Firms registered outside the United States and listed on a primary U.S. exchange may provide their U.S. shareholders with financial statements prepared under their domestic (non-U.S.) generally accepted accounting principles (GAAP). The Securities and Exchange Commission requires such firms to reconcile their reported earnings and shareholders' equity to U.S. GAAP as part of a Form 20-F filing. These reconciliations provide a set of precise measures of the differences created by alternative accounting practices.
We use the reconciliations to address two questions. First, are the differences in U.S. and non-U.S. GAAP as summarized in the aggregate reconciliations of earnings and shareholders' equity value-relevant? That is, do the reconciliations of accounting data to U.S. GAAP increase the associations between accounting measures and price (or return)? Second, which differences in accounting practices summarized in the components of the reconciliation are value-relevant? Addressing this second question provides insights about the value-relevance of alternative measurement practices. In this study, we evaluate the questions by considering the associations between accounting earnings and security returns, and whether the accounting measures partially explain the ratio of market price to book value of shareholders' equity. Our results suggest that the reconciliations of earnings and shareholders' equity to U.S. GAAP are value-relevant. This result holds both in aggregate and for some specific components, in particular property revaluations and capitalized goodwill.