IFRS-Local GAAP Reconciliation Statements and Accounting Information Quality

Abstract

The main objective of this paper is to investigate the quantitative impact of International Financial Reporting Standards (IFRS) on accounting components. IFRS 1 requires IFRS adopter firms to prepare comparative information under IFRS and under local GAAP, which is termed as IFRS-Local GAAP (e.g., IFRS-UK GAAP for the UK) reconciliation statement. This statement shows every accounting line item (in all financial statements) under two accounting systems for the same accounting period, which helps us to know the differences between local GAAP and IFRS. Analysing 1153 Australian listed firms’ reconciliation statements, this study documents that investment value is 35.38 percent higher in IFRS relating to investment value under local GAAP. Financial assets are shown 28.48 percent higher in IFRS relating to financial assets under local GAAP; goodwill is valued 22.60 percent higher in IFRS relating to goodwill value under local GAAP. On the other hand, retained earnings decrease by 23.3 percent under IFRS compared to retained earnings under local GAAP. More importantly, net income increases by 5.64 percent under IFRS compared to those under local GAAP. The findings of this study suggest that IFRS affects significantly accounting components which indicates the value relevance of IFRS. In addition, this study shows the importance of understanding the differences between local accounting standards and international accounting standards. This study will also be beneficial for investors, decision makers, preparers of financial statements, and other users of accounting information. More importantly, this study will be useful to those countries planning to adopt or in the process of adopting international accounting standards (e.g., Indonesia, Japan).