Journal of Accounting and Public Policy 26 (2007) 1–38
www.elsevier.com/locate/jaccpubpol
Differences between domestic accounting
standards and IAS: Measurement,
determinants and implications
Yuan Ding a,1, Ole-Kristian Hope b,*, Thomas Jeanjean c,
Herve´ Stolowy c
a China Europe International Business School, Shanghai, China
b Rotman School of Management, University of Toronto, Toronto, Canada
c HEC School of Management, Paris, France
Abstract
This study analyzes determinants and effects of differences between Domestic
Accounting Standards (DAS) and International Accounting Standards (IAS). We use
an extensive list of differences between DAS and IAS to create two indices, absence
and divergence. Absence measures the extent to which the rules regarding certain
accounting issues are missing in DAS but are covered in IAS. Divergence applies in cir-
cumstances where the rules regarding the same accounting issue differ in DAS and IAS.
It measures the extent of differences between DAS-based rules and IAS-based rules.
Using a sample of 30 countries for 2001, we show that absence is (mainly) determined
by the importance of the equity market and ownership concentration, while divergence is
positively associated with the level of economic development and the importance of the
accounting profession, but is constrained by the importance of equity markets. Our
* Corresponding author. Tel.: +1 416 946 3610; fax: +1 416 971 3048.
E-mail addresses: dyuan@ceibs.edu (Y. Ding), okhope@rotman.utoronto.ca (O.-K. Hope),
jeanjean@hec.fr (T. Jeanjean), stolowy@hec.fr (H. Stolowy).
1 The research was conducted when the first author was affiliated with HEC School of
Management, Paris.
0278-4254/$ - see front matter Ó 2006 Elsevier Inc. All rights reserved.
doi:10.1016/j.jaccpubpol.2006.11.001

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Y. Ding et al. / Journal of Accounting and Public Policy 26 (2007) 1–38
analysis suggests that a higher level of absence implies more opportunities for earnings
management and for decreases in firm-specific information to investors. A larger diver-
gence from IAS is associated with richer firm-specific information in capital markets.
Ó 2006 Elsevier Inc. All rights reserved.
Keywords: International accounting differences; Institutional factors; Earnings management; Sy-
nchronicity
1. Introduction
Although accounting standards are important determinants of financial
reporting quality, they differ across countries. A commonly held belief is that
such differences reduce the quality and the relevance of accounting informa-
tion. Proponents of harmonized international standards claim that if all firms
follow the same set of accounting standards, external financial reports of firms
would provide more uniform disclosures and more useful accounting informa-
tion to investors (e.g., Purvis et al., 1991). The recent initiatives to harmonize
(or converge) accounting standards across countries and to adopt a uniform set
of International Accounting Standards (IAS) have received considerable atten-
tion from investors, regulators, and academics worldwide.2 Prior research
reveals that complex institutional factors influence financial reporting quality
(e.g., Ball, 2001). The purpose of our study is twofold. First, we investigate
the impact of cross-country variations in institutional frameworks on the dif-
ferences between domestic accounting standards (DAS) and International
Accounting Standards (IAS). Second, we explore how these differences impact
financial reporting quality.
Adoption of IAS has been controversial and heavily debated (Flower, 1997;
Zeff, 1998). Nonetheless, the mandatory adoption of IAS/IFRS by the Euro-
pean Union3 and the formal commitment by the US Financial Accounting
Standards Board (FASB) and the International Accounting Standards Board
(IASB) to converge US GAAP with IAS, have clearly contributed to the accep-
tance of IAS in many parts of the world. However, accounting standards exist
in a mosaic of complex institutional frameworks, rather than in isolation.
Changing one piece of the mosaic may or may not be the optimal solution if
other institutions stay unchanged (Ball, 2001; Hope, 2003a; Hope et al.,
2006). Therefore, it is important to consider the influence of institutional
2 We refer to these standards as International Accounting Standards (IAS) because our research
is based on accounting standards promulgated by the International Accounting Standards
Committee (IASC) before its transformation into the International Accounting Standards Board
(IASB) and before the introduction of International Financial Reporting Standards (IFRS).
3 Publicly listed EU companies must apply IAS/IFRS from fiscal year 2005.

