Which is More Useful for Predicting Future Cash Flows, Ias-Earnings or U.S. Gaap-Earnings?

Posted: 26 Aug 2003

Date Written: July 16, 2003

Abstract

International Accounting Standards (IAS) are emerging as a credible alternate to the U.S. GAAP. The European Commission recently issued a regulation requiring about 7,000 European public companies to adopt IAS by 2005. Similarly, the Australian government has proposed that IAS be adopted from 2005. The SEC has called for research to evaluate whether IAS should be permitted for cross-border offerings of securities in the U.S. In response, this study examines which set of standards, IAS or U.S. GAAP, produces earnings and accruals that are more useful in predicting future operating cash flows. The sample consists of firms from twelve countries representing years 1992 through 2002. The results indicate that when observations are pooled across the years 1992 through 2002, U.S. GAAP-earnings outperform IAS-earnings. However, when the time period is partitioned into before (1992-1999) and after the development and approval of core IAS standards (2000-2002), the ability of the U.S. GAAP-earnings to beat IAS-earnings is observed only for the years 1992-1999. A similar pattern is observed when earnings are disaggregated into cash flow and accruals. In short, the findings support the notion that the gap between IAS and U.S. GAAP, in terms of predictive ability, is shrinking. Overall, the findings bode well for the on-going development of IAS as a credible global accounting standard.

Keywords: international accounting standards, U.S. GAAP, cash flows, earnings, accruals

JEL Classification: M41, M44, M47

Suggested Citation

Krishnan, Gopal, Which is More Useful for Predicting Future Cash Flows, Ias-Earnings or U.S. Gaap-Earnings? (July 16, 2003). Available at SSRN: https://ssrn.com/abstract=425040

Gopal Krishnan (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

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