Disincentives to Exchange Customized Local GAAP for IFRS

• In Event: 7.02. Globalization and IFRS

Abstract

The movement towards global adoption of International Financial Reporting Standards (IFRS) resulted in the loss of numerous local Generally Accepted Accounting Principles (GAAPs). A number of these standards were tailored to capture the adopting jurisdictions' economic nuances. Occasionally local GAAP covered economically significant transactions not addressed within IFRS. One example is our setting where Canadian GAAP included guidance on recognizing regulatory assets and liabilities, unlike IFRS. In the face of this disparity, Canadian regulators granted utility firms the choice to opt out of Canada’s nationwide adoption of IFRS. Firms could elect to follow either Canadian GAAP or US GAAP, which permits the recognition of regulatory assets and liabilities. Leveraging this unique setting, we test whether the loss of allowances under local GAAP are costly enough to deter firms from adopting IFRS. We find that this is the case, especially for firms with higher historical market risk, analyst coverage, institutional ownership, insider ownership, and block ownership. We also provide evidence that firms with regulatory assets experience lower future equity market risk and future institutional ownership when adopting IFRS relative to when they do not adopt IFRS. Our findings highlight a perceived cost to IFRS adoption – a cost associated with losing jurisdictionally tailored accounting standards.

Authors

• Emily Anne Shafron, Texas A&M University

• Herita Akamah, University of Nebraska

• Stephani A. Mason, DePaul University