US GAAP and IFRS: How Close is 'Close Enough'?

Abstract

One important aspect of the world economy is the process of implementing uniform financial reporting standards. A leap forward took place when the European Union required that listed companies in all member nations use International Financial Reporting Standards (IFRS) for years beginning 2005. Another aspect of the process is the joint effort between the International Accounting Standards Board and the US Financial Accounting Standards Board to eliminate differences in accounting principles between IFRS and US GAAP. In this study we investigate IFRS vis-a-vis US GAAP from 2004 to 2006, using all three primary financial statements. We find that large differences remain in income calculation and shareholders’ equity, but that the number of items has fallen to a handful. This study contributes to three topics. Academic accounting research often uses reported accounting numbers drawn from companies in different countries, so it is important to understand the comparability of the numbers. Financial analysis uses financial statement data in many profitability and risk measures, so analysts are concerned with how comparable the ratios are when the companies being compared are from different countries with different standards. 'Harmonization' has been progressing for several years. Information users will benefit by knowing the degree of convergence.