compensation Costs
Table 1 lists the reconciling items and ranks them by frequency of
occurrence on 2006 20-F statements.
We then looked at (1) the explanations in Statement 20-F for the
chosen reconciling items and companies, (2) the corresponding IFRS and
SFAS standards for the individual reconciling items, and (3) the IASB
and FASB agenda projects that are part of the convergence program. Based
on this review, we believe that the following describes the most
significant reconciling items as or December 2006 and the near term
prospects for their reduction or elimination.
Reconciling items relating to deferred income tax allocation were
the most frequently occurring issue. While the average difference as a
percentage of net income was relatively low, in at least one case, the
reconciling item was over ten times the net difference in IFRS vs. U. S.
GAAP income (with other reconciling items offsetting this huge
difference). Both the IASB (IAS 12: IASB 2004c) and the FASB (SFAS 109:
FASB 1992) require the recognition of deferred tax assets and deferred
tax liabilities resulting from differences in the reporting of income
and the valuation of assets for financial and tax reporting.
There are a large number of differences, however, in the
implementation of these standards. For example, it appears from an
analysis of the 20-F of individual companies that some companies used
different rates for computing taxes under IFRS than under U. S. GAAP
based on the IFRS rule that "substantially enacted" rates
should be used as opposed to the U. S. GAAP rule that an entity should
not anticipate changes in future tax rates. Similarly, some companies
reported tax differences associated with the fact that while both IFRS
and U. S. GAAP call for the tax effects of items that are direct
adjustments of stockholders' equity to be reflected in
stockholders' equity or comprehensive income, U. S. GAAP requires
that tax effects resulting from changes in rates must be reflected in
operating income. Other companies reported differences based on
different standards that apply as to whether a tax asset should be
recognized and the different amounts of taxes that are required to be
reported for share-based compensation schemes.
Even though these differences appear on the 20-F of a large number
of companies and can be significant dollar amounts, they do not appear
to reflect fundamental differences in the underlying companies. Nor do
they appear to be the types of items that should be highlighted to users
of financial statements. Furthermore, it does not appear likely that a
company would choose to use IFRS or U. S. GAAP to "take
advantage" of the differences in reporting for taxes. As a result,
there appears to be a substantial opportunity for convergence of the two
standards without losing important financial reporting information. The
agenda for the convergence project calls for an exposure draft
reconsidering IAS 12 (IASB 2004c) to be issued in 2008 and a new
statement to be issued in 2009. This appears to be an important project
because of the frequency of its occurrence as a reconciling item but it
also appears that it is one area where convergence will be easily
Pensions And Other Post Retirement Benefits
The second most frequent reconciling item was associated with
pension and other postretirement benefits. Once again, the general
accounting treatment is similar under both accounting regimes (Primarily
IAS 19 (IAS 19: IASB 2004d) and SFASs 87, (FASB 1985a), 88, (FASB
1985b), 106, (FASB 1990), 132(R), (FASB 2003), and 158 (FASB 2006c).
Both systems generally require that the costs associated with retirement
benefits be recognized in the period which those benefits are earned by
the employee rather than when they are paid.
Several of the companies that we reviewed had the pension costs
associated with years prior to adopting IAS 19 (IASB 2004d). IFRS 1
allows those cost to be charged to equity while U. S. GAAP requires that
these costs flow through the income statement. Other firms, however, had
significant reconciling items associated with income from pension assets
in some countries being directly reported on the income statement of
sponsoring companies presumably because the funding vehicle was not
sufficiently distinct from the sponsoring company. Other firms were
subject to an IFRS limitation on the amount of prepaid pension costs
which could be recognized in financial statements. Corresponding limits
do not exist under U. S. GAAP.
These differences, while occurring less frequently than those
related to deferred taxes, seem to be somewhat more consequential. The
dollar amounts can be quite large as a percentage of reported income
and, unlike the case of deferred taxes, it is easy to conceive that the
management of a company might prefer one set of reporting standards over
another to account for these costs. The different treatments provided
for these types of cost may well significantly impair the ability of
users to compare companies using different accounting standards.