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Y. Ding et al. / Journal of Accounting and Public Policy 26 (2007) 1–38
3
frameworks on the differences between DAS and IAS when we investigate
implications of such differences on financial reporting quality.
Prior studies and surveys (e.g., Price Waterhouse International, 1973, 1975,
1979; Ordelheide and Semler, 1995) often interpret international accounting
differences as different options adopted by different nations to address the same
accounting issue. Such interpretation matches the concept of divergence that we
use in this paper (explained in Section 2). Few studies, however, have examined
the comprehensiveness of a given set of accounting standards in comparison
with another set of standards, which corresponds to the concept of absence
in this study.
Our aim is to analyze international accounting differences by developing a
more refined measure of differences between DAS and IAS. Our primary
source for accounting differences is ‘‘GAAP 2001: A Survey of National
Accounting Rules Benchmarked against International Accounting Standards’’
(Nobes, 2001). Based upon this survey, we construct a comprehensive list of
items to develop the measures used in this paper – absence and divergence.
Absence measures the differences between DAS and IAS as the extent to which
the rules regarding certain accounting issues are missing in DAS while covered
in IAS. Divergence measures the difference between DAS and IAS as the extent
to which the rules regarding the same accounting issue differ in DAS and IAS.
We discuss our measures in detail in Section 2.
Using a sample of 30 countries for the year 2001, we investigate the role of
five institutional factors (legal origin, ownership concentration proxying for
governance structure, economic development, importance of the accounting
profession, and importance of the equity market) as potential determinants
of the differences between DAS and IAS. Our evidence suggests that the
importance of the equity market is negatively related to the absence of
DAS. There is a positive association between ownership concentration and
absence. We find a significant positive relation between divergence and the
level of economic development and the importance of the accounting profes-
sion, and a negative association between divergence and the importance of
equity market. Our results are consistent with Ball’s (2001) argument that
merely changing accounting standards without effecting corresponding
improvements in capital market regulations/development may not yield
desired results in financial reporting quality. Our study also provides evidence
that emerging countries often treat IAS as a reference point and as a way to
upgrade their accounting system. Until recently, nations that were more eco-
nomically developed have been more likely to be confident in exploring inde-
pendent accounting options that are appropriate for their own context,
without referring to IAS. As a result, their DAS often diverge from IAS. Fur-
thermore, in nations with highly developed equity markets we are more likely
to observe standards similar to IAS – this is consistent with the idea that IAS
are developed primarily for publicly traded firms.

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We explore the implications of the differences between DAS and IAS for
earnings management and for synchronicity of stock prices. Our main find-
ings indicate that absence creates an opportunity for more earnings manage-
ment and exacerbates the synchronicity of stock prices. Greater synchronicity
implies that the idiosyncratic component of the changes in prices is small,
thus stock prices are mainly affected by market-wide stock price swings. This
result is consistent with the theory developed by Jin and Myers (2006), who
find that lack of transparency (opaqueness) leads to a high level of synchro-
nicity. We also find that divergence between DAS and IAS has no effect on
earnings management and is negatively related to the synchronicity of stock
prices.
Our paper makes three contributions to the accounting literature. First,
based upon a survey published by major accounting firms, we construct two
measures of international accounting differences which measure differences in
two dimensions – absence and divergence. To our knowledge, absence is new
to the literature. Prior research has examined accounting differences similar
to our divergence notion; hence our contribution is to provide complementary
evidence to prior research (using a new data source).
Second, our study investigates the complex relation between institutional
factors and the differences between DAS and IAS (whereas Ding et al.
(2005) study the same differences in relation to culture). International harmo-
nization of accounting standards is not necessarily a desirable goal because
country-specific GAAP evolves in a political process that balances country-spe-
cific economic environments, users, and objectives (Ball, 2001). Our study is
another step towards better understanding of whether institutional factors
and accounting standards are substitutes or complements. The determinant
analysis results suggest that simply adopting IAS may not necessarily improve
national accounting systems unless countries also implement profound changes
in economic development policy, corporate governance mechanisms, and
financial market functioning in general. This evidence is consistent with Ball
et al. (2003) study on earnings quality in four Asian countries.
Third, by exploring the implications of variations in absence and divergence
on financial reporting quality, our study indirectly highlights the advantages
and disadvantages of adopting a uniform set of IAS worldwide. While a high
degree of absence harms financial reporting quality, our study provides evi-
dence that divergence from IAS has no impact on financial reporting quality.
To a certain extent, divergence enables information preparers to disclose more
firm-based information.
The remainder of the paper is organized as follows. Section 2 reviews the lit-
erature and describes our measures. Section 3 examines determinants of
absence and divergence while Section 4 reports and discusses the results for
the implications of absence and divergence on financial reporting quality.
Finally, Section 5 concludes.

