University of Arkansas, Fayetteville


During the past five years, the number of US. citizens who own foreign securities has increased by thirty percent. This trend has led to the need for a uniform accounting system that would increase the comparability and consistency of financial statements across countries in the world. Today, over 100 countries have adopted International Financial Reporting Standards (IFRS) as their primary accounting system. The European Union required the use of IFRS in 2005. In the U.S., the Securities and Exchange Commission is considering the adoption of IFRS in 2014. IFRS and U.S. Generally Accepted Accounting Principles (GAAP) are different in many ways. U.S. GAAP is more detailed, with strict rules and guidelines to follow. In contrast, IFRS allows more room for accountants to make judgments in preparing financial statements and auditing them. This has led to the assumption that IFRS would open the door to earnings management and decrease the conservatism of financial statements. Conservatism is "the accountant's tendency to require a higher degree of verification to recognize good news as gains than to recognize bad news as losses" (Basu, 1997). Conservatism helps prevent managers from manipulating income and earnings per share (EPS). While there are many studies on accounting conservatism in U.S. GAAP,few or no studies have been done to determine the impact of conservatism in IFRS. This study was conducted to determine whether IFRS is more conservative than US. GAAP by comparing the book-to-market value (BTM) between IFRS.firms and U.S. GAAP firms. Lower BTAf values are associated with greater firm conservatism.