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Attribute differences between U.S. GAAP and IFRS earnings: An exploratory study
The International Journal of Accounting 42 (2007) 148 – 152
Reply
Attribute differences between U.S. GAAP and IFRS earnings: An exploratory study ☆ Sofie Van der Meulen a,⁎, Ann Gaeremynck b , Marleen Willekens a a
Department of Accountancy, Tilburg University, Tilburg, 5000LE, the Netherlands b Department of Applied Economics, KULeuven, Leuven, 3000, Belgium
1. Introduction We thank the discussant, Ole-Kristian Hope, and an anonymous reviewer for their constructive comments and suggestions. We use this opportunity to address the following topics that embrace their most important comments: potentially differential enforcement; the use of the R2 as a test metric and the Cramer test; discussion of GAAP differences; and firm-characteristic controls. 2. Potential for differential enforcement Glaum and Street (2003) find indeed that the average level of compliance with disclosure requirements on Germany's New Market is significantly lower for firms that apply IFRS than for companies applying U.S. GAAP. However, Glaum and Street also show that compliance is higher for firms audited by a Big 4 auditor, and that the difference between the two sets of standards also becomes smaller for such firms. Accordingly, we ran all four models on a subsample of firms audited by Big 4 auditors. Given the reduction in sample size and the implications for the Cramer estimation, we choose to report this as an additional analysis rather than in the paper's base results section.
☆ This paper was presented at the Illinois International Accounting Symposium held at HEC in Paris, France, on June 8–10, 2006. DOIs of original article: 10.1016/j.intacc.2007.04.001,10.1016/j.intacc.2007.04.002. ⁎ Corresponding author. Tel.: +31 13 4668296. E-mail address: [email protected] (S. Van der Meulen).
0020-7063/$30.00 © 2007 University of Illinois. All rights reserved. doi:10.1016/j.intacc.2007.04.003
S. Van der Meulen et al. / The International Journal of Accounting 42 (2007) 148–152
149
Next to auditor type, Glaum and Street also identify other factors that positively influence firms' compliance level with disclosure rules. These include being cross-listed on a U.S. exchange and the inclusion in the audit opinion of explicit references to the applied standards. We want to emphasize that both factors are indirectly controlled for in our study through our sample selection procedure. First, we excluded firms that are cross-listed on a U.S. exchange. We primarily motivate this decision by referring to prior evidence (Lang, Raedy, & Yetman, 2003) on differing time series properties of earnings for cross-listed (as opposed to non-cross-listed) firms. As mentioned above, Glaum and Street also favor a separate consideration of U.S. cross-listings. However, in their paper disclosure items are studied; this does not necessarily imply that compliance is equally “problematic” for measurement issues and bottom-line earnings (as concluded by Glaum and Street). Second, we identified firms as either IFRS or U.S. GAAP adopters by inspecting both the Notes section and the auditor's report. Only when both documents explicitly mentioned the adoption of the same standard, did we include the firm in our sample. Applying such selection criteria is likely to result in a more homogenous sample, where differences between IFRS and U.S. GAAP-compliance levels are probably less pronounced than in the sample used by Glaum and Street. 3. Use of the R2 as a test metric and the Cramer test Prior research has identified and modelled a number of accounting attributes, using various regression models. When estimating these models, researchers have typically focused on either the coefficient estimates (see for example studies in the ERC and persistence literature, but also Givoly & Hayn, 1992; Francis, Schipper, & Vincent, 2003) or on the model's R2 (see for example Alford, Jones, Leftwich, & Zmijewski, 1993; Harris, Lang, & Moller, 1994; Joos & Lang, 1994; Pope & Rees, 1992). The focus critically depends on the study's purpose. For example, coefficients are typically studied when one is interested in the incremental explanatory value of one variable over and above other specified variables already in the model, while the R2 captures the overall degree of association between the dependent variable and all independent variables. Likewise, Holthausen and Watts (2001) classify prior value relevance literature into incremental (or coefficient) and relative association (or R2) studies, respectively. In our exploratory study, we are interested in evaluating quality attributes of overall IFRS versus overall U.S. GAAP compliant accounting information. In the case of timeliness, for example, we are interested in the overall timeliness of earnings and less in the split up between timeliness towards good or bad news. Therefore, we choose the R2 as a measure of reference. To test for differences between the two standards sets, we then estimated the models on both IFRS and U.S. GAAP information separately and compared the resulting R2. Prior research (for example, the reconciliation literature) applies a Vuong test to make statistically valid inferences. However, in our setting where firms either apply IFRS or U.S. GAAP, but not both, we need to additionally control for sample differences. Consistent with other empirical, accounting research in recent years (e.g., Ball, Kothari, & Robin, 2000; Ely & Pownall, 2002; Giner & Rees, 1999; Lang et al., 2003; Nwaeze, 1998; Harris et al., 1994), we apply the Cramer test (1987) and accordingly estimate the standard deviation of estimated R2s.
