Directory UMM :Data Elmu:jurnal:T:The International Journal Of Accounting:Vol35.Issue1.2000:

The International
Journal of
Accounting

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
Donna L. Street,* Nancy B. Nichols,* and Sidney J. Grayy
*James Madison University, Harrisonburg, VA, USA; and yUniversity of New South Wales, Sydney,
NSW, Australia

Key Words: IASC; US GAAP reconciliations; Net income; IOSCO; SEC

Abstract: With the International Accounting Standards Committee (IASC) reaching the
completion of its core standards program, the International Organization of Securities
Commissions (IOSCO) is considering its response to the IASC's application for endorsement of
International Accounting Standards (IASs). A critical aspect of IOSCO's acceptance of IASs is
likely to be the extent to which such standards are compatible with US Generally Accepted
Accounting Principles (US GAAP). This issue is explored by an empirical study of US GAAP
reconciliations by non-US companies complying with IASC standards. The results indicate that

the impact of accounting differences between IASs and US GAAP is narrowing and suggest that
the Securities Exchange Commission (SEC) should consider accepting IASC standards without
condition. Alternatively, an SEC endorsement could include a short list of IASs where acceptance
is subject to additional disclosures.

With the International Accounting Standards Committee (IASC) reaching completion of
its core standards program, the International Organization of Securities Commissions
(IOSCO) is considering its response to the IASC's application for endorsement of
International Accounting Standards (IASs). Given the significance of the US capital
market in the global context, a critical aspect of IOSCO's acceptance of IASs is likely to be
the extent to which such standards are compatible with US Generally Accepted Accounting Principles (GAAP). It is unlikely that significant differences from US GAAP will be
easily accepted by the Securities Exchange Commission (SEC) in the US, a key IOSCO
member, without the requirement for non-US companies to continue to provide a
reconciliation to US GAAP.

Direct all correspondence to: Donna L. Street, School of Accounting, James Madison University, Harrisonburg,
VA 22807, USA; E-mail: streetdl@jmu.edu
The International Journal of Accounting, Vol. 35, No. 1, pp. 27 ± 63
ISSN: 0020-7063.
All rights of reproduction in any form reserved.

Copyright # 2000 University of Illinois

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THE INTERNATIONAL JOURNAL OF ACCOUNTING

Vol. 35, No. 1, 2000

The purpose of this project is to respond to the call for research to assist the SEC in
assessing IASs for cross-border offerings of securities in the US (Turner, 1999a).
Specifically, the research aims to identify the most important differences between IASC
standards and US GAAP in practice and to assess the significance and materiality of these
accounting differences with particular reference to the measurement of net income. To the
extent that such accounting differences are not significant or material, the argument for
accepting IASs without reconciliation to US GAAP will be supported. On the other hand,
the contrary is likely to strengthen the argument for retaining the status quo.

THE IOSCO PERSPECTIVE
An important aspect of IOSCO's overall commitment to facilitating cross-border offerings
and listings by multinational enterprises is the Technical Committee's participation in the

IASC project to develop a core set of IASs (IASC, 1999). Following the March 1999
publication of the IASC interim standard on financial instruments, which resulted in the
IASC substantially completing all key parts of the core standards, the IOSCO Technical
Committee began its assessment of the core standards. The assessment will focus on whether
the core standards are of sufficiently high quality to warrant permitting foreign issuers to
utilize them to access a country's capital markets as an alternative to domestic standards.
In recent years, the IOSCO Technical Working Group on Multinational Disclosure and
Accounting devoted substantial resources to participating in the development of the core
standards. This process included providing commentary on key proposals in each
standard. As part of the assessment, the Working Group is evaluating whether its concerns
were addressed in the final core standards, whether the IASC's standards work together to
form an operational whole, and the potential impact of the standards on investors, issuers,
and the markets.
The Working Group has completed an analysis of its comment letters and has created a
comprehensive inventory of outstanding issues on individual IASs. Currently, the Working
Group is analyzing those comments to identify IASC standards that may be recommended
for use on a cross-border basis without condition and those standards where acceptance
may be subject to additional disclosures or other conditions.
After the Working Group has completed its analysis, the group will make a recommendation to the IOSCO Technical Committee. The Technical Committee will then decide
whether to recommend that IOSCO members permit foreign issuers to use IASs in lieu of

national standards for cross-border offering and listing purposes. The Technical Committee considers completion of the IOSCO assessment as a matter of great urgency.

THE SEC PERSPECTIVE
As a key member of IOSCO, the SEC has stated its commitment to support the IASC but, in
line with the IOSCO agreement, has indicated (SEC, 1996) there are three key elements in
the acceptance of IASC Standards. First, the standards must include a core set of standards
that constitute a comprehensive generally accepted basis of accounting. Second, the
standards must be of high quality and result in comparability, transparency, and full
disclosure. Third, the standards must be rigorously interpreted and applied. As Zeff (1999)

Materiality of US GAAP Reconciliations by Non-US Companies

29

has pointed out, ``The SEC is truly a control agency, and it has a low tolerance for
ambiguity.'' The SEC requires non-US companies to report in the same way as US
companies and thus, all foreign registrants must either use, or reconcile to, US GAAP.
However, pressure on the SEC has been growing to adopt a more conciliatory approach to
non-US companies. The New York Stock Exchange (NYSE) has been concerned for some
time that many non-US companies have been deterred from seeking a listing in New York

by the SEC's reconciliation requirement (Cochrane, 1992). In 1996, the US Congress
(1996) charged the SEC to support the development of IASs and to report on ``the outlook
for successful completion of a set of IASs that would be acceptable to the Commission for
offerings and listings by foreign corporations in United States markets.'' While the SEC is
yet to decide on the acceptability of IASC standards, it seems clear that the key question will
be whether these standards will be considered close enough to US GAAP to be acceptable.