Permitting a company to choose its accounting standards might provide
more accounting flexibility to management than many financial statement
users would be comfortable with.
Post retirement benefits, including pensions, are an agenda item in
the IASB/FASB convergence program. The current agenda (FASB 2008b) calls
for an exposure draft in 2009 with a final IFRS in 2011. The significant
differences in accounting for these costs will presumably continue to
exist at least until that time and make the comparability of financial
statements prepared under the different regimes quite problematic.
Almost half of the companies examined had reconciling items
relating to financial instruments. While the average size and the range
of differences are not as large as in the case of Pensions and Other
Post Retirement Benefits, the textual description of the differences
highlights a number of rather significant differences in the two
accounting systems. IAS 32 (IASB 2005c) and 39 (IASB 2005d) and IFRS 7
(IASB 2005b) represent the primary guidance for the accounting for
financial instruments under IFRS. U. S. GAAP has a number of separate
standards dealing with topics related to financial instruments. SFAS 115
(FASB 1993b) and 133 (FASB 1993c) are arguably the primary authority
while SFASs 114, (FASB 1993a) 140, (FASB 2000) 155, (FASB 2006a) 157
(FASB 2006b) and 158 (FASB2006c) deal with narrower issues. Both systems
generally require fair value accounting but there appear to be quite
significant differences permissible in the implementation of the
Examples of significant difference that appeared in the analysis of
20-F include the following. Previously taken write-offs relating to
certain investments were partially or fully reversed for a company
reporting under IFRS while those reversals are not permitted under U. S.
GAAP. Furthermore, certain assets were "derecognized" under
IFRS standards whereas those amounts have to be retained on the balance
sheet under U. S. GAAP. Some assets were reported as "available for
sale" securities under IFRS but were required to be reported using
the equity method for U. S. GAAP. Also, derivatives were categorized as
hedges under IFRS where they did not qualify as such under U. S. GAAP.
These types of reconciling items represent significant differences
in accounting under the two models and it is easy to conceive that
management might have a preference for one method over the other. The
accounting for financial instruments is similar to the accounting for
pension and post retirement costs in the sense that quite significant
differences exist and it is at least possible to visualize companies
that would, if given the opportunity, choose one set of accounting
principles over another in order to change the accounting presentation.
Accordingly, this appears to be seems like a very significant area for
concern and, while it is on the IAS's research agenda, no target
date has been set for an exposure draft or new standard.
An important reconciling item on the 2006 20-F's was labeled
"Minority Interest." Perhaps the preferred term for this issue
now is "Non-controlling Interest." Prior to the issuance of
SFAS 160 (FASB 2008a) (effective for years beginning on or after
December 15, 2008), U. S. GAAP generally treated non-controlling
interest as an item separate from equity and income attributable to this
interest was expensed in the computation of net income. IAS 27 (IASB
2008b) generally requires that non-controlling interest be included in
equity and, therefore, there is no corresponding expense item in the
income statement. It appears that almost all of the reconciling items on
the 2006 statements were attributable to this issue. SFAS 160 (FASB
2008b) brought U. S. GAAP substantially in line with IFRS on this issue,
so while the item was significant in 2006 reconciliations, our opinion
is that it is unlikely to remain so in the future.