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Y. Ding et al. / Journal of Accounting and Public Policy 26 (2007) 1–38
5
2. Measurement of differences between IAS and DAS
2.1. Literature on international accounting differences
Various data sources have been used to measure international accounting
differences in prior literature. Most of the prior studies interpret international
accounting differences as different options adopted by different nations for the
same accounting issues, which corresponds to our divergence concept.
During the 1970s, Price Waterhouse International (1973, 1975, 1979) pub-
lished a series of studies on accounting principles and reporting practices
worldwide. These surveys have been used in several international accounting
studies (e.g., Frank, 1979; Nair and Frank, 1980, 1981; McKinnon and Janell,
1984; Doupnik and Taylor, 1985).
After summarizing the information on accounting practices in 15 countries
(European countries, the US, Canada, Australia and Japan) plus IAS, Ordelhe-
ide and Semler (1995) proposed the TRANSACC Reference Matrix. They pro-
vide a comprehensive examination of different accounting methods. However,
their analysis is restricted to the most developed countries in the world. Several
subsequent studies have used this matrix to classify countries according to their
accounting differences (e.g., d’Arcy, 2001).
Ashbaugh and Pincus (2001) seek to determine whether the variation in
accounting standards across national boundaries relative to IAS has an impact
on financial analysts’ ability to forecast non-US firms’ earnings accurately.
They analyze accounting practices in 13 countries to identify differences in
countries’ accounting standards relative to IAS, covering both differences in
disclosure requirements and measurement methods for IAS versus sample
firms’ domestic GAAP in 1993. Besides Ashbaugh and Pincus (2001), few
extant studies examine the comprehensiveness of a given set of accounting
standards in comparison with others.4 There is thus ample room for improve-
ment in the existing measurements for international accounting differences.
2.2. Framework of analysis
Prior studies have established some links between differences in accounting
standards across countries and financial reporting quality (e.g., Alford et al.,
1993; Joos and Lang, 1994; Auer, 1996) (see Fig. 1). In a widely cited study,
Alford et al. (1993) find that differences in countries’ accounting standards
affect the informativeness of reported financial information. The effect of insti-
tutional factors on financial reporting quality has also been studied (see Fig. 1).
4 Bushman et al. (2004) examine links between corporate transparency and several corporate
governance variables using an international sample.

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Y. Ding et al. / Journal of Accounting and Public Policy 26 (2007) 1–38
Institutional factors
Ball, Robin and Wu (2003)
Determinants
Implications
Quality of
accounting
information
Different accounting
standards across
countries
Alford et al. (1993), Joos and Lang (1994), Auer (1996)
Studied in the literature
Not yet studied
Fig. 1. Traditional framework of analysis.
Ball et al. (2003) operationalize financial reporting quality as timely incorpora-
tion of economic losses and find that it is misleading to classify countries by
accounting standards, ignoring reporting incentives, as is common in some
international accounting textbooks, transparency indexes, and IAS advocacy.
They argue that financial reporting quality is sensitive to the incentives of both
managers and auditors. Such incentives are in turn highly influenced by the
interplay between market and political forces in the reporting jurisdiction. In
the present study, we examine similar issues while investigating the interrela-
tions between institutional factors and differences in accounting standards.
We further explore the implications of these differences (i.e., absence and diver-
gence) on the financial reporting quality. The dotted lines in Fig. 1 delineate
our approach to studying the indirect impact of institutional factors on the
financial reporting quality.
Fig. 2 illustrates the extensions we make to the general framework in the
extant literature. First, we disaggregate differences between DAS and IAS as
absence and divergence. Appendix A provides a detailed description of these
constructs. Second, we examine institutional determinants that influence each
of these accounting difference constructs.5 Third, we examine how absence
5 We acknowledge the difficulty in jointly examining determinants and economic consequences of
variations in accounting standards. We also are not claiming that we are able to completely control
for any potential simultaneity between determinants of differences and consequences of such
differences.

