Nature and duration of the accounting differences between Italian and US GAAP : A case study on conservatism

Purpose – The purpose of this paper is to focus on alternative accounting treatments over time to assess their impact on the level of conservatism in a comparison between Italian local accounting standards and USA generally accepted accounting principles. Design/methodology/approach – A case study approach is adopted to investigate the accounting adjustments applied to net income and shareholders’ equity as included in the Form 20-F reconciliations reported by all Italian firms that were listed on a US market over the period 1999-2008. The methodology first introduced by Gray (1980) and frequently applied over 30 years to several international accounting comparisons is adapted to recognise a multi-period dimension of the accounting choice. In particular, the paper focuses on the temporal dimension of such adjustments in order to capture their attitude to reverse or become permanent over time. Findings – The results show that the level of conservatism is visible in the measurement of net assets and is shaped by the prevailing directional effect of accounting adjustments that become permanent as their cumulative reversal is persistently delayed. Such a phenomenon arises and intensifies when the accounting differences relate to recurring operations and/or to long-term assets and liabilities. Amongst them those violating the clean surplus relation are the most controversial as they not only generate a permanent effect in the measurement of net assets, but also an opposite permanent effect in the measurement of earnings. Research limitations/implications – Future empirical research confirming the finding in different contexts might overcome the limitations of a relatively poor number of observations in the case study. Practical implications – Identifying the duration of alternative accounting treatments is relevant to assess their potential influence on stakeholders decision-making process as this may steadily influence the future of a firm. Originality/value – The propositions express a sequence of the timing effects of alternative accounting treatments that highlight the primary role of permanent differences in persistently shaping the value of net assets and help to provide a less erratic interpretation of the level of conservatism.