by Ryan DesJardin
  Equity Analyst, Gradient Analytics LLC (a Sabrient Systems company)

Here at Gradient Analytics, our focus extends far beyond domestic equity research. We are known to cover an extensive group of publicly traded companies whose shares trade on a wide variety of stock exchanges around the globe. Our team of analysts must be vigilant in keeping up to date on new accounting standards issued by both the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). More importantly, our team must be able to understand and reconcile the key differences between United States Generally Accepted Accounting Principles (US GAAP) and International Financial Accounting Standards (IFRS) in order to accurately assess a firm's financial health.

The ability to distinguish between these accounting standards has become a crucial skill for investors as IFRS has become increasingly prevalent in recent years. Today, more than 140 countries worldwide (including the United States in some cases) either permit or require the use of IFRS for publicly listed companies. In fact, there are only three major capital markets that don't currently mandate the use of IFRS for publicly traded firms: Japan, China, and the United States. Since 2010, when Japan added IFRS to its list of approved standards for domestic issuers, more than a third of companies traded on the Tokyo Stock Exchange have either adopted or instituted a plan to adopt IFRS in the near future. China continues to amend its accounting standards to broadly align with IFRS. Furthermore, domestic investors must also be mindful of the variations between accounting standards as the SEC allows foreign issuers to report under IFRS despite trading on US exchanges.

In 2002, the FASB and IASB entered into the "Norwalk Agreement," which aimed to eliminate the many variations between US GAAP and IFRS. Since then, the boards have worked together to issue several accounting standard updates in an attempt to enhance the consistency and comparability of global accounting standards. Despite these ongoing efforts, many key dissimilarities remain between the two standards that present a number of obstacles to investors. This article uses earnings quality and fundamental perspectives to discuss key challenges while providing tips on evaluating a firm’s true earnings power.  Read on....