The Convergence of IFRS and US GAAP: Evidence from the SEC’s Removal of Form 20-F Reconciliations

We use the SEC’s 2007 decision that eliminates the reconciliation requirement for foreign listed private issuers (FPIs) reporting under IFRS as a natural experiment to examine whether IFRS and US GAAP produce accounting information of comparable quality. We conduct statistical analyses using a sample of 563 firm-year observations of FPIs during the period 2002 through 2008 for a panel of 70 FPIs that report under IFRS as our treatment group and 46 FPIs that report under US GAAP as our control group. Using a stock-valuation model and a difference-in-differences analysis of scaled residuals we examine whether the reconciliation values reported by IFRS FPIs prior to 2007 were value relevant and if the elimination of the reconciliation information in the postintervention period (2007 and 2008) has adversely affected the information available to investors to make stock-valuation decisions. The results for the 2002 through 2006 period suggest that the reconciliation values for book value were value relevant. The difference-in-differences analysis shows that while the residual-value model incorporating reconciliation information produced comparable scaled stock price residuals for IFRS and US GAAP FPIs prior to 2007, the removal of the reconciliation information resulted in scaled stock price residuals for IFRS FPIs exceeding those for US GAAP FPIs by more than 35 percent after the SEC’s decision to waive the reconciliation filing requirement. These findings may be of interest to the SEC in its recent deliberations of whether, when, and how IFRS should be incorporated into the US financial reporting system.