Essays on the U.S. GAAP-IFRS Convergence Project, the Nature of Accounting Standards, and Financial Reporting Quality Assma M
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Florida International University FIU Digital Commons FIU Electronic Theses and Dissertations University Graduate School 6-22-2016 Essays on the U.S. GAAP-IFRS Convergence Project, the Nature of Accounting Standards, and Financial Reporting Quality Assma M. Sawani Florida International University, [email protected] DOI: 10.25148/etd.FIDC000784 Follow this and additional works at: https://digitalcommons.fiu.edu/etd Part of the Accounting Commons Recommended Citation Sawani, Assma M., "Essays on the U.S. GAAP-IFRS Convergence Project, the Nature of Accounting Standards, and Financial Reporting Quality" (2016). FIU Electronic Theses and Dissertations. 2537. https://digitalcommons.fiu.edu/etd/2537 This work is brought to you for free and open access by the University Graduate School at FIU Digital Commons. It has been accepted for inclusion in FIU Electronic Theses and Dissertations by an authorized administrator of FIU Digital Commons. For more information, please contact [email protected]. FLORIDA INTERNATIONAL UNIVERSITY Miami, Florida ESSAYS ON THE U.S. GAAP-IFRS CONVERGENCE PROJECT, THE NATURE OF ACCOUNTING STANDARDS, AND FINANCIAL REPORTING QUALITY A dissertation submitted in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY in BUSINESS ADMINISTRATION by Assma M. Sawani 2016 To: Acting Dean Jose M. Aldrich College of Business This dissertation, written by Assma M. Sawani and entitled Essays on the U.S. GAAP- IFRS Convergence Process, the Nature of Accounting Standards, and Financial Reporting Quality, having been approved in respect to style and intellectual content, is referred to you for judgment. We have read this dissertation and recommend that it be approved. Elio Alfonso Ali Parhizgari Antoinette Smith Changjiang Wang Steve W. Lin, Major Professor Date of Defense: June 22, 2016 The Dissertation of Assma M. Sawani is approved. Acting Dean Jose M. Aldrich College of Business Andres G. Gil Vice President for Research and Economic Development and Dean of University Graduate School Florida International University, 2016 ii © Copyright 2016 by Assma M. Sawani All rights reserved. iii DEDICATION I dedicate this thesis to my parents, Mustafa and Amal Sawani. Without their duaas, patience, understanding support and most of all love, the completion of this work would not have been possible. iv ACKNOWLEDGMENTS I wish to give thanks and praise first and foremost to Allah for giving me the strength and fortitude to complete this degree. I wish to thank my family in particular my parents, brother, Ali, whose support was essential to my completion of this dissertation and sister, Abrar, who tirelessly collected data with me. I wish to express my deep gratitude and thanks to Dr. Steve Lin, for his dedication, guidance and enthusiasm in helping me develop my proposal and making this dissertation possible. I would also like to thank the many professors at Florida International University’s School of Accounting for their encouragement and guidance throughout the last four years as I worked toward completion of my degree. I would also like to thank my fellow graduate students in the accounting program for their comradery and support. Finally, I want to thank the KPMG Foundation for awarding me the Minority Accounting Doctoral Scholarship for the duration of my time as graduate student. v ABSTRACT OF THE DISSERTATION ESSAYS ON THE U.S. GAAP-IFRS CONVERGENCE PROJECT, THE NATURE OF ACCOUNTING STANDARDS, AND FINANCIAL REPORTING QUALITY by Assma M. Sawani Florida International University, 2016 Miami, Florida Professor Steve W. Lin, Major Professor In this dissertation, I examine the changes to the nature of the accounting paradigms of U.S. GAAP and International Financial Reporting Standards (IFRS) over the course of the U.S. GAAP and IFRS convergence project. I further examine whether the changes to the nature of IFRS following convergence impacts the financial reporting quality. The motivation for this study is to provide an initial review of the progress of the convergence process between U.S. GAAP and IFRS that aims to converge both sets of standards towards more principles-based paradigms. The ultimate goal of the convergence process was the development of globally recognized high quality financial reporting standards (FASB, 2002) and the development of principles-based accounting standards was identified as an essential component of such a goal. Extant literature and professional practice agree that U.S. GAAP is more rules-based whereas IFRS is more principles-based. Thus, both the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) agreed that the convergence process would be an ideal vehicle to converge both sets of standards towards more principles-based paradigm. I document that over the course of the convergence project, vi the underlying accounting paradigm of U.S. GAAP has remained consistent whereas the accounting paradigm of IFRS has become more rules-based. Amendments to existing International Standards and newer standards added over the course of the convergence have moved IFRS towards a more rules-based nature which was not the intended outcome of the convergence process. I further examine if the changes in rules vs. principles-based nature of IFRS has impacted the accounting quality. Using a firm level instrument developed in Folsom et al. (2016) that measures the extent to which firms rely on principles-vs –rules-based accounting, standards I find a relation between firm reliance on principles-based standards and earnings persistence. I also find an association between firm reliance on principles-based standards and earnings ability to predict future cash flows as well as concurrent returns. More, importantly the results of my study provide initial evidence that these associations are significantly manifested in the post- convergence period. iii TABLE OF CONTENTS CHAPTER PAGE I. INTRODUCTION .........................................................................................................1 II. NATURE OF ACCOUNTING STANDARDS .............................................................4 II.1 Introduction ...........................................................................................................4 II.2 IFRS, U.S. GAAP and the Convergence Project ..................................................9 II.2.1 U.S. GAAP and Standards Setting ...................................................11 II.2.2 IFRS and Standard Setting ...............................................................14 II.2.3 U.S. GAAP and IFRS Convergence Project ....................................18 II.3 Hypothesis Development ...................................................................................24 II.4 Variable Measures and Sample ..........................................................................26 II.4.1 Rules-Based Continuum Score (RBC) .............................................28 II.4.2 Derivation of RBC1 and RBC2 ........................................................32 II.4.3 Validation of RBC Measure .............................................................34 II.5 Results ................................................................................................................36 II.5.1 Graphical Analyses ..........................................................................36 II.5.2 Statistical Analyses ..........................................................................40 II.5.3 Additional Analysis ..........................................................................42 II.6 Summary and Future Research ..........................................................................43 III. IMPACT OF CONVERGENCE PROJECT ON EARNINGS INFORMATIVENESS ..............................................................................................45 III.1 Introduction .......................................................................................................47 III.2 Literature Review ..............................................................................................49 III.2.1 Nature of Accounting Standards and Management Discretion ..........................................................................................49 III.2.2 Nature of Accounting Standards and Earnings Informativeness ................................................................................51 III.3 Research Design...............................................................................................53 III.3.1 Firm Level Measure of Reliance on Principles-Based IFRS .....................................................................53 III.3.2 Research Design and Test Models .................................................56 III.3.3 Control Variables ...........................................................................59 III.4 Sample Selection and Descriptive Statistics ...................................................59 III.5 Results .............................................................................................................63 III.5.1 Earnings Persistence Equation (3) .................................................63 III.5.2 Earnings Informativeness Equation (4) ........................................65 III.5.3 Current Earnings and Concurrent Annual Returns Equation (5) .....................................................................................67 viii III.5.4 Additional Tests .............................................................................68 III.6 Summary