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S. Van der Meulen et al. / The International Journal of Accounting 42 (2007) 148–152
However, and as pointed out by Cramer himself, the discussant and in footnote 9 of our paper, the computations might not be robust for small samples. To accommodate for some of the deficiencies in the Cramer estimation, we also executed a bootstrap analysis. Bootstrapping is a relatively new, nonparametric approach to statistical inferences, and increasingly used in accounting research (e.g. Malliaropulos, 1996; Goncharov, Werner, & Zimmerman, 2007). The approach allows for the construction of significance levels for a test statistic without a priori assumptions about the statistic's sampling distribution. The distribution itself is estimated by constructing an infinite or large amount of re-samples and using the within-sample variation in R2. The samples are taken randomly from the original sample and without replacement. As such, the bootstrap method helps to reduce the bias that typically originates from using a small sample. Performing a bootstrap with 300 resampling iterations on the Big 5 subsample, we obtained significant z-statistics of 2.33 and 1.83 on model 3a, 3b respectively. For all other models, the z-statistic was insignificant, ranging from 0.04 in model 4a to 0.53 in model 1b). Notwithstanding our design choice, we do acknowledge that there may exist potential benefits from using the coefficients approach. For example, it might lead to interesting insights on the incremental effect of specific earnings components. In addition, such an analysis could further confirm the robustness of our R2 results. Therefore, and as mentioned in the last paragraph in the results section, we pooled all observations, introduced a dichotomous variable to reflect the applied standards and interacted this variable with all explanatory variables. Significant differences between IFRS and U.S. GAAP are reflected Table 1 Modelling predictive ability of past and present earnings using the coefficient approach and additionally controlling for some firm characteristics
S. Van der Meulen et al. / The International Journal of Accounting 42 (2007) 148–152
151
in the significance of the interaction coefficient. As reported in the paper, the results from this analysis confirm the R2 results: only in the predictive ability models do we find a significant difference (t = 1.79; not further tabulated). Adding intercept controls for firm characteristics, as suggested by the discussant and the anonymous reviewer, does not significantly alter our results (see Table 1). 4. GAAP differences and firm-level controls With regard to the GAAP differences between the two regimes under study, we agree with the discussant that our discussion section is rather concise. However, given the aim of this paper, being an exploratory research on earnings attributes, we feel that the focus should be on bottom-line reported earnings numbers and less on the standards and their wording. There are already ample discussion reports out there, edited by professionals at some of the most renown accounting firms, that document these differences at great length (e.g., KPMG). For the sample period we covered, we especially refer to the FASB's study (Bloomer, 1999) The IASC-U.S. Comparison Project: A Report on the Similarities and Differences between IASC Standards and U.S. GAAP-second edition. So instead of trying to complement those studies with yet another comparison, we prefer to cross-reference these studies in our paper. To test the materiality of the differences, we point out that direct tests can only be performed on a sample of firms that report according to both standards sets. So far, the U.S. setting where foreign firms publish IFRS financial statements together with a reconciliation to U.S. GAAP is the only possible setting to make such computations. Street, Nichols, and Gray (2000) and Blanco and Osma (2003), for example, concluded on highly material reconciliation amounts (of about 20% of U.S. GAAP earnings). Blanco and Osma (2003) also document material differences in the period after the IASC's Core Standards Project (post 1998), but they also observe that the materiality is decreasing. However, also in this later period, reconciliation amounts seem to have an economic impact since trading volume reactions are registered around the reconciliation announcement. Nevertheless, this setting also introduces some lessdesirable characteristics (e.g., differences in enforcement and in reporting incentives), which makes the results less applicable to our German New Market sample. In an attempt to control for differences in company characteristics in the current setting, we performed multiple tests that all pointed in the same direction. First, we made subsamples of small/large and highly/less levered firms and reran the models. Second, we performed a two-stage Heckman procedure to control for differences in firm characteristics. Finally, we also added intercept controls on the firm level in the coefficient-approach models. To the extent that these are adequate controls, we conclude that the observed difference in predictive ability can be ascribed to the standards rather than to differences in firm characteristics between the IFRS and U.S. GAAP subsample. References Alford, A., Jones, J., Leftwich, R., & Zmijewski, M. (1993). The relative informativeness of accounting disclosures in different countries. Journal of Accounting Research, 31, 183−201 (Supplement). Ball, R., Kothari, S. -P., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29(1), 1−51.
