Michael, okay, good for industrial companies, but what about financial assets. From what I have read on IFRS, there is more flexibility to value assets, and to revalue them upward. That’s my concern.

David, it’s simple: LIFO inventory accounting is not permitted under IFRS, but it is under GAAP. Since LIFO reports COGS at current market prices, it results in a more accurate income statement at the expense of the balance sheet, where LIFO inventories are valued at historical (not current) cost. With FIFO, it’s just the opposite.

Furthermore, since LIFO uses higher COGS (assuming rising prices over time), it lowers pre-tax earnings and taxes, thus *increasing* after-tax earnings (a major reason why almost every US company uses it). Any blanket claim to the contrary is misleading at best.

You write, “Earnings will rise, but P/E multiples will fall. The intial net effect should be small.”

I don’t understand this. Is this some kind of statistical look at PEs of companies using IFRS versus similar companies using GAAP? My guess is the PE stays the same and the stock price and earnings go up.

So company A, a NYSE or NASDAQ listed company, changes from GAAP to IFRS on say July 1, 2009. Analysts will upgrade before the date expecting reported earnings to rise. The stock price starts to increase in anticipation. By the time the quarter ends,, Sep’09 and the company reports earnings, the stock price is up so that the PE is in line with what it was before the company announced it was changing to IFRS.

My guess is during the transition period US listed stocks trade the same whether they use IFRS or GAAP. And that since IFRS stocks earnings are higher, their stock prices will be higher. I just don’t believe Wall Street is that concerned about earnings quality as you are or other value inverstors are. There are just way too many examples of earnings chicanery and executive spin. First example that comes to mind is AMAT. Horrible earnings and sales performance, but stock is doing fine, PE is high, based on hype about future sales growth to solar fab chip companies. Mind you this future has been promised for about 1 year.

I’m thinking of putting out a shorter summary of the most significant differences between GAAP and IFRS. There are some places where IFRS is an improvement, such as the handling of goodwill. But the main difference is how it is applied: in the hands of good men, a flexible, principles-based accounting system will be used for good, and it will improve accuracy of reporting. But we live in a world where some manipulate accounting results in the short run to achieve their goals. I prefer a rigid accounting standard, more rigid than GAAP, that may be less accurate at points, but gives a neutral rendering of results that financial analysts can then make their “ad hoc” adjustments to, in order to correct the inadequacies.

Marty Whitman has commented on this for years. Flexible accounting systems lessen comparability of results across companies.

PS — I’m not sure IFRS gives a more accurate balance sheet. I will study it, though.

Certainly, the manner in which some items are reported is descretionary. For example, (if I remember correctly) dividends can be reported under investing or operating sections of the cash flow statement under IFRS. Sure, it’s flexible, but does it really hurt analysts? Your calculator has + and – buttons. I’m not an accountant, but from what I have seen of IFRS, these are the “flexible” parts that you are talking about. They have no material affect.

As I mentioned at Barry’s site, inventory is a big deal and as we both pointed out (me at Barry’s site), this will cause differences in balance sheets and income statements. With IFRS, you get a more accurate balance sheet; with USGAAP, you get a more accurate income statement. You pick.

Your job probably requires that you interpret financial statements. Are you just an old dog that doesn’t want to learn new tricks?