THE IMPACT OF US GAAP RECONCILIATIONS
In order to investigate this issue further, the significance and materiality of recent US
GAAP reconciliations by non-US companies claiming to comply with IASs are
examined. These reconciliations, currently required by the SEC to be supplied on Form
20-F for non-domestic companies listing on a US stock exchange, provide a reliable
source of information about the nature and impact of differences between IASC standards
and US GAAP in practice. While recent research has endeavored to assess the nature of
such accounting differences, this has been limited to an evaluation of their incidence in
the case of US companies (Street and Gray, 1999).
At the same time, previous research analyzing the impact of accounting differences
using US GAAP reconciliations has been limited to an assessment of country differences
including the UK, the Netherlands, Sweden and Australia (e.g., Weetman and Gray, 1990,
1991; Weetman et al., 1998; Hellman, 1993; Norton, 1995). While the differences between

UK and US GAAP have been reported as material and becoming larger in recent years, the
significance of differences in the case of the Netherlands, Sweden and Australia is
somewhat less clear. Further, the value relevance of US GAAP reconciliations (i.e., the
impact on share prices and returns) is also not clear with mixed results from recent studies
on this issue (see Amir et al., 1993; Bandyopadhajay et al., 1994; Rees, 1995, 1996; Barth
and Clinch, 1996; Fulkerson and Meek, 1998).
The research reported in this article extends earlier research by incorporating an
assessment of how IASC±US GAAP differences impact quantitatively on the measurement of net income and provides an analysis of whether or not these differences are
significant or material in the case of non-US companies complying with IASC standards.

METHODOLOGY
Sample
Companies that comply with IASs and provide US GAAP reconciliations in Form 20-F
were identified based on a list supplied by the SEC. The list included the names of 41 SEC

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THE INTERNATIONAL JOURNAL OF ACCOUNTING

Vol. 35, No. 1, 2000

registrants believed to follow IASs. Eleven companies were dropped from the SEC list
based on the following criteria:
.

.
.
.
.

Use US or UK as opposed to IASC GAAP (Adecco, Ashanti Goldfields,
Huaneng Power International, Logitech International, Shangdon Huaneng Power
Development);
Acquired by another company (Basic Petroleum International);
Italian companies that use IASs only in the absence of Italian guideline (Benetton,
ENI);
Auditors opinion and accounting policy footnote make no mention of IASs (Emco,
CICB);
Delisted (ISS International Service Systems).

The researchers also reviewed a list of companies appearing on both the IASC's
``Companies Referring to Their Use of IAS'' and ``The Complete Depositary Receipt
Directory'' of the Bank of New York to identify any additional IAS companies that file
Form 20-F. This step identified BHP as a 20-F company. A collection of over two hundred
1997 annual reports of IASC companies were also reviewed to identify companies that
voluntarily provide reconciliations to US GAAP. This step added Atlas Copco and Scania
to the sample. The sample of 33 companies consists of:
.
.
.

Twenty-seven using IASs and filing form 20-F (the audit opinion states that the
financial statements comply with IAS);
Four stating their financials comply with IAS in all material aspects (in the
accounting policy footnotes) and filing form 20-F; and
Two stating their financials comply with IAS in all material aspects and voluntarily
providing a reconciliation to US GAAP in their annual report.

The sample comprises seven companies from China; three each from Canada, the
Netherlands, and Sweden; two each from Bermuda, France and Switzerland; and one each

from Australia, the Cayman Islands, Finland, Germany, Hungary, Italy, Mexico, Papua
New Guinea, Poland, Portugal, and Russia. A list of the sample companies is provided in
Appendix A.
While the sample companies are not necessarily representative of all companies
complying with IASs, they would appear to be a sample relevant to the SEC for the
purposes of assessing US GAAP compatibility and the significance of the 20-F reconciliation requirement.

IAS/US Accounting Differences
Measurement practices of IASs that differ from US GAAP are described in several
sources such as FASB's (1996) The IASC±US Comparison Project and PricewaterhouseCoopers' (1998) International Accounting Standards: Similarities and Differences IAS, US
GAAP, and UK GAAP. The key differences that result in 20-F reconciliation adjustments
for the sample companies are listed in Table 1. Panels A through M describe differences

Materiality of US GAAP Reconciliations by Non-US Companies

31

where compliance with IAS in 1997 will force or allow divergence from US GAAP. In
some areas, such as measurement of deferred taxes (Panel B) and property, plant, and
equipment (Panel C), IASs provide two options, one being compatible with US GAAP

(i.e., comprehensive allocation/historical cost) and the other allowing for divergence (i.e.,
partial allocation/revaluation). As reflected in Table 1, disharmony may also arise in areas
where US GAAP is more detailed or provides more guidance than IASs, for example, in
selecting the method for foreign currency translation (Panel F) and accounting for
associates (Panel L). Another area of concern lies in the absence of IASs addressing
industry practices. While the US provides guidelines on general R&D and industry
specific guidance for software development costs and oil and gas exploration, IASs cover
only basic R&D (Panel M). Panels AA through DD illustrate another problematic area
where, in the absence of an IAS, companies may adopt accounting practices that vary from
US GAAP (i.e., restructuring provisions/Panel AA).
In recent years, the IASC has revised several standards and issued additional
standards as part of its core standards project which was completed in December
1998 with the issuance of IAS 39 (Financial Instruments). Thus, the last column of
Table 1 provides an update of the extent to which IASs have changed since the period
covered by the study (1995 ±1997). In that many of the modifications to IASs have been
in line with US GAAP, reconciling items arising from these areas will disappear or
become less significant/material in forthcoming years. An SEC decision regarding IASs
should consider the impact of these revised standards and new standards, which the
IASC has just completed.
The Index of Comparability

