The European-U.S. "GAAP Gap": IFRS to U.S. GAAP Form 20-F Reconciliations

This study evaluates the extent to which the FASB and IASB convergence projects and the EU-wide adoption of IFRS have impacted the differences between firms' financial results under US GAAP and IFRS. Using 2004 to 2006 reconciliation disclosures of 75 EU cross-listed firms, the researchers find that the average gap between US GAAP and IFRS income and between US GAAP and IFRS shareholders' equity declined from 2004 to 2006, consistent with convergence, though the net income gap remains significant. Furthermore, most firms report IFRS net income (shareholders' equity) higher (lower) than US GAAP net income (shareholders' equity), with the result that 28% of the sample firms' 2006 ROE under IFRS is more than 5 percentage points higher than under US GAAP, whereas fewer than 10% of the sample report ROE more than 5 percentage points lower. Finally, shareholders' equity reconciliations and income reconciliations appear value-relevant, although results are somewhat sensitive to model specification.