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Blanco, J., & Osma, B. (2003). The comparability of international accounting standards and US GAAP: An empirical study of Form 20-F reconciliations. International Journal of Accounting, Auditing and Performance Evaluation, 1 (1), 5−36. Cramer, J. (1987). Mean and variance of R2 in small and moderate samples. Journal of Econometrics, 35, 253−266. Ely, K., & Pownall, G. (2002). Shareholder-versus stakeholder-focused Japanese companies: Firm characteristics and accounting valuation. Contemporary Accounting Research, 19(4), 615−636. Bloomer, C (1999). The IASC-U.S. Comparison Project: A report on the similarities and differences between IASC standards and U.S. GAAP. FASB, Norwalk, Connecticut. Francis, J., Schipper, K., & Vincent, L. (2003). The relative and incremental explanatory power of earnings and alternative (to earnings) performance measures for returns. Contemporary Accounting Research, 20(1), 121−164. Giner, B., & Rees, W. (1999). A valuation-based analysis of the Spanish accounting reforms. Journal of Management and Governance, 3(1), 31−48. Givoly, D., & Hayn, C. (1992). The valuation of the deferred tax liability: Evidence from the stock market. Accounting Review, 67(2), 394−410. Glaum, M., & Street, D. (2003). Compliance with the disclosure requirements of Germany's New Market: IAS versus US GAAP. Journal of International Financial Management and Accounting, 14(1), 64−100. Goncharov, I., Werner, J., & Zimmerman, J. (2006). Legislative demands and economic realities: Company and group accounts compared. Working paper. Harris, T., Lang, M., & Moller, H. (1994). The value relevance of German accounting measures: An empirical analysis. Journal of Accounting Research, 32(2), 187−210. Holthausen, R., & Watts, R. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics, 31(1–3), 3−75. Joos, P., & Lang, M. (1994). The effects of accounting diversity: Evidence from the European Union. Journal of Accounting Research, 32, 141−168 (Suppl.). Lang, M., Raedy, J., & Yetman, M. (2003). How representative are firms that are cross-listed in the United States? An analysis of accounting quality. Journal of Accounting Research, 41(2), 363−386. Malliaropulos, D. (1996). Are long-horizon stock returns predictable? A bootstrap analysis. Journal of Business Finance and Accounting, 23(1), 93−108. Nwaeze, E. (1998). Regulation and the valuation relevance of book value and earnings: Evidence from the United States. Contemporary Accounting Research, 15(4), 547−573. Pope, P., & Rees, W. (1992). International differences in GAAP and the pricing of earnings. Journal of International Financial Management and Accounting, 4(3), 190−219. Street, D., Nichols, N., & Gray, S. (2000). Assessing the acceptability of International Accounting Standards in the US: An empirical study of the materiality of US GAAP reconciliations by Non-US companies complying with IASC standards. The International Journal of Accounting, 35(1), 27−63.
