The need for comparability is perhaps most obvious where investors use quantitative analysis, such as in factor investing or in initial screening before more detailed fundamental analysis. Such analysis typically focuses on headline metrics such as earnings, leverage and return on investment, with limited, if any, adjustments made to reported data. If that data is not comparable, the factors may be misrepresented1We examined the value factor and the impact of inconsistent intangible asset accounting in our article ‘Intangible asset accounting and the value false negative’.

• Generally, the settlement of a supranational enforcement body may not find acceptance by sovereign countries, that is, granting IFRS regulation to another body.
• Generally speaking, investors’ valuations of private firms are a function of firms’ financial reporting and other available information.
• We obtain a final sample of 14,417 private M&As from 1997 to 2017 and measure the value relevance of the financial reports as the explanatory power of regressions of transaction valuations on the book value of equity and net income (Barth et al. 2012; McInnis et al. 2018).
• To help develop our hypotheses, we conduct a series of interviews with M&A valuation experts.
• We examine whether higher accounting comparability between public and private firms leads to higher value relevance of private firms’ reported financial information.

Within the United States alone, there are approximately 6 million private companies in operation (US Census Bureau 2016; Reamer 2019). In the course of a private company’s life, the two most common ways for shareholders to exit their positions in that firm are through an initial public offering or, much more frequently, in a merger or acquisition (M&A). While some research examines the use of venture capital-backed private firms’ accounting information for valuations around IPOs (Hand 2005; Armstrong et al. 2006), little empirical evidence exists about the importance of private firms’ reported financial information for valuations in M&As. We add to this area of research by examining whether accounting comparability to publicly traded firms impacts the value relevance of private firms’ financial reporting in such transactions. To test whether the value relevance of private firms’ reported financial information is greater when it is more comparable to that of public firms, we first examine the difference between the value relevance of private firms that follow IFRS and the value relevance of those that follow local GAAP.

A more important and often overlooked effect is how the pension financial income and expense is calculated. IFRS calculates an interest amount based on the net surplus or deficit whereas US GAAP incorporates a separate expected return on pension assets. The latter produces a more favourable profit and loss effect, with the impact being material for many companies with significant pension schemes. While the IFRS and US GAAP accounting for purchased intangibles, including those purchased as part of a business combination, is essentially the same, intangibles that are internally generated are treated quite differently. Under US GAAP any expenditure on research and development must be immediately expensed, whereas, under IFRS, expenditure on ‘development’ must be capitalised. IFRS capitalisation is subject to several criteria, but for many companies it results in the recognition of a significant asset, that would not appear in balance sheets under US GAAP.

5 Value relevance of public versus private firms’ financial reporting

For example, it is often sensible for accounting requirements to change, which reduces comparability over time. Extant accounting research shows that application of IFRS’s principles-based standards is influenced significantly by management’s incentives, language, and country-related factors (e.g., socio-political and cultural environment) differently between countries. We provide a review of the literature that accordingly substantiates differences in application of IFRS between countries. Economies, investors, and creditors rely on the free flow of capital and investments across different countries. International Financial Reporting Standards (IFRS) have become the global language by which investors from across more than 165 countries make judgments regarding cross-border investments.

• Lundholm et al. (2014) conclude that “foreign firms are responding to a perceived reluctance on the part of US investors to own them and attempt to lower the investors” information disadvantage or psychological distance by providing clear disclosures.
• Consistent with this, we suggest that the EMMoU includes the application of IFRS financial reporting as published by the IASB and a comment letter approach, especially for cross-border listed firms.
• Research suggests that the effect of information on investors’ decisions increases with the precision of that information (Kim and Verrecchia 1991).
• Practice develops in financial reporting and the global coordination of auditing and securities regulation serves to produce generally accepted approaches to the implementation of seemingly vague requirements of accounting standards.
• To this end, we prescribe an organizational dynamic change of IOSCO’s organization structure to achieve CFR globally.

Both within the local GAAP and the IFRS sample, we then compute the standard deviation of GROWTH to measure variation in expected economic growth and the standard deviation of RISK to measure variation in economic risk. We use these measures to assess the potential impact of variation in expected growth rates and discount factors on our results. All interviewees consider financial statements to be one of the most important information sources for valuing private firms.

However, in practice, the application of these thresholds may not produce as many comparability problems for investors as you might expect. Practice develops in financial reporting and the global coordination of auditing and securities regulation serves to produce generally accepted approaches to the implementation of seemingly vague requirements of accounting standards. However, if it appears that the approaches adopted by companies in dealing with thresholds seem to differ, then it may be worth you asking questions.

