US Financial Accounting Standards Research Articles

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

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.

Should Merger Accounting be Reconsidered?: A Discussion Based on the Chinese Approach to Accounting for Business Combinations

In 2006, the China Accounting Standards Committee (CASC) issued its Statement No. 20, which permits both the purchase and pooling of interests (or merger) method of accounting for business combinations. The decision of the CASC in Statement No. 20 stands in contrast to the decisions taken by the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) which both eliminated the pooling of interests method. As a result of the issuance of CASC 20, along with similar pronouncements by the Japanese standard setters and other standards setting bodies, the goal of harmonizing international accounting standards has been faced with a lack of convergence in the area of accounting for business combinations. In this paper we examine the reasons for this lack of convergence in order to develop a reconciled framework. In particular, the Chinese standards setters have sought to develop an approach to accounting for business combinations which distinguishes between instances where the combining entities are under common control or not under common control. Using a relatively narrow definition of common control, both the FASB and the IASB have excluded business combinations among entities under common control from the scope of their respective pronouncements. The purpose of this paper is to analyze the reasons for the distinctly different approach taken by the Chinese accounting standards setters by comparing the provisions of FASB 141, IFRS 3 and CASC 20. Our analysis will show that the technical differences between the standards are based on different understandings of the underlying economics of business combinations (Anthony, 1987), which leads in turn to different representations of the combination process. We believe that a forthright recognition of these differences may lead to a reconsideration of the pooling of interests and merger methods in a new comprehensive framework.

Financialized accounts: Share buy-backs, mark to market and holding the financial line in the S&P 500

In recent years the US corporate sector has deployed more cash from operations to finance the repurchase of outstanding share capital for treasury stock. Shares repurchased for treasury stock can help flatter earnings per share, fund senior management share option compensation schemes and finance corporate acquisitions. In financialized accounts these are now significant transactions which, it is argued, serve the financial interests of managers and investors. The US Financial Accounting Standards Board (FASB) is now demanding a “greater use of fair value measurements in financial statements” with the result that share options and corporate acquisitions will be “marked to market”. This will force a financialized ratchet because managers in the S&P 500 will need step up cash extraction if they are to hold the financial line.

Over‐Complexity in Accounting Standards and the Emerging Duopoly of US GAAP AND IFRS

US accounting regulation has been criticised for maintaining an over‐complex “rules‐based” approach, cited as the partial cause of significant failures in corporate governance. US regulators state that they are now on a pathway to a more “principles‐based” approach, but the International Accounting Standards Board (IASB) claims superiority in this approach already. The recent efforts of the US Financial Accounting Standards Board (FASB) and IASB are examined to see if either claim is clearly supportable. As these authorities appear to be in the process of creating a world accounting standard‐setting duopoly, unresolved problems involving over‐complexity are likely to be transported to other countries, including Australia.

Usefulness of financial statement components in valuation: An examination of start-up and growth firms

According to US financial accounting standards and prior research, accrual-based earnings provide the best measure of firm performance. Results from prior capital markets research imply that earnings are more value-relevant than operating cash. There are, however, potential problems in pooling cross-sectionally across all firms and assuming a homogeneous sample of companies. For many start-up and early growth companies, their earnings are non-positive. Other components of the financial statements may be more value-relevant than the bottom-line earnings. In early firm life cycle stages, growth opportunities are a relatively larger component of firm value than assets in place; in these stages, the proxy that provides more value-relevant information about firm-value is the one that provides more information about the future growth opportunities of the firm. This study examines both the incremental and relative usefulness of earnings, cash flow and book value financial statement components using various valuation models. Results indicate that earnings do not provide significant information for valuation of start-ups, but become incrementally informative as firms move into a growth stage. Other financial statement components, particularly cash flow measures, are relatively more value-relevant than earnings in these early stages of a firm's existence. These results have implications for researchers, analysts, investors and management.

Accounting Standards and German Supplementary Pensions: The Emerging Framework Underpinning Global Finance

In this paper we focus on the current status of German employer-sponsored supplementary pensions in the context of moves towards the harmonization of international accounting standards. We emphasize the changing standards used to measure pension liability, and the consequences of these changes for (firstly) corporate management discretion and (secondly) German under-funded systems of defined benefit pensions. In combination, we show that claimed historical differences between the Anglo-American market for corporate control and the German system of entrenched management within interlocking boards of supervision are now less compelling than assumed. Adoption of international and US financial accounting standards by leading German corporations presages a new era in European capital markets with important implications for the design and management of German supplementary pensions. The reader is introduced to financial accounting standards institutions, the evolution of US accounting standards since the introduction of FASB 87 and recent patterns in US corporate pensions and liabilities. Emphasis is placed upon the concerted campaign of national and international accounting professionals to harmonise corporate accounting practices and the measurement of pension liabilities to accepted international standards. Using data collected from 1998 annual reports for German finns in the DAX 30 index, we report on the adoption of international accounting standards and the scope and significance of reported corporate net pension liabilities. Noting the theoretical literature relevant to adoption, we identify four reasons that may account for the immediate adoption of intemational accounting standards. As well, tests for correlation between