Reply
Attribute differences between U.S. GAAP and IFRS earnings: An exploratory study ☆ Sofie Van der Meulen a,⁎, Ann Gaeremynck b , Marleen Willekens a a
Department of Accountancy, Tilburg University, Tilburg, 5000LE, the Netherlands b Department of Applied Economics, KULeuven, Leuven, 3000, Belgium
1. Introduction We thank the discussant, Ole-Kristian Hope, and an anonymous reviewer for their constructive comments and suggestions. We use this opportunity to address the following topics that embrace their most important comments: potentially differential enforcement; the use of the R2 as a test metric and the Cramer test; discussion of GAAP differences; and firm-characteristic controls. 2. Potential for differential enforcement Glaum and Street (2003) find indeed that the average level of compliance with disclosure requirements on Germany's New Market is significantly lower for firms that apply IFRS than for companies applying U.S. GAAP. However, Glaum and Street also show that compliance is higher for firms audited by a Big 4 auditor, and that the difference between the two sets of standards also becomes smaller for such firms. Accordingly, we ran all four models on a subsample of firms audited by Big 4 auditors. Given the reduction in sample size and the implications for the Cramer estimation, we choose to report this as an additional analysis rather than in the paper's base results section.
☆ This paper was presented at the Illinois International Accounting Symposium held at HEC in Paris, France, on June 8–10, 2006. DOIs of original article: 10.1016/j.intacc.2007.04.001,10.1016/j.intacc.2007.04.002. ⁎ Corresponding author. Tel.: +31 13 4668296. E-mail address: [email protected] (S. Van der Meulen).
0020-7063/$30.00 © 2007 University of Illinois. All rights reserved. doi:10.1016/j.intacc.2007.04.003
S. Van der Meulen et al. / The International Journal of Accounting 42 (2007) 148–152
149
Next to auditor type, Glaum and Street also identify other factors that positively influence firms' compliance level with disclosure rules. These include being cross-listed on a U.S. exchange and the inclusion in the audit opinion of explicit references to the applied standards. We want to emphasize that both factors are indirectly controlled for in our study through our sample selection procedure. First, we excluded firms that are cross-listed on a U.S. exchange. We primarily motivate this decision by referring to prior evidence (Lang, Raedy, & Yetman, 2003) on differing time series properties of earnings for cross-listed (as opposed to non-cross-listed) firms. As mentioned above, Glaum and Street also favor a separate consideration of U.S. cross-listings. However, in their paper disclosure items are studied; this does not necessarily imply that compliance is equally “problematic” for measurement issues and bottom-line earnings (as concluded by Glaum and Street). Second, we identified firms as either IFRS or U.S. GAAP adopters by inspecting both the Notes section and the auditor's report. Only when both documents explicitly mentioned the adoption of the same standard, did we include the firm in our sample. Applying such selection criteria is likely to result in a more homogenous sample, where differences between IFRS and U.S. GAAP-compliance levels are probably less pronounced than in the sample used by Glaum and Street. 3. Use of the R2 as a test metric and the Cramer test Prior research has identified and modelled a number of accounting attributes, using various regression models. When estimating these models, researchers have typically focused on either the coefficient estimates (see for example studies in the ERC and persistence literature, but also Givoly & Hayn, 1992; Francis, Schipper, & Vincent, 2003) or on the model's R2 (see for example Alford, Jones, Leftwich, & Zmijewski, 1993; Harris, Lang, & Moller, 1994; Joos & Lang, 1994; Pope & Rees, 1992). The focus critically depends on the study's purpose. For example, coefficients are typically studied when one is interested in the incremental explanatory value of one variable over and above other specified variables already in the model, while the R2 captures the overall degree of association between the dependent variable and all independent variables. Likewise, Holthausen and Watts (2001) classify prior value relevance literature into incremental (or coefficient) and relative association (or R2) studies, respectively. In our exploratory study, we are interested in evaluating quality attributes of overall IFRS versus overall U.S. GAAP compliant accounting information. In the case of timeliness, for example, we are interested in the overall timeliness of earnings and less in the split up between timeliness towards good or bad news. Therefore, we choose the R2 as a measure of reference. To test for differences between the two standards sets, we then estimated the models on both IFRS and U.S. GAAP information separately and compared the resulting R2. Prior research (for example, the reconciliation literature) applies a Vuong test to make statistically valid inferences. However, in our setting where firms either apply IFRS or U.S. GAAP, but not both, we need to additionally control for sample differences. Consistent with other empirical, accounting research in recent years (e.g., Ball, Kothari, & Robin, 2000; Ely & Pownall, 2002; Giner & Rees, 1999; Lang et al., 2003; Nwaeze, 1998; Harris et al., 1994), we apply the Cramer test (1987) and accordingly estimate the standard deviation of estimated R2s.