Accrual reliability, earnings persistence and stock prices

These differences could lead to underlying disparities in the information that public and private firms report (Breuer et al. 2018; Bonacchi et al. 2019), which may prevent information spillovers from public to private markets. Thus, a priori, it isn’t clear if or to what extent accounting comparability between public and private firms impacts the value relevance of private firms’ reporting. One important issue related to self-selection is that the sample of private firms that choose to follow local GAAP standards may exhibit a lower adjusted R2 in the value relevance regressions due to higher within-sample variation in the multiples applied by investors. Two key factors that impact the applied multiples are expectations about growth and risk (i.e., discount factors). Thus, absent public peer information, differences in the variation of expected growth and risk (which can ultimately lead to differences in the variance of applied multiples) between the samples could lead to differences in estimated value relevance.

Accounting & Finance

“Differences in text” used in this research has not quantified detail differences for each adopted standards. Therefore, future research can use a more in-depth measurement of the IFRS adoption level that considers differences or exceptions of accounting treatment. The purpose of this paper is to examine the indirect effect of the International Financial Reporting Standard (IFRS) adoption in increasing the foreign investors’ ownership through the improvement of comparability of financial statements. However, the differences in interpretation of terms may be mitigated when all companies list on the same stock exchange and, therefore, become subject to the same (high) level of enforcement. In other words, the listing country’s enforcement authority is acting as a regulatory body, in enforcing IFRS for its cross-border listed companies regardless of the location of their home country. With regard to lag, for example, South Africa adopts IFRS as published, but European Union countries adopt IFRS with carve-outs and sometimes with a substantial lag.

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First, we repeat our core tests using an alternative regression model that controls for the effect of country and industry composition on differences in value relevance. Second, we proxy and control for expectations of growth and risk using available historical accounting data. Zeff and Nobes (2010) argue that only a few countries have “fully adopted” IFRS as many jurisdictions have not incorporated the full text of IFRS without any change directly and instantly into their national accounting regulations. Moreover, pseudo-adoption timelines may vary across national jurisdictions when IFRS must go through a co-endorsement process like in the EU. In fact, Felski (2017) empirically finds that the pseudo-adopted IFRS financial reporting can impair CFR across countries.

The effect of financial reporting quality on CEO compensation structure: Evidence from accounting comparability

(We defer the discussion of this to Section 5.2.) While we cannot rule out this possibility, our findings suggest that these differences are unlikely to fully explain our results. We also observe the current status of IOSCO’s membership, enforcement achievements, and organization structure and review the market authorities’ comment letter approach to establish a rigorous and global enforcement framework for the IASB’s IFRS. After having transformed the static data that we collected, observed, and analyzed based on a rigorous inductive approach, we https://adprun.net/comparability-in-international-accounting/ propose an organization dynamics change for IOSCO. In the same vein of Quagli et al. (2020), we believe that a global enforcement authority could achieve the homogenous enforcement of IFRS at a global level. However, we are also aware that presently IFRS enforcement activities are legally engrained at the country level. Therefore, IOSCO currently cannot intervene in national state’s laws as it can only make recommendations, should strengthen its engagement with local enforcement authorities in promoting a homogeneous enforcement of IFRS globally.

The differences in the standard deviations of GROWTH between the local GAAP and IFRS samples (Difference [(a) – (b)]) suggest that the standard deviation of growth is generally smaller in the local GAAP sample compared to the IFRS sample. The experts stated that the set of peer multiples they use varies depending on the specifics of the M&A and the target firm. Moreover, there are no fixed rules or guidelines on what constitutes an adequate number of comparable firms. However, they generally suggest that having a larger group of peers is more advantageous because this allows for more noise to be filtered out of the information gathered from peers. More peers also offer more opportunities to find particularly well-fitting and highly comparable firms for their evaluations. Consistent with this, the experts indicated that when more peers are available, they emphasize multiples and perceive the reasonable range of peer valuations as more binding (both for internal procedures and for negotiations).

Felski (2017) examines countries that modify adoption of IFRS to assess the extent to which CFR is impaired. This study provides evidence that some countries experience difficulties in implementing the latest version of IFRS or ensuring proper translation of the standards due to a lack of resources, while other countries endorse IFRS with modifications to represent their financial reporting environment. It follows that the specifics of how countries modify IFRS adoption may result in differences in comparable financial reporting between different countries, though all state IFRS compliance. Research suggests that the effect of information on investors’ decisions increases with the precision of that information (Kim and Verrecchia 1991). When information is more precise, investors are more certain of its implications and weigh it more in their decisions. Insights from our interviews further support this intuition.Footnote 12 These arguments suggest that the relation between accounting comparability between public and private firms and the value relevance of private firms’ reporting is increasing with the precision of the information from public firms.