Impairment, Goodwill And Intangibles
While a number of companies had reconciling items classified as
being related to the accounting for impairment and had separate
reconciling items related to accounting for goodwill, in many other
cases the issues were combined. Therefore, we have chosen to combine
them as well. These items showed up on a large number of firms and
frequently the amounts, as a percentage of the difference in income,
were quite large. The U. S. GAAP rules governing these items are
primarily in SFAS 142 (FASB 2001b) and 144 (FASB 2001c). The IAS rules
are in IAS 36 (IASB 2004e) and 38 (IASB 2004f) as well as IFRS 3 (IASB
With regard to impairment, two major issues appear to account for
most of the reconciling items. First, unlike U. S. GAAP, IFRS permit the
reversal of impairment losses under certain circumstances. Second, under
U. S. GAAP, impairment losses are only triggered if undiscounted
projected cash flows from an asset are below its carrying value. A
number of firms took impairment losses for IFRS statements that could
not be taken on U. S. GAAP statements.
With regard to goodwill and intangibles, the major reconciling
items (ignoring impairment issues) appeared to be related to
transitional issues. For example, one company converted to IFRS on
January 1, 2004 and elected not to reinstate goodwill that had
previously been written off under national accounting standards. Under
U. S. GAAP that election is not available and the goodwill had to be
reinstated. These differences, however, generally had a relatively small
impact on the income statement.
The differences in the treatment of impairment of assets and the
possible reversal of impairment losses seem to be the most consequential
issues in this area. Differences caused by these items can be very
large. It follows then that resolving these differences would be
important in making the two accounting models more comparable; however,
it appears that addressing impairment issues is not part of the IAS
U. S. GAAP (SFAS141: FASB 2001a) and IFRS rules (IFRS 3: IASB
2008a) are both based on the purchase method of accounting. For 2006,
nevertheless, there were differences in implementation that resulted in
the largest reconciling items between IFRS and U. S. GAAP.
Three items appeared to account for the major differences
categorized under business combinations under the 20-F. First,
restructuring costs incurred following the acquisition of a company (and
therefore categorized under business combinations) are generally
recognized earlier under IFRS than under U. S. GAAP. Second, as of 2006,
IFRS reported the fair market value of the total net assets acquired in
an acquisition while U. S. GAAP reported fair market value in proportion
to the share of ownership acquired. Third, contingent consideration was
typically treated as part of the purchase price under IFRS whereas under
U. S. GAAP a company had to meet more stringent standards before
contingent consideration could be included as part of the acquisition
Both standard setters have revised their GAAP in this area since
2006 with the new rules generally effective for 2009. These new rules
appear to resolve most of the items that caused differences in 2006;
therefore it appears that the substantial reconciling items for business
combinations that appeared in 2006 are not likely to be significant in
Employee Compensation Costs
Share-based payments are treated under IFRS (IFRS 2: IASB 2004a) in
a manner substantially similar to the treatment required under SFAS
123(R) (FASB 2004). The main differences under compensation were related
to severance costs and costs related to the discontinuance of benefit
plans. The relevant U. S. GAAP rules are mainly in SFASs 88 (FASB 1985b)
and 146 (FASB 2002) and the relevant IAS rules are primarily in IAS 19
(IASB 2004d). The general rules governing the recognition of liabilities
also appear to have generated some differences.
Examples of typical reported differences include the following. One
company recorded a severance pay obligation mandated under Italian law
as a defined benefit plan for IFRS reporting but elected to report the
present value of the termination obligation for U. S. GAAP. Another
company recognized a liability for certain severance costs in 2004 for
IFRS statements but that did not meet the standards for recognition
until 2005 for U. S. GAAP.
Standing alone, these differences occurred fairly frequently in
2006 and some of the reconciling items were quite significant. When
combined with the differing treatment of pensions and other
post-retirement benefits, these two represent a very significant
difference between U. S. GAAP and IFRS. Presumably these issues will be
addressed in the review of IAS 19 (IASB 2004d) mentioned above and in
the portion of the Conceptual Framework project dealing with the
recognition of liabilities
Differences resulting from different capitalization rules occurred
fairly frequently and many of them were quite substantial. The review of
the reconciling items in the 20-F suggested that most of the items were
associated with the capitalization of interest costs (IAS 23: IASB 2007)
and SFAS 34 (FASB 1979) and the treatment of Research and Development
Expenses (IAS 38: IASB 2004f) and SFAS 2 (FASB 1974).