In order to understand the significance of IASC±US GAAP differences in practice, it is
necessary to have a methodology that will facilitate the assessment of how such
differences impact on accounting results. Gray (1980) introduced an ``index of conservatism'' to compare profit measurement practices across countries. Weetman and Gray
(1990, 1991), Weetman et al. (1993), Adams et al. (1993), Cooke (1993), Hellman (1993),
and Norton (1995) utilized the index in a similar manner. Weetman et al. (1998) renamed
the index to focus on ``comparability'' and to place more attention on relative accounting
treatment without requiring a judgement regarding which accounting treatment is more or
less conservative. The ``index of comparability'' indicates the measurement impact of
accounting differences. The index may thus be differentiated from alternative harmonization measures such as the H, I, or C indices which quantify the incidence of accounting
differences but not their bottom-line impact (van der Tas, 1988).
Formula of the Index of Comparability
Where IAS reported income is compared to US GAAP income, the index is expressed
by the formula:
1ÿ

…Net income USA ÿ Net income IAS †
j Net income USA j

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Table 1. Key Differences between US and IASC GAAP as Reflected in 1997 20-F Reconciliations
Item and companies
Panel A: Inventory
Impairment: Hoechst
Costing: Hoechst, Nova

Comments

ARB 43: inventories carried at
lower of cost or market
Under certain circumstances idle
capacity costs may be absorbed
into inventory costs

IAS 2: inventories carried at lower
of cost and net realizable value
IAS 2: allocation of fixed production overhead based on normal
capacity levels, with unallocated
overheads expensed as incurred
IAS 2: benchmarks FIFO and
weighted average
Allowed alternative LIFO

Although US and IASC GAAP are
comparable, LIFO is not acceptable in some countries

ARB 43: permits FIFO, weighted
average, and LIFO

FAS 109: liability method with
comprehensive allocation
Tax benefit from operating loss
carry forward recorded if ``more
likely than not'' to be realized
Change in tax rate not recognized
until enacted

Old version IAS 12: (effective
1995±1997) allows full or partial
allocation of timing differences
Allows deferral or liability method
Deferred tax assets only carried
forward when reasonable expectation of realization
Under liability method, change in
tax rate may be recognized when
announced

IAS 12 Revised (effective years
beginning on or after 1 January
1998)
Accrue deferred tax liability for
nearly all taxable temporary
differences
Accrue deferred tax asset for nearly
all deductible temporary differences if probable a tax benefit
will be realized
Accrue unused tax losses and tax
credits if probable will be
realized
Use tax rates expected at settlement

Vol. 35, No. 1, 2000

Panel B: Deferred tax
Method: Astra (partial), Banco
Comercial Portuges, Beijing
Yanhau (deferred tax asset),
BioChem Pharma, BHP (based
on announced tax rate), Fiat
(partial), Hoechst (1995 only),
Ispat (partial), Mexican Maritime (partial), Netia (1995 and
1996 only), New Holland, Nokia
(partial), Nova (deferral method), Scandia (partial), Usinor
(deferred tax asset), Yanzhou
Coal Mining (deferred tax asset)

IASC GAAP

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Measurement: Hoechst

US GAAP

Measurement after initial recognition must be at historical cost

IAS 16 benchmark: property, plant,
and equipment at historical cost
following initial recognition
Allowed alternative: revaluation of
classes of assets

Investment Properties: Banco

Treated same as property, plant,
and equipment

Impairment: China Southern,
Nova

FAS 121: impaired PPE written
down to fair value

Treated as property per IAS 16 or
as long-term investments per IAS
25
IAS 12: impaired PPE written
down to recoverable amount

Panel D: Leases
Sale and leaseback accounting:
China Southern, Mexican
Maritime, Nokia

FAS 13: defer and amortize profits
up to certain limits
Immediately recognize losses

IAS 17: defer and amortize profit
arising on sale and finance leaseback
If operating lease arises, profit
recognition depends on sale proceeds compared to fair value of
asset

Most revaluations not voluntary
(i.e., all Chinese companies
related to restructuring during
mid-1990s associated with privatization; Fiat compliance with
specific laws; New Holland in
accordance with laws of certain
countries in which the Company
operates)
A future IAS may reduce options in
this area
IAS 36: (effective for years beginning on or after 1 July 1999)
addresses impairment of PPE
FAS 121 and IAS 36 differ in key
respects and G4 + 1 is working
to minimize such differences

Materiality of US GAAP Reconciliations by Non-US Companies

Panel C: Property, plant, and equipment
Measurement: Atlas, Beijing
Yanhau Petrochemical, BHP,
China Eastern, China Southern, Fiat, Guangshen Railway,
Ispat, Jilin Chemical, New
Holland, Shanghai Petrochemical, Yanzhou Coal Mining

The G4 + 1 members are discussing
proposed revisions to leasing
standards based on the discussion
paper, Accounting for Leases: A
New Approach.

