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- Title
Assessing the Financial Reporting Consequences of Conversion to IFRS: The Case of Equity-Based Compensation.
- Authors
McAnally, Mary Lea; McGuire, Sean T.; Weaver, Connie D.
- Abstract
The potential conversion of accounting standards from U.S. GAAP to International Financial Reporting Standards (IFRS) raises the issue of unknown financial reporting consequences. We consider one important accounting issue, namely equity-based compensation, and study how IFRS conversion will affect financial statements and the quality of reported numbers. The difference between the two standards is that IFRS reports tax benefits from equity-based compensation at their intrinsic value each period. This amounts to quasi fair-value accounting under IFRS compared to historiccost accounting under GAAP. We develop and compare pro forma GAAP and IFRS accounting reports for a broad cross section of U.S. firms. We find that IFRS yields lower deferred tax assets and recognized tax benefits for approximately two-thirds of the option grants in our sample. Moreover, reported tax items will be more volatile under IFRS and these effects will be more pronounced for firms with greater option use and stock price volatility. Importantly, we find that IFRS tax items are better able to predict future cash flows. One conclusion is that IFRS improves the relevance, and thereby, the quality, of at least some reported numbers.
- Subjects
UNITED States; ACCOUNTING standards; FINANCIAL statement laws; COMPENSATION (Law); STOCKS (Finance); FINANCIAL statements; TAX benefits; STOCK prices; MARKET volatility
- Publication
Accounting Horizons, 2010, Vol 24, Issue 4, p589
- ISSN
0888-7993
- Publication type
Article
- DOI
10.2308/acch.2010.24.4.589