Globalisation of accounting standards: the usefulness of U.S. GAAP reconciliation information

Considerable progress has been made in the past decade converging national Generally Accepted Accounting Principles (GAAP), including United States (U.S.) GAAP, with International Financial Reporting Standards (IFRSs). Furthermore, many countries have adopted, or partially adopted, IFRSs as their national GAAP. The globalisation of accounting standards motivates this study to examine the usefulness of U.S. GAAP reconciliation information over time. With the expectation that converged accounting standards decrease the usefulness of reconciliation information over time, this study examines the market reactions around the release of reconciliation information during 2002–2007. Decreasing usefulness of reconciliation information is expected because of accounting standards becoming increasingly similar to U.S. GAAP. This study shows that market reactions (abnormal returns and abnormal trading volume) to the release of reconciliation information are greater in the earlier period (2002–2004) than in the later period (2005–2007). This study also investigates how the usefulness of reconciliation information is affected by country-level attributes, namely, investor protection, earnings quality, and earnings and the book value of equity differences between U.S. and domestic GAAP. With the exception of earnings differences, results indicate support for the country-level attributes being associated with market reactions to the release of U.S. GAAP reconciliation information, when measured by abnormal trading volume. When market reactions are assessed using abnormal returns, no associations are found. The results of sensitivity analysis generally support the main results. Therefore, this study finds that the convergence of accounting standards leads to the decreasing usefulness of reconciliation information, indicating that the similarity of accounting standards is priced by the market over time. This study also finds some support for country-level factors impacting the usefulness of reconciliation information, as indicated by a positive association between abnormal trading volume and foreign registrants’ home country investor protection, earnings quality, and book value of equity differences. These results support the claims of the Securities and Exchange Commission (SEC) that the usefulness of reconciliation information has decreased. This was a factor considered by the SEC when removing the requirement for reconciliation statements for foreign registrants preparing financial reports using IFRSs as issued by the International Accounting Standards Board (IASB). The results also inform the SEC’s deliberations on continuing the reconciliation requirement for companies preparing financial reports using GAAP other than IFRSs as issued by the IASB.