In 2007, IAS 23 (IASB 2007) was revised to require the
capitalization of interest costs for IFRS in a manner parallel to the
rules of SFAS 34 (FASB 1979), so one of the major items for 2006 appears
to have been eliminated. The differing treatment of Research and
Development Expenditures does not appear to be on the agenda to be
revisited. The 20-F's generally did not disaggregate R &D from
other capitalization issues, so it is difficult to tell the size of the
related adjustments. Even though it did appear in 2006 reconciliations,
the circumstances under which R & D are capitalized for IFRS are
quite restrictive, so it is at least arguable that these reconciling
items will not be significant in the future.
The rules governing the amortization of intangibles under IFRSs
38(IASB 2004f) and IFRS 3 (IASB 2008a) are substantially similar to U.
S. GAAP: SFASs 141 (FASB 2001a) and 142 (FASB 2001b). In fact, although
this is an item on the convergence agenda of the IAS and is the subject
of research activity at the IASB, it does not appear to be a currently
active agenda item.
The reconciliation items that appeared in 2006 appear to be
primarily related to valuation issues for firms that changed from a
national standard to IFRS. These transitions resulted in differing
values for intangibles, including goodwill, and some of those
differences result in different charges to income in 2006. The fact that
the current practice seems to be so similar under the two accounting
systems suggests that perhaps no further action should be taken. On the
other hand, where these differences do occur, they can be
SUMMARY AND CONCLUSIONS
While substantial progress has been made in the convergence of U.
S. GAAP with IFRS, some major differences existed in 2006 and appear to
remain extant today, a situation which can have a very substantial
impact on reporting income statement items. These differences will make
comparing financial results for companies reporting under the two
different accounting models quite difficult and could encourage some U.
S. companies to adopt international standards solely for the different
financial accounting alternatives that may be available. Based on our
review, it seems that, at a minimum, there should be more conformity in
the areas of pensions and other post retirement benefits; financial
instruments; and impairment, goodwill, and intangibles before the U. S.
companies are allowed to choose between U.S. GAAP and IFRS, as proposed
by the SEC beginning in the year 2010. Furthermore, our findings lead us
to agree with the Financial Reporting Committee of the American
Accounting Association (AAA 2008a) that we do not support the SECs
ruling that eliminates the U.S. GAAP-IFRS reconciliation requirement at
this time. In addition, our results induce us to disagree with Financial
Accounting Standards Committee of the AAA (AAA 2008b) which endorses the
SEC proposal that supports the ruling and also recommends that U.S.
firms also be allowed to choose between IFRS and U.S. GAAP. Finally,
given that substantial differences between IFRS and GAAP remain, we feel
that the SEC' roadmap to require all U. S. firms to adopt IFRS by
2014 is unwarranted without substantial progress on convergence in the
areas we have noted.
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Table 1: 20-F Items Ranked by Frequency of Occurrence
Data Extracted from 57 Companies Reporting Using 20-F for 2006
Number of Median Mean
Times Appeared Percentage * Percentage *
Taxes, Deferred 49 7.1% 4.2%
Pensions and other 37 -19.8% -33.1%
Financial 24 -3.3% -9.9%
Minority Interest 23 0.2% 7.7%
Impairment ** 21 1.0% 33.1%
Business 18 -6.5% -186.7%
Employee 17 -1.8% -18.7%
Capitalization 15 -7.5% -29.8%
Amortization 13 -14.8% -62.1%
* Reconciling item as a percent of the absolute value of the
reported difference between income computed under U. S. GAAP and
income computed under IFRS.
** The descriptive information in the 20-F statements indicated that
sometimes the title impairment dealt with goodwill and intangibles
but other times it dealt with other impairments. The level of detail
in the 20-F did not permit recategorizing these items. The
discussion in the text combines these two items.