150
S. Van der Meulen et al. / The International Journal of Accounting 42 (2007) 148–152
However, and as pointed out by Cramer himself, the discussant and in footnote 9 of our paper, the computations might not be robust for small samples. To accommodate for some of the deficiencies in the Cramer estimation, we also executed a bootstrap analysis. Bootstrapping is a relatively new, nonparametric approach to statistical inferences, and increasingly used in accounting research (e.g. Malliaropulos, 1996; Goncharov, Werner, & Zimmerman, 2007). The approach allows for the construction of significance levels for a test statistic without a priori assumptions about the statistic's sampling distribution. The distribution itself is estimated by constructing an infinite or large amount of re-samples and using the within-sample variation in R2. The samples are taken randomly from the original sample and without replacement. As such, the bootstrap method helps to reduce the bias that typically originates from using a small sample. Performing a bootstrap with 300 resampling iterations on the Big 5 subsample, we obtained significant z-statistics of 2.33 and 1.83 on model 3a, 3b respectively. For all other models, the z-statistic was insignificant, ranging from 0.04 in model 4a to 0.53 in model 1b). Notwithstanding our design choice, we do acknowledge that there may exist potential benefits from using the coefficients approach. For example, it might lead to interesting insights on the incremental effect of specific earnings components. In addition, such an analysis could further confirm the robustness of our R2 results. Therefore, and as mentioned in the last paragraph in the results section, we pooled all observations, introduced a dichotomous variable to reflect the applied standards and interacted this variable with all explanatory variables. Significant differences between IFRS and U.S. GAAP are reflected Table 1 Modelling predictive ability of past and present earnings using the coefficient approach and additionally controlling for some firm characteristics
S. Van der Meulen et al. / The International Journal of Accounting 42 (2007) 148–152
151
in the significance of the interaction coefficient. As reported in the paper, the results from this analysis confirm the R2 results: only in the predictive ability models do we find a significant difference (t = 1.79; not further tabulated). Adding intercept controls for firm characteristics, as suggested by the discussant and the anonymous reviewer, does not significantly alter our results (see Table 1). 4. GAAP differences and firm-level controls With regard to the GAAP differences between the two regimes under study, we agree with the discussant that our discussion section is rather concise. However, given the aim of this paper, being an exploratory research on earnings attributes, we feel that the focus should be on bottom-line reported earnings numbers and less on the standards and their wording. There are already ample discussion reports out there, edited by professionals at some of the most renown accounting firms, that document these differences at great length (e.g., KPMG). For the sample period we covered, we especially refer to the FASB's study (Bloomer, 1999) The IASC-U.S. Comparison Project: A Report on the Similarities and Differences between IASC Standards and U.S. GAAP-second edition. So instead of trying to complement those studies with yet another comparison, we prefer to cross-reference these studies in our paper. To test the materiality of the differences, we point out that direct tests can only be performed on a sample of firms that report according to both standards sets. So far, the U.S. setting where foreign firms publish IFRS financial statements together with a reconciliation to U.S. GAAP is the only possible setting to make such computations. Street, Nichols, and Gray (2000) and Blanco and Osma (2003), for example, concluded on highly material reconciliation amounts (of about 20% of U.S. GAAP earnings). Blanco and Osma (2003) also document material differences in the period after the IASC's Core Standards Project (post 1998), but they also observe that the materiality is decreasing. However, also in this later period, reconciliation amounts seem to have an economic impact since trading volume reactions are registered around the reconciliation announcement. Nevertheless, this setting also introduces some lessdesirable characteristics (e.g., differences in enforcement and in reporting incentives), which makes the results less applicable to our German New Market sample. In an attempt to control for differences in company characteristics in the current setting, we performed multiple tests that all pointed in the same direction. First, we made subsamples of small/large and highly/less levered firms and reran the models. Second, we performed a two-stage Heckman procedure to control for differences in firm characteristics. Finally, we also added intercept controls on the firm level in the coefficient-approach models. To the extent that these are adequate controls, we conclude that the observed difference in predictive ability can be ascribed to the standards rather than to differences in firm characteristics between the IFRS and U.S. GAAP subsample. References Alford, A., Jones, J., Leftwich, R., & Zmijewski, M. (1993). The relative informativeness of accounting disclosures in different countries. Journal of Accounting Research, 31, 183−201 (Supplement). Ball, R., Kothari, S. -P., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29(1), 1−51.
