While financial reporting standards under U.S. GAAP and IFRS are fundamentally similar, differences do exist that may affect our analysis of company financial statements. This is particularly true when comparing a U.S. company following U.S. GAAP to a firm that uses IFRS. To illustrate, we compare research and development (R&D) accounting methods under both sets of standards and illustrate how they affect the analysis of financial results of firms in a specific industry–—automotive manufacturers. Our results provide insight into settings in which differences in R&D accounting may have the greatest impact on financial analysis.

Using a different accounting standard affects financial statements

While there are numerous standard setters in the accounting world, the majority of leading companies now use either U.S. GAAP or International Financial Reporting Standards (IFRS). For a short while around 2008, it looked as though the Securities and Exchange Commission (SEC) planned to move the U.S. toward the adoption of IFRS but now convergence of the two, rather than adoption, seems to be the more likely path. James Schnurr (2015), chief accountant of the SEC, in his speech at the Baruch College Financial Reporting Conference, stated that collaborations were currently the only way for convergence. In a different speech that year at the Brooklyn Law School, SEC Commissioner Kara M. Stein (2015) said that she was “not convinced of a need to abandon U.S. GAAP in favor of IFRS.” During these collaborations, however, each body has adjusted the resulting standards to fit the perceived needs of its constituents. For example, while the standards on leases and revenue recognition both have many things in common, the differences are still very important. Understanding the differences is crucial. Even within U.S. GAAP and IFRS, there are choices that each company needs to make: what inventory flow system to adopt or what depreciation method to use. Both of these choices, as well as differing regulations, may affect the classic financial ratios that analysts and investors use to evaluate a company.