IMPACT OF DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ON PERCEIVED COMPANY PERFORMANCE

Grace O’Farrell
University of Winnipeg
Chunhui Liu
Khalifa University of Science, Technology & Research
Dedicated to the memory of Dr. Lee J. Yao
ABSTRACT
This research contributes to understanding of the impact of differences between
International Financial Reporting Standards (IFRS) and the United States of America’s Generally
Accepted Accounting Principles (US – GAAP) on perceived company performance, and how
investors assess those differences. Such impact is studied and illustrated through a case study of
Siemens AG’s 20-F form for fiscal year 2007. This case study recognizes and addresses the different
ratio results from the two different standards and the impact the varying results may have on
investors.
The results reveal that perceived company profitability based on IFRS was higher than that
based on US- GAAP and that profitability measures based on US-GAAP are more value relevant.
US-GAAP income is found to be more conservative than IFRS income in European Union (EU) and
more valued by the market in this study. As a result, investors do not put as much emphasis on IFRS
earnings as they do on US-GAAP earnings. Market forces act in a way to keep the stock price of
Siemens the same in Germany and on the New York Stock Exchange (NYSE) through arbitrage.
These market forces will act as an equalizer even though IFRS earnings are not as strong, dollar
per dollar, as the US-GAAP earnings for Siemens. This may lead to lower earnings quality under
IFRS.