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S. Van der Meulen et al. / The International Journal of Accounting 42 (2007) 148–152
Blanco, J., & Osma, B. (2003). The comparability of international accounting standards and US GAAP: An empirical study of Form 20-F reconciliations. International Journal of Accounting, Auditing and Performance Evaluation, 1 (1), 5−36. Cramer, J. (1987). Mean and variance of R2 in small and moderate samples. Journal of Econometrics, 35, 253−266. Ely, K., & Pownall, G. (2002). Shareholder-versus stakeholder-focused Japanese companies: Firm characteristics and accounting valuation. Contemporary Accounting Research, 19(4), 615−636. Bloomer, C (1999). The IASC-U.S. Comparison Project: A report on the similarities and differences between IASC standards and U.S. GAAP. FASB, Norwalk, Connecticut. Francis, J., Schipper, K., & Vincent, L. (2003). The relative and incremental explanatory power of earnings and alternative (to earnings) performance measures for returns. Contemporary Accounting Research, 20(1), 121−164. Giner, B., & Rees, W. (1999). A valuation-based analysis of the Spanish accounting reforms. Journal of Management and Governance, 3(1), 31−48. Givoly, D., & Hayn, C. (1992). The valuation of the deferred tax liability: Evidence from the stock market. Accounting Review, 67(2), 394−410. Glaum, M., & Street, D. (2003). Compliance with the disclosure requirements of Germany's New Market: IAS versus US GAAP. Journal of International Financial Management and Accounting, 14(1), 64−100. Goncharov, I., Werner, J., & Zimmerman, J. (2006). Legislative demands and economic realities: Company and group accounts compared. Working paper. Harris, T., Lang, M., & Moller, H. (1994). The value relevance of German accounting measures: An empirical analysis. Journal of Accounting Research, 32(2), 187−210. Holthausen, R., & Watts, R. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics, 31(1–3), 3−75. Joos, P., & Lang, M. (1994). The effects of accounting diversity: Evidence from the European Union. Journal of Accounting Research, 32, 141−168 (Suppl.). Lang, M., Raedy, J., & Yetman, M. (2003). How representative are firms that are cross-listed in the United States? An analysis of accounting quality. Journal of Accounting Research, 41(2), 363−386. Malliaropulos, D. (1996). Are long-horizon stock returns predictable? A bootstrap analysis. Journal of Business Finance and Accounting, 23(1), 93−108. Nwaeze, E. (1998). Regulation and the valuation relevance of book value and earnings: Evidence from the United States. Contemporary Accounting Research, 15(4), 547−573. Pope, P., & Rees, W. (1992). International differences in GAAP and the pricing of earnings. Journal of International Financial Management and Accounting, 4(3), 190−219. Street, D., Nichols, N., & Gray, S. (2000). Assessing the acceptability of International Accounting Standards in the US: An empirical study of the materiality of US GAAP reconciliations by Non-US companies complying with IASC standards. The International Journal of Accounting, 35(1), 27−63.