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Y. Ding et al. / Journal of Accounting and Public Policy 26 (2007) 1–38
7
Divergence of DAS
Alford et al.(1993), Joos and Lang (1994), Auer (1996)
from IAS
Determinants
Implications
Institutional factors
Quality of
accounting
Ball, Robin and Wu (2003)
information
Determinants
Implications
Absence of DAS
vis-à-vis IAS
Implications
Studied in the literature
Not yet studied
Fig. 2. Proposed framework.
and divergence impact financial reporting quality proxies by earnings manage-
ment and synchronicity of stock prices.
2.3. Measurement of absence and divergence
As explained above, in this study we examine differences between local
GAAP and IAS. IAS is a logical benchmark to use due to its growing impor-
tance worldwide. Similar to US GAAP, the IAS framework has an investor
focus (where ‘‘investor’’ is defined broadly), and consequently our measures
– absence and divergence – should be interpreted with this in mind.
One of the contributions of this study is that we construct a measure of dif-
ferences between national GAAP and IAS based on the survey ‘‘GAAP 2001:
A Survey of National Accounting Rules Benchmarked against International
Accounting Standards’’. This survey was published jointly by seven large audit
firms: Andersen, BDO, Deloitte Touche Tohmatsu, Ernst & Young, Grant
Thornton, KPMG and PricewaterhouseCoopers. In this survey, partners in
the large audit firms in 62 countries were asked to benchmark their local writ-
ten requirements against some 80 accounting measures, focusing on both
national and international standards in force for the financial reporting period
ending 31 December 2001 (Nobes, 2001).6 We believe that it is reasonable to
use the year 2001 as an observation point to help understand the impact of
institutional factors on the differences between DAS and IAS, because these
6 Street (2002) provides a summary of the GAAP 2001 survey.

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Y. Ding et al. / Journal of Accounting and Public Policy 26 (2007) 1–38
observed differences occur at the last point in time prior to the mandated adop-
tion of IAS in major jurisdictions.
In the survey, the resulting high-level summaries were prepared by identify-
ing, for the selected accounting measures, those instances in which a country
would not allow (because of inconsistent requirements) or would not require
(because of missing or permissive requirements) the IAS treatment (Nobes,
2001). For each country, the accounting differences with IAS are listed in four
categories:
1. Accounting may differ from what is required by IAS because of the absence
of specific rules on recognition and measurement.
2. No specific rules requiring disclosures.
3. Inconsistencies between national and IAS rules that could lead to differences
for many enterprises in certain areas; and
4. In certain enterprises, these other issues could lead to differences from IAS.
Based on these four differences we define absence to be items from group one
or two and divergence to be items from group three or four. Appendix A
describes the measurement of absence and divergence in greater detail.
2.4. Sample
We have information on accounting differences for 62 countries. However,
our sample size is constrained by data availability and varies between 31 and 39
countries, depending on the regressions. To enable the readers to compare
more easily across tables, we have identified a common sample across all tests
(N = 30) and report primary results based on the common sample. Results
based on the expanded sample are not displayed for the sake of simplicity,
but results using the maximum sample size are consistent with those reported
and generally stronger.
Table 1, Panel A, details the sample and shows how absence and divergence
scores are distributed across sample countries included in our multivariate
tests. Countries are classified in a decreasing order of absence and divergence.
Our sample captures a significant proportion of the world economy; it repre-
sents 66.2% of the total World GDP in 20017 with 30 countries.8 Our view is
that until 2001, the differences between DAS and IAS in our sample countries
reflected the natural development of accounting standards without mandated
adoption of IAS (e.g., the European Union in 2005). Countries (e.g., Kenya)
adopting the entire set of IAS (i.e., adopting the entire set of IAS with limited
7 Source: World Development Indicators database, online version, World Bank, GDP, PPP
(current international $) (NY.GDP.MKTP.PP.CD).
8 93.5% of the total World GDP in 2001 with 62 countries.

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Y. Ding et al. / Journal of Accounting and Public Policy 26 (2007) 1–38
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Table 1
Absence and divergence
Country
Absence
Country
Divergence
Panel A: Scores by country
Greece
40
Germany
38
Austria
34
Italy
37
Denmark
31
Austria
36
Malaysia
30
United Kingdom
35
Thailand
29
France
34
Portugal
29
Ireland
34
Spain
28
Belgium
32
Pakistan
27
Finland
31
Italy
27
Spain
29
Philippines
24
Greece
28
Finland
22
Sweden
26
Belgium
22
Canada
25
Australia
22
Netherlands
25
France
21
Taiwan
23
Taiwan
19
United States
23
Japan
18
Japan
22
India
18
Portugal
22
Germany
18
Australia
21
Korea, Rep.
15
Denmark
21
Hong Kong, China
14
India
19
Indonesia
12
Norway
17
Sweden
10
Hong Kong, China
15
Netherlands
10
Pakistan
14
South Africa
7
Philippines
14
Norway
7
Singapore
14
United States
6
Malaysia
13
Singapore
4
Indonesia
12
Canada
4
Korea, Rep.
11
United Kingdom
0
Thailand
7
Ireland
0
South Africa
1
Number of countries
30
Number of countries
30
Average
18.3
Average
22.6
Absence
Divergence
Panel B: Pearson correlations
Divergence
0.0738
p-values
(0.698)
N
30
30
CIFAR disclosure index
À0.5876
À0.1165
p-values
(0.001)
(0.563)
N
27
27
Disclose (Ashbaugh and Pincus)
À0.0975
0.2415
p-values
(0.763)
(0.450)
N
12
12
(continued on next page)

