US watchdogs have made telling overtures towards harmonisation by announcing
plans to let foreign issuers present their IFRS- compliant accounts without the
need to reconcile them to US GAAP. But the glut of differences between the two
sets of standards causes major swings.
Comparing industrial companies in the survey,
discovered 426 reconciliation differences. The main sticking points occurred in
the treatment of tax (60), pensions (55), goodwill and intangible assets (53),
and financial instruments (40)
Citigroup said: ‘The differences could well result in investors and/or
analysts coming to different conclusions about the financial position and
performance of the business depending on the GAAP used.
‘The complexity of the reconciling items means that, for most investors,
using the primary GAAP numbers is the only practical option (that is, for
dual-list companies generally IFRS). It would appear that if US companies were
given the option to use IFRS rather than US GAAP then this would provide a boost
to book earnings and returns.’
The study focused on 73 European companies with listed American Depository
Receipts- foreign stocks traded on US exchanges. Citigroup looked at the
reconciliation between IFRS and US GAAP, provided in annual reports submitted to
the SEC for the 2005 and 2006 financial years.
The study found that 82% had higher net income under IFRS, while book value
was lower for about 70% of the sample. Overall returns on equity were also much
higher on average under IFRS, acccording to Citigroup.
‘The differences between the reported numbers for book and earnings under the
two GAAPs are clearly material,’ it said.
At year end 2006, Chemical giant Bayer’s profits under IFRS were 525% higher
than under US GAAP. Lloyds TSB posted IFRS profits 54.4% above the US GAAP
equivalent, while Diageo (33.7%) and Pearson (30.8%) also showed major
In breakdowns of book value and equity returns, UK-based companies topped the
tables of European companies showing the biggest divergence. BSkyB (84.1%)
GlaxoSmithkline (72.9%), Imperial Tobacco (61.5%) and the National Grid (55.8%)
all had book values significantly lower under IFRS than the US GAAP equivalent.
Of the 15 companies with the largest differences in returns on equity, the
top nine were UK quoted. BSkyB headed the table again with a 382% increase under
IFRS followed by major blue chips including Diageo, Intercontinental Hotels and
Profits under IFRS were on average 23% higher for the sampled companies with
the median value levelling out at 6%. Despite only covering a two-year period,
Citigroup said that the latest figures showed that the median value was
dropping, suggesting that some of the differences are being ironed out.
In general, the banking giant believed that there was not much to choose from
between the two standards: ‘Trying to make investment decisions based on a
superior knowledge of the GAAP differences may add some value, but for many of
these differences it is difficult to choose a clearly superior accounting
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