(continued)

33

34

Table 1. (Continued)
Item and companies

IASC GAAP

Comments

FAS 87: accrued benefit method
Use of current market assumptions
Actuarial gains/losses which exceed
``corridor'' amortized over expected remaining working lives
of participating employees

IAS 19: permits accrued benefit
valuation (benchmark) and
projected-benefit (alternative)
methods
Use of long-term assumptions
Actuarial gains/losses recognized
systematically over remaining
working life of employees
Does not specifically address other
post employment benefits (para
4) or employee benefits such as
compensated absences

1998s IAS 19 Revised (effective
for years beginning on or after
1 January 1999), compatible
with FAS 87
Accrued benefit method
Use of discount rate based on
market yields on high quality
corporate bonds
Actuarial gains/losses exceeding
``corridor'' amortized over expected remaining working lives
of employees
Accrual basis for other employee
benefits

FAS 106: similar rules for other
post employment benefits

Panel F: Foreign currency translation
Method: Astra

FAS 52: reporting currency used as
the functional currency and the
temporal method used for translation

IAS 21: similar to US GAAP but
sparse guidance may create diversity in practice (i.e., only four
brief paragraphs provide guidance
for determining the functional
currency for foreign operations)
IAS 21: statements restated to
current purchasing power (via
IAS 29) prior to translation into
the reporting currency of the
reporting enterprise

SEC has endorsed IAS 29 for
foreign issuers

Vol. 35, No. 1, 2000

Hyperinflation: Ispat

FAS 52: current rate method when
functional currency is foreign
currency
Temporal method when functional
currency is reporting currency

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Panel E: Retirement benefits
Pensions: Banco (gain amortization), Hoechst, Matav (OPEB),
Mexican Maritime (pensions
and compensated absences),
New Holland

US GAAP

Panel G: Goodwill
Goodwill amortization: Atlas,
Scandia, Usinor

Negative goodwill: Ispat

FAS 52: closing exchange rate used

IAS 21: either historical exchange
rate or closing rate may be used

FASB comparison notes this aspect of IAS 21 as a significant
difference with US GAAP
likely to impair comparability

APB 17: maximum amortization
period of 40 years

IAS 22: amortization period may
not exceed 5 years unless a
longer period not to exceed 20
years can be justified

IASC's 20-year ceiling becomes
rebuttable presumption via
1998 revision of IAS 22 (effective for period beginning on or
after 1 July 1999); does not
permit assignment of an infinite useful life to goodwill

APB 16: reduces proportionately
values assigned to noncurrent
assets (other than marketable
securities) in determining their
fair values, any excess recognized as a deferred credit
Negative goodwill amortized to income on a systematic basis over a
period not exceeding 40 years

IAS 22 benchmark: fair value nonmonetary assets acquired reduced proportionately until excess eliminated, any excess
negative goodwill and treated as
deferred income
Alternative: any excess of acquirer's interest in fair values of
identifiable assets/liabilities over
cost is negative goodwill and
treated as deferred income
Amortize negative goodwill over
period not exceeding 5 years, unless period not exceeding 20 years
can be justified

Materiality of US GAAP Reconciliations by Non-US Companies

Translation of foreign goodwill
and fair value adjustments:
LVMH, Mexican Maritime

(continued)

35

36

Table 1. (Continued)
Item and companies

US GAAP

Panel H: Old goodwill standard
Capitalize or Charge to Reserves:
Banco Comercial Portugues,
Fiat, Hoechst, New Holland,
Mexican Maritime

Panel I: Minority interests
Minority interests: Credicorp
(not specified), Hoechst, Mexican Maritime

Comments

IAS 22 may be ambiguous where
items are covered in the form of
background material and implementation guidance (para 23±26)
IAS 22: (as revised in 1993) goodwill must be capitalized
However, original version allowed
goodwill to be charged to reserves

Goodwill on acquisitions prior to
1995 may give rise to reconciling adjustments in that companies were not required to
reinstate goodwill previously
charged to reserves

APB 16: stated at acquirer's share of
pre-acquisition carrying value of
assets
APB 17: allocate value to all intangibles based on appraised values,
including acquired in-process R&D
In-process R&D with no alternative
future use is immediately
expensed

IAS 22: stated at either the acquirer's share of the pre-acquisition
carrying value of assets or fair
value of the net assets
Following an acquisition, only record intangibles as an acquired
asset if they meet the definition
of and recognition criteria for an
intangible asset, otherwise, intangibles subsumed within goodwill and amortized accordingly

Minority interests may differ for
US and IAS GAAP due to
differences in assignment of
costs to intangible assets such
as in-process R&D
FASB is considering a new standard that would wipe out
instant write-offs for the value
of as-yet-undeveloped products
picked up in an acquisition

Vol. 35, No. 1, 2000

APB 16: goodwill must be capitalized

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Miscellaneous: Netia

IASC GAAP

FAS 34: under certain conditions
interest capitalized as part of
acquisition cost of an asset

China Southern, Jilin, Shanghai
Petrochemical
Panel K: Accounting for investments
Credicorp, LVMH, Rostelecom

IAS 23 benchmark: expense all
borrowing costs in the period
incurred

Under allowed alternative, borrowing costs are defined broader than FAS 34, i.e., foreign
currency exchange gains/losses
capitalized to extent regarded
as adjustment to interest costs

Alternative: capitalize borrowing
costs if attributable to acquisition
of qualifying asset
FAS 115: investments in marketable debt/equity securities carried
at market except for held to
maturity debt securities that are
carried at amortized cost
Holding gains/losses on trading
securities (current) charged to net
income, while holding gains/
losses on available for sale securities (non-current) charged to
stockholder's equity (comprehensive income, effective for 1998
financial statements)

IAS 25: current investments at
either: market or lower of cost
or market
Holding gains/losses on current
investments carried at market
recognized as income/expense
or per paragraph 32
Long-term investments carried at
either: cost, revalued amounts, or
for marketable securities, lower
of cost and market value
Per paragraph 32, holding gains on
revaluation of long term investments credited to equity
Holding losses may be charged
against existing revaluation surplus, if valuation of security falls
below cost the charge must go to
income

IAS 39 (effective for periods
beginning on or after 1 January
2001): all financial assets recognized on the balance sheet
Subsequent to initial recognition,
all financial assets (with limited
exceptions including held to
maturity debt securities) remeasured to fair value

Materiality of US GAAP Reconciliations by Non-US Companies

Panel J: Borrowing costs
Atlas, Hoechst, Ispat, Netia,
Swisscom, and Unisor

(continued)