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Y. Ding et al. / Journal of Accounting and Public Policy 26 (2007) 1–38
Table 1 (continued)
Absence
Divergence
Methods (Ashbaugh and Pincus)
0.3414
0.6922
p-values
(0.278)
(0.013)
N
12
12
Accrual index (Hung)
À0.5427
À0.2078
p-values
(0.016)
(0.393)
N
19
19
Two-sided p-values in parentheses
Absence of specific rules on recognition, measurement and disclosure in DAS compared to IAS
(= number of absent items per country out of 111).
Divergence: Inconsistencies that could lead to differences for many or some enterprises between
DAS and IAS (number of divergent items per country out of 111).
Panel A is presented by decreasing order of absence and divergence.
CIFAR disclosure index: Measure of the quantity of financial information in financial reports, an
index created by examining and rating companies’ annual reports on their inclusion or omission of
85 items (Center for International Financial Analysis & Research – CIFAR, 1995).
Methods index: Captures the differences in financial reporting standards across countries relative to
IAS due to the differences in measurement methods (Ashbaugh and Pincus, 2001).
Accrual index designed by equally weighting 11 accrual-related accounting standards for each
country (Hung, 2001).
prior standards in place) could be argued to represent artificial conformity.
These countries are not included in our 30-country sample. In addition, Table
1, Panel A shows that there is no country with a zero score in divergence. Coun-
tries with a zero score in absence, the UK and Ireland, on the other hand, are
obviously countries that do not fit with the concept of artificial conformity.
On average, 18.3 items out of the 111 (16.45%) covered by IAS are absent
from DAS. For 22.6 items (20.69% of the items) IAS and DAS prescribe dif-
ferent solutions. Median values are similar. As of 2001, in spite of the conver-
gence of accounting standards, DAS and IAS differ on more than one third of
the items. Note that for each measure, we observe a large variance across coun-
tries with values ranging from 0 to 40 for absence and from 1 to 38 for
divergence.
2.5. Validity and interest of the measures absence and divergence
In Table 1, Panel B, we compute the Pearson correlation between
absence, divergence, and existing measures used in the literature. First, we
find there is a low and insignificant correlation between these two measures
in our 30-country sample. We also find an insignificant correlation between
absence and divergence in our 62- and 39-country samples. Consequently, the
absence of correlation between absence and divergence is not sample specific.
This finding confirms that our constructs measure two different dimensions

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Document Outline

• Differences between domestic accounting standards and IAS: Measurement, determinants and implications
  • Introduction
  • Measurement of differences between IAS and DAS
    • Literature on international accounting differences
    • Framework of analysis
    • Measurement of absence and divergence
    • Sample
    • Validity and interest of the measures absence and divergence
  • Determinants of differences between DAS and IAS
    • Factors potentially associated with absence
      • Legal origin11
      • Ownership concentration
      • Economic development
      • Importance of the accounting profession
      • Importance of equity markets
    • Factors potentially associated with divergence
      • Legal origin
      • Ownership concentration
      • Economic development
      • Importance of the accounting profession
      • Importance of equity markets
    • Research design
      • Determinants of absence
      • Determinants of divergence
    • Findings and interpretation of determinants of variations in absence and divergence
      • Descriptive statistics
      • Correlations
      • Multivariate results
  • Implications of differences between DAS and IAS
    • Hypothesis development
      • Earnings management
      • Synchronicity
    • Research design
      • Implications of absence and divergence on earnings management
      • Implications of absence and divergence on synchronicity
    • Empirical findings
      • Earnings management
        • Descriptive statistics
        • Correlations
        • Multivariate results
      • Synchronicity
        • Descriptive statistics
        • Correlations
        • Multivariate results
  • Conclusions
  • Acknowledgements
  • Details of the measurement of Absence and Divergence
  • Japan (Source: Nobes, 2001, p. 75)
  • References

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