A Quantitative Study on the Difference between US GAAP and IFRS Measuring Comparability with Financial Ratio

Before 2005 countries developed GAAP rules unique to their needs and analysts had to become familiar with these GAAPs to compare performance of firms from different countries. In 2005, 120 countries converted to IFRS to eliminate these differences with the goal of improving accounting quality, transparency, and comparability. Since 2002, the US has considered converting to IFRS; however, they are not convinced of the feasibility or need to convert. The SEC requires firms domiciled outside the US and cross-listed on an American stock exchange to complete Form 20-F to reconcile their GAAP financials to US GAAP. Consequently, in 2005 foreign firms trading in the US had two if not three sets of standards to address in producing financials. The purpose of this ex-post facto, quantitative design with three MANOVAs was to understand how the financial outcomes measuring both short and long-term ratios for profitability, liquidity, market value, and capital structure differ between US GAAP and IFRS for the same firm in the same year. The participants were 56 firms from 16 countries cross-listed in the US and filed the SEC Form 20-F. One MANOVA completed had no transformation of variables, a second MANOVA implemented a square root transformation, the final MANOVA implemented a log 10 transformation of variables. In the final analysis of the multivariate test of Wilks' Lambda, all three MANOVAs examining the short-term ratios had p values of p = .955, p = .945, and p = .855, respectively. All three MANOVAs examining the long-term ratios had p values of p = .316, p = .420, and p = .481, respectively. The null hypothesis for both research questions were false and rejected. The descriptive statistics showed US GAAP had overall lower ratios than IFRS, which is in keeping with conservatism because of the lower underlying raw numbers. This study showed significant differences between the standards as measured by ratios so comparability is impaired; however, more importantly conservatism as a guiding concept was compromised under IFRS. A study encompassing a longer time period is recommended to assess if the results hold. Another recommended study using countries converting after 2005 would reveal if their financial outcomes as measured by ratios produces the same results.