37

38

Table 1. (Continued)

Panel L: Accounting for associates
Equity Method: Banco, Hoechst,
Netia

Panel M: Research and development
Development: Banco Comercial
Portugues, Nokia, Nova

IASC GAAP

Comments

APB 18: equity method (investor
should present its share of the
associate's profit/loss at a post-tax
level)

IAS 28: equity method (not clear at
what level investor should report
its share of the associates' profit/
loss, pre-tax or post-tax)

Equity method as described in
IAS 28 essentially the same as
APB 18, but IAS 28 is not as
detailed and may provide for
variation in interpretation

FAS 2: expense all research and
development costs as incurred

IAS 9: expense research cost as
incurred and must capitalize/
amortize development costs if
stringent criteria (i.e., satisfy
definition of asset) met
No industry specific standards

1998's IAS 38 (effective for years
beginning on or after 1 July
1999) reaffirms IASC position
on R&D

Some software development costs
must be capitalized
For oil and gas exploration may use
successful efforts or full cost

1998's IAS 38 (effective for years
beginning on or after 1 July
1999) does not apply to mineral rights and expenditure on
exploration for, or development
and extraction of, minerals, oil,
natural gas and similar nonregenerative resources

Vol. 35, No. 1, 2000

Industry Practice: BHP (area of interest method for oil exploration),
Lihir Gold, Swisscom (software)

US GAAP

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Item and companies

Item
Panel AA: Restructuring provisions
The G4 + 1's Provisions: Their
Recognition Measurement,
and Disclosure in Financial
Statements states there is little
published guidance on recognition/measurement of provisions in general and outlines
group's view on restructurings: BHP, Fiat, Hoechst, Ispat, LVMH, New Holland,
Swisscom, Usinor

Panel BB: Employee stock compensation
Employee stock compensation
(including stock options):
Cayman Water, Gucci, Matav,
Netia, (Usinor also had a
violation but there was no
income effect)

US GAAP

Note on IAS coverage

Comments

FAS 5: allowed if management is
committed and process has effectively begun
EITF 94-3 allows setting up of reserves only if certain conditions met
For employee termination, employees
must be informed regarding key
provisions of plan prior to period end
Certain costs may be accrued as a part
of restructuring charge under IAS are
not allowed
Restructuring plan must be scheduled
within a period of time which
indicates significant changes to plan
are not likely

IAS 10 addresses contingent liabilities (record if probable and a
reasonable estimate of the amount
can be made) but does not specifically address restructuring costs

IAS 37 (effective for periods
beginning on or after 1 July
1999): a provision for restructuring costs should be recognized only if a formal plan for
the restructuring exists and
management has raised a valid
expectation in those affected
that it will carry out the
restructuring by starting to implement that plan or announcing its main features to those
affected by it
Based on G4 + 1 Discussion Paper

Cost of share awards/options charged
over period of employee's performance via one of two options: APB
25, cost measured based on intrinsic
value or FAS 123, cost based on fair
value using an option pricing model
For companies electing APB 25, FAS
123 requires disclosure of amount
of compensation expense that
would be recorded if stock options
were carried at fair market value

Disclosures are required, but there
is no standard or proposals on
measurement

No limit on the period of time to
complete are structuring plan

Materiality of US GAAP Reconciliations by Non-US Companies

Items appearing in 20-F reconciliations that are not covered by IAS

IAS 30 (effective for years beginning on or after 1 January
2001): financial assets/liabilities recognized on balance
sheet
After initial recognition most
financial liabilities measured
at original recorded amount
(less principle repayments and
amortization)Ðonly derivatives and liabilities held for
trading remeasured to fair value
(continued)
39

40

Table 1. (Continued)
Items appearing in 20-F reconciliations that are not covered by IAS
Item

Note on IAS coverage

Comments

FAS 52: hedged foreign currency
receivables/payables translated at
exchange rate at balance sheet date,
with unrealized exchange gains/
losses recorded in income
Difference between amount of forward exchange contract translated
at forward rate and exchange rate at
date of inception amortized over
life of contract
Forward contract translated at exchange rate at balance sheet date
and any unrealized exchanges
gains/losses recognized in income

Accounting for forward exchange
contracts and hedging excluded
from the scope of IAS 21
However, IAS 21 does not preclude
hedge accounting

Per IAS 39 (effective for years
beginning on or after 1 January
2000) hedging means designating a derivative or (for hedges
of foreign currency risks) a
non-derivative financial instrument as an offset in net profit/
loss, in whole or in part, to the
change in fair value or cash
flows of a hedged item
Hedge accounting is permitted
in certain circumstances, provided hedging relationship is
clearly defined, measurable,
and effective

Strict criteria for asset recognition and
amortization

No specific IAS addressing intangible assets

IAS 38 (effective periods beginning on or after 1 July 1999)
prescribes accounting for intangible assets and establishes
specific criteria for asset recognition

Vol. 35, No. 1, 2000

Panel DD: Accounting for
intangibles/deferred costs
See below

US GAAP

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Panel CC: Accounting for forwards
Accounting for forward exchange contracts and hedging:
Astra, LVMH, Scandia

APB 17: maximum life of intangibles 40 years

IAS 38 will require that depreciable
amount of an intangible asset be
allocated on a systematic basis
over estimated useful life

Banco Comercial Portugues includes costs of publicity campaigns in sundry assets
Scandia capitalized preoperating
expenses
Banco Comercial Portugues capitalized issuance costs

Advertising and publicity costs
expensed as incurred

IAS 38 will require that expenditure
on advertising and promotional
activities be expensed as incurred
IAS 38 will require that start-up
costs be expensed as incurred
No IAS on capital transactions

