When deciding whether to use U.S. Generally Accepted Accounting Principles (U.S. GAAP) or International Financial Reporting Standards (IFRS) in financial reports filed with the U.S. Securities and Exchange Commission (SEC), many non-U.S. companies listed in the U.S. behave like savvy "shoppers." This is the core finding of a recent study from the Hebrew University of Jerusalem.

"This research shows that the choice of accounting standards is not merely a regulatory compliance issue," said Dr. Heylel-li Biton, lead researcher at the Hebrew University Business School, in a statement released on July 2 when the findings were published. "It reflects deliberate decisions by companies to align their financial reporting with their operational goals and cost structures." The study was published in The International Journal of Accounting.

2007 Regulatory Change: Lowered Barrier to IFRS Adoption

Since 2007, it has become easier for so-called foreign private issuers (FPIs) to use IFRS in the U.S. That year, the SEC eliminated the requirement for FPIs to reconcile financial reports prepared under IFRS with U.S. GAAP. According to a report at the time by the law firm Cleary Gottlieb, this change was expected to pave the way for more foreign companies to list in the U.S., facilitate cross-border mergers and acquisitions, and reduce reporting compliance costs.

Data Reveals: Most Companies Still Stick with U.S. GAAP, but a Clear Trend Toward Switching

Despite the relaxed regulatory environment, U.S. GAAP remains the long-term preference for many filers. The study sample covers 413 FPIs registered with the SEC between 1995 and 2015 that consistently reported financial data using the same accounting standards. Of these, the vast majority (325) used U.S. GAAP, 73 adopted IFRS, and only 15 used their home country's local version of GAAP.

However, an examination of the sample of non-U.S. companies that switched accounting standards after the 2007 IFRS reconciliation rule change reveals a "significant trend toward IFRS": 273 companies moved from local GAAP to IFRS, and 82 moved from U.S. GAAP to IFRS.

Industry Preferences: Capital-Intensive Sectors Favor IFRS

The study found that some companies may prefer U.S. GAAP because it is associated with lower compliance costs, but the data shows that companies from capital-intensive industries such as manufacturing and mining tend to favor IFRS. Of the 261 mining FPIs in total, 127 chose to report using IFRS, 108 used local GAAP, and only 26 chose U.S. GAAP.

Standard Differences and Regulatory Risk: Companies' Strategic Considerations

Companies may make preferences based on the rules that affect them. The study notes that regarding accounting guidance for revaluation of long-term assets, IFRS "provides more options to convey underlying value; therefore, companies with more assets are more likely to choose IFRS to implement fair value accounting."

But from an enforcement perspective, U.S. GAAP may offer certain advantages because the SEC is less familiar with IFRS, increasing the likelihood that companies reporting under IFRS will receive comment letters and requests for amendments, the report says.

In recent years, the Financial Accounting Standards Board (FASB), which sets and updates GAAP rules, has gradually moved away from efforts to converge U.S. GAAP with international standards, CFO Dive previously reported.