China Southern incremental
costs directly attributable to
equity securities offering deferred and later charged
against proceeds from initial
offering

The deferred amount would be
expensed in an earlier accounting
period (upon the postponement
of the earlier proposed offering
of equity securities)

Organizational costs expensed under US GAAP
Issuance costs expensed as incurred

In August 1998, the G4 + 1
agreed that the most appropriate treatment of share
issuance costs is to account
for them as a reduction in
the proceeds of the capital
raising

No IAS on capital transactions

Materiality of US GAAP Reconciliations by Non-US Companies

LVMH capitalized brands with
no amortization

(continued)

41

42

Table 1. (Continued)
Companies that violate IAS
Policy followed/company

Comments

IAS 19 (like US GAAP): future salary increases
taken into account in calculation of future
pension commitments

Some sample companies might argue IAS 19 is
not applicable for their pension plans; however, the IASC argues that several such
companies are not complying with IAS 19
The IASC (1998) states that some argued that the
old IAS 19 did not work well for plans in
countries such as Germany, Japan, and the
Netherlands
IASC now holds that as these countries were
represented on the Retirement Benefits Steering Committee, such arguments will have little
force in the future

IAS 19: use either accrued benefit valuation
(benchmark) or projected-benefit (alternative)
method

Nokia: various pension schemes in accordance
with local conditions/practices and the
schemes are funded through payments to
insurance companies or to trustee-administered funds as determined by periodic
actuarial calculations
Scandia: provisions based on actuarialprojections, the Swedish plan administered
by Pension Registration Institute

Nokia and Scandia do not appear to adhere to the
measurement criteria of IAS 19 (post Comparability Project), nor do they provide the
significantly expanded disclosures which include:
. Accounting policies including a description
of the actuarial valuation methods used
. Actuarial present value of promised retirement benefits at the date of the most recent
actuarial valuation
. Fair value of the plan assets
. Principle actuarial assumptions used in
determining the cost of retirement benefits

Vol. 35, No. 1, 2000

BHP: charges to income contributions to
pension plans

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Panel AAA: Retirement benefits
Astra: do not take future salary increases into
account

IAS requirement

Panel CCC: Foreign currency transactions
Biochem Pharma: part of foreign currency
translation adjustment recognized in earnings on repatriation of capital from foreign
operations

BioChem Pharma, IPL, and Nova: deferral
and amortization of exchange differences
on long-term monetary items

Panel DDD: Accounting for associates
BHP only discloses effect of accounting for
associates on an equity basis

Usinor states that some investments in nonconsolidated subsidiaries are carried at
lower cost or fair value as defined by the
COB

IAS 8: all items of income/expense included in
profit/loss unless prohibited by an IAS

IAS 21: a pro rata portion of exchange gains/
losses accumulated in equity recognized in
income upon disposal of an investment in a
self-sustaining operation
Only a dividend constituting a return of the
investment is considered a disposal
IAS 21 benchmark: on settlement of monetary
items or on reporting monetary items at rates
different from those at which initially recorded, resulting gains/losses recognized in
period they arise (allowed alternative not
applicable)

Canadian Handbook acknowledges this as a
difference between Canadian GAAP and IASs

IAS 28: equity method used for investments in
associates when there is significant influence

Legal impediment has been removed in Australia
and new standard will require that investments
in associates be recognized on an equity
accounting basis
Usinor states that under US GAAP the equity
method would be used to account for these
investments
Hence, it appears that Usinor exercises significant
influence and should also use equity method
under IASC GAAP

Method followed by these companies eliminated
as part of IASC Comparability Project
Canadian Handbook acknowledges as a difference
between Canadian GAAP and IASs

Materiality of US GAAP Reconciliations by Non-US Companies

Panel BBB: All inclusive income
Banco Comercial Portugues charges ``bonus
to employees'' against reserves
Fiat does not charge entire tax on equity and
substitute equalization tax to income

(continued)

43

44

Table 1. (Continued)
Companies that violate IAS
Policy followed/company

Panel FFF: Capitalization of costs
Usinor: charged change in accounting policy
for furnace relining costs in 1994 to income
to conform with French accounting principles

Comments

Under IASC and US GAAP when a company's
own shares are repurchased, the shares are
shown as a deduction from shareholder's
equity

Fiat carries treasury stock as a fixed asset, but
there were no entries to income for the year
related to treasury stock

IAS GAAP requires capitalization of such costs

In 1996 financial statements Usinor acknowledges that the nonrecurring charge is in
violation of IASs

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Panel EEE: Treasury stock
LVMH: carried as asset on balance sheet;
recorded a loss associated with sale of
treasury stock
Usinor: treated as a cash equivalent and
valued at 1 cm

IAS requirement

Vol. 35, No. 1, 2000

Materiality of US GAAP Reconciliations by Non-US Companies

45

The denominator is US net income because 20-F reconciliations are addressed to
investors accustomed to US GAAP (Weetman et al., 1998). Consequently, these investors
view differences as departures from US net income rather than as departures from IAS
net income. Net income is chosen for the denominator rather than a scale factor, such as
sales or market value, because the research seeks to evaluate the materiality of
accounting differences.
ISA 320, Audit Materiality, provides general guidance regarding an assessment of
materiality. However, like the publications of other professional bodies and standard
setters, the International Federation of Accountants' (IFAC) ISA 320 does not provide
specific materiality guidelines to practitioners. In practice, auditors assessing materiality in
relation to the impact on users make reference to percentages. Audit practice indicates a
useful guideline as being 5±10 percent of income before taxation (Grant Thorton, 1990).
As firm policy, Ernst and Young (1998) states that audit differences require consultation
whenever the gross or net unrecorded differences exceed 5 percent of pretax income.
While the SEC asserts that both qualitative and quantitative factors must be considered in
determining materiality, SEC Chief Accountant Turner has stated that traditionally, 5
percent of earnings is believed to be the cut-off point for determining if an item is material
or not (Burns, 1999). The current research provides findings based on bands at 5 percent
and 10 percent of net income.
The neutral value of 1.0 is utilized for consistency with previous literature. An index
value exceeding 1 indicates the IAS net income is greater than that reported according to
US GAAP (or an IAS loss is not as large as a US loss). An index value less than 1
indicates that the IAS reported net income is less than that reported under US GAAP (or an
IAS loss is larger than a US loss).
Since the 20-F reconciliation contains considerable detail, partial index values may be
determined based on the formula:
1ÿ

…partial adjustment†
j Net income USA j

The partial index values measure the contribution of each 20-F reconciling item. The
neutral value of 1 is retained for consistency. The indexes of partial adjustments sum to the
total index by the formula:
Total comparability index ˆ

n
X

adjustmentn ÿ …n ÿ 1†

1

Evaluation of Index
The comparability index carries the disadvantage of reporting extreme index values if
US net income/loss approaches zero. Fortunately, such occurrences are rare in the current
data set and do not seriously affect interpretation. The presence of outliers must be
weighed against the association of the ``index of comparability'' with the accounting
concept of materiality that is usually judged in relation to profit. Such outliers result in
comparable problems in practical interpretation of their impact on financial statement
users. Further, it has been asserted that materiality cannot be judged on a relative value

46

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Vol. 35, No. 1, 2000

basis when net income is small or the item causes a change from a small net income to a
small net loss.
Use of the index to evaluate annual data may carry the risk of including in any given
year a short-term timing difference that reverses in the following year due to a difference in
recognition criteria. Fortunately, in that the 20-F provides 3 years of data, it allows for
consideration of this aspect. An examination of the 3-year comparisons within each 20-F
revealed two reversals (both associated with restructuring) in reconciling items that are
observable for each of the separate adjustments analyzed. The impact of the two reversals
on the overall index and the appropriate partial index was considered. The impact on the
overall index of comparability was less than 1 percent in all years, and the impact on the
restructuring partial index was less than or equal to 1 percent in all years.

RESULTS
Data were pulled from the 1997 20-Fs (or annual reports) of the 33 sample companies.
Hence, the data cover the years 1995 ±1997. This section presents the (1) frequency of, and
(2) tests of materiality for the 20-F reconciling adjustments and discusses the main causes
of adjustments. Table 2 reports the relevant index of comparability measured as a mean
and a median over the group as a whole (after excluding outliers) and for each type of
reoccurring adjustment. Table 2 also reports the number of reconciling adjustments overall
and by category. Each category in Table 2 represents a grouping of more than one type of
adjustment (as reflected in Table 1), so that the total number of adjustments presented by
companies in their 20-F reconciliations are considerably greater than the number of line
items indicated in Table 2.
Index of Comparability for IAS Income
The overall index of comparability reveals that in 1995, 1996, and 1997, the
adjustment to profit under IASs represents 7 percent (increase in IAS income), 20
percent (increase in IAS income), and 8 percent (increase in IAS income) of profit
under US GAAP, respectively. T-tests (Table 3a) indicate that the mean index of
comparability for IAS Income is significantly greater than 1 only in 1996 ( p = 0.01).
The median values are 1.03, 1.01, and 1.00 for 1995, 1996, and 1997, respectively,
and the non-parametric Wilcoxon tests (Table 3b) indicate no statistically significant
differences (at p < 0.05). Throughout Table 3, outliers are eliminated from the
calculation of the t-statistics but not the Wilcoxon test.
According to Table 2, in all 3 years, the most frequently occurring sources of
adjustments representing differences in US GAAP and IASs were associated with
property, plant, and equipment; deferred taxes; goodwill; and capitalization of borrowing
costs. Less frequently occurring adjustments are due to restructuring; research and
development; foreign currency translation; retirement benefits/pensions; employee stock
compensation; intangibles; minority interests; investments; accounting for associates; sale
leasebacks; and inventory. In each year, a few adjustments are associated with adoption of
new IASs or FASs (i.e., accounting changes). Of particular concern in each year is that
several adjustments are associated with what appears to be violations of IASs.

Description of adjustment
Overall
Revised
Violations of IASs
PP&E Revaluations
Deferred Taxes
Goodwill
Capitalized Borrowing Costs
Restructuring
Research and Development
Foreign Currency Translation
Retirement Benefits/Pensions
Accounting Changes
Employee Stock Compensation
Intangibles
Minority Interest
Investments
Accounting for Associates
Sale leasebacks
Inventory
Other
Notes:

1997
Count

1997
Mean

1997
Median

1996
Count

1996
Mean

1996
Median

1995
Count

1995
Mean

1995
Median

31
31
11
14
11
10
8
6
4
5
4
4
4
3
3
3
3
3
2
11

1.08
1.06
1.07
0.91
1.06
1.08
0.93
1.03
1.00
1.03
1.02
0.97
1.06
1.01
1.23
1.02
1.38
1.11
1.04
1.04

1.00
1.00
1.02
0.94
1.03
1.01
0.95
1.01
1.00
1.03
1.02
0.96
1.06
1.00
1.01
1.03
1.02
1.00
1.04
1.02

33
33
10
11
13
9
6
6
6
5
4
3
3
3
3
3
3
3
2
12

1.20
1.18
1.06
0.95
0.99
1.21
0.99
1.06
1.14
1.13
1.12
1.10
1.09
0.98
1.03
1.01
1.28
0.98
0.98
1.07

1.01
1.01
1.01
0.98
0.99
1.03
1.00
1.06
0.99
1.01
1.01
1.07
1.07
1.00
0.99
1.02
1.10
0.97
0.98
1.01

28
28
10
8
16
7
6
5
5
5
4
3
2
4
2
3
2
3
2
13

1.07
1.11
0.90
0.97
0.93
1.03
1.01
0.64
1.27
1.32
1.29
0.50
1.63
1.09
0.96
1.01
0.65
0.93
1.03
1.11

1.00
1.00
0.99
0.99
0.97
1.02
0.99
1.02
1.02
1.04
1.29
1.01
1.63
1.05
0.96
0.99
0.65
0.97
1.03
1.01

Materiality of US GAAP Reconciliations by Non-US Companies

Table 2. Excluding Outliers. Number of Companies Making Each Category of Adjustment to Net Income Including Mean and Median Index of Comparability
for 1997, 1996, and 1995

The following outliers were excluded from calculations of the mean and median values with regard to:
Hoechst (1997 overall index of comparability and 1995 overall index of comparability and partial index of comparability for goodwill and minority interest);
Swisscom (1997 overall index of comparability and partial index of comparability for restructuring and research and development);
Ispat (1995 overall index of comparability and partial index of comparability for goodwill) (full sample only);
Magyar (1995 overall index of comparability and partial index of comparability for other);
Lihir (1997 partial index of comparability for research and development).

47

48

Table 3. Index of Comparability for Net Income
3a. Mean value and t-statistic

1997
1996
1995
income 1997
income 1996
income 1995

31
33
28
31
33
28

1.083
1.197
1.073
1.057
1.179
1.109

11
10
10
14
11
8
11
13
16
10
9
7
8
6
6

1.072
1.059
0.899
0.905
0.955
0.970
1.060
0.993
0.934
1.076
1.211
1.025
0.926
0.989
1.008

SD

SEM

t

p value

0.3509
0.4381
0.3317
0.3305
0.4278
0.02843

0.0630
0.0762
0.0627
0.0594
0.0744
0.0809

1.318
2.588
1.172
0.964
2.409
2.036

0.197
0.014
0.252
0.343
0.022
0.052

0.1776
0.1315
0.3117
0.1607
0.1562
0.0581
0.0991
0.0948
0.4076
0.2088
0.4207
0.0428
0.1029
0.0334
0.1468

0.0535
0.0416
0.0985
0.0429
0.0471
0.0205
0.0298
0.0263
0.1019
0.0660
0.1402
0.0162
0.0364
0.0136
0.0599

1.361
1.434
ÿ1.021
ÿ2.198
ÿ0.959
ÿ1.439
2.009
ÿ0.275
ÿ0.649
1.149
1.503
1.573
ÿ2.025
ÿ0.747
0.137

0.203
0.185
0.334
0.046
0.360
0.193
0.072
0.787
0.526
0.279
0.171
0.166
0.082
0.488
0.896

Vol. 35, No. 1, 2000

Partial Adjustments
IAS Violations 1997
IAS Violations 1996
IAS Violations 1995
PP&E Revaluations 1997
PP&E Revaluations 1996
PP&E Revaluations 1995
Deferred Taxes 1997
Deferred Taxes 1996
Deferred Taxes 1995
Goodwill 1997
Goodwill 1996
Goodwill 1995
Capitalized Borrowing Costs 1997
Capitalized Borrowing Costs 1996
Capitalized Borrowing Costs 1995

M

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Net Income
Net Income
Net Income
Revised net
Revised net
Revised net

N

1995

Net income
Revised net
income
IAS Violations
PP&E Revaluations
Deferred taxes
Goodwill
Capitalized
Borrowing
costs

1996

1997
p value

N

Median

Wilcoxon
statistic

p value

p value

N

Median

Wilcoxon
statistic

184
162

0.104
0.046

33
33

1.01
1.01

201
207

0.077
0.094

33
33

1.00
1.00

266
250

0.398
0.293

0.99
0.99

15
9

0.101
0.104

10
11

1.01
0.98

30
8

0.399
0.013

11
14

1.02
0.94

31
30

0.430
0.079

0.93
1.04
0.95

41
31
12

0.081
0.157
0.377

13
9
6

0.99
1.03
1.00

31
35
13

0.155
0.069
0.300

11
10
8

1.06
1.01
0.99

29
46
8

0.361
0.030
0.080

N

Wilcoxon
Median statistic

31
31

1.03
1.02

10
8
16
9
6

Materiality of US GAAP Reconciliations by Non-US Companies

3b. Actual median and Wilcoxon statistic

49

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Vol. 35, No. 1, 2000

Overall Materiality of Adjustments
The mean and median data in Table 2 provide summary indicators for the group of
companies as a whole, but, when making investment decisions, investors are concerned
with individual companies. Thus, the findings are presented as distributions of adjustments
in bands of materiality in Tables 4 and 6. Discussion is in terms of adjustment to net
income but could also apply to adjustments to net loss. Tests of statistical significance are
again reported in Table 3.
In regard to overall net income, Table 4 presents the distribution bands of net income
that an accountant might view as ``immaterial'' (i.e., differences less than 5%) or ``material
at 10 percent or more'' or ``material at 5 ±10 percent.'' In 1995, 1996, and 1997,
respectively, three (of 31 or 10%), two (of 33 or 6%) and two (of 33 or 6%) companies
report IAS income less than US income where the adjustment represents 5±10 percent of
US income. One (of 31 or 3%), two (of 33 or 6%) and four (of 33 or 12%) report IAS
income exceeding US income by 5±10 percent of US income. In 1995 and 1996, four (of
31 or 13%) and five (of 33 or 15%) report IAS income lower than US GAAP where the
adjustment is at least 10 percent of US income. In 1997, eight (of 33 or 24%) report IAS
income lower than US GAAP where the adjustment is at least 10 percent of US