The Effects of Out-of-Regime Guidance on Auditor Judgments

About Appropriate Application of Accounting Standards

H. Scott Asay
Tippie College of Business
The University of Iowa

Tim Brown
Department of Accountancy
College of Business
University of Illinois at Urbana-Champaign

Mark W. Nelson
Johnson Graduate School of Management
Cornell University

and

T. Jeffrey Wilks
School of Accountancy
Marriott School of Management
Brigham Young University

October 2015

_______________
*We thank professionals from the accounting firms who participated in this study. We also thank
Ken Trotman, two anonymous reviewers, Rob Bloomfield, Scott Emett, Kurt Gee, Ling Harris,
Bob Libby, Bob Swieringa, Hun Tong Tan, David Wood, Mark Zimbelman, workshop
participants at Cornell University and Brigham Young University, a reviewer from the American
Accounting Association Accounting, Behavior and Organizations Sections Mid-Year Meeting
and a reviewer for the American Accounting Association International Accounting Sections
Mid-Year Meeting for comments on an earlier draft of this paper.
 The Effects of Out-of-Regime Guidance on Auditor Judgments
About Appropriate Application of Accounting Standards

Abstract

Accountants making judgments with respect to a particular set of standards are increasingly
aware of standards from other reporting regimes that offer additional or conflicting guidance. In
fact, IFRS encourages reliance on out-of-regime standards when IFRS lacks guidance. This
paper reports the results of two experiments which provide evidence that auditors in such
circumstances are vulnerable to contrast effects, whereby reporting judgments under IFRS are
systematically influenced away from the accounting treatment supported by standards from
another regime (U.S. GAAP). Contrast effects are observed (1) when out-of-regime standards are
considered before making a reporting judgment under IFRS and (2) when out-of-regime
standards are applied as local GAAP for a subsidiary of a foreign parent that reports under IFRS.
We also find that contrast effects are reduced when auditors believe IFRS lacks guidance. These
results have implications for financial statement preparers and auditors in the current incomplete-
convergence environment.

Keywords: Convergence; Contrast effect; IFRS, Financial accounting standards; Audit judgment
 The Effects of Out-of-Regime Guidance on Auditor Judgments
About Appropriate Application of Accounting Standards

1. Introduction

The FASB and IASB have pursued a convergence agenda for a number of years, but

many standards are not yet converged, and full convergence appears unlikely (Katz 2014). Even

for U.S. and IFRS standards that are largely converged, various differences continue to exist

between U.S. GAAP and IFRS (Ernst & Young 2013; SEC 2011a), creating an environment of

incomplete convergence that is likely to persist in the future. As a consequence, accounting firms

and educators commonly train auditors and teach students both U.S. GAAP and IFRS,

highlighting the differences between these two sets of standards (Ernst & Young 2013;

PricewaterhouseCoopers 2014; Spiceland et al. 2016). In addition, auditors often service clients

that report under IFRS as well as clients that report under U.S. GAAP (AICPA 2014). Reflecting

the breadth of knowledge necessary to practice in this environment, the CPA exam tests

knowledge of key differences between accounting under U.S. GAAP and IFRS.1 In this paper,

we examine how auditors application of standards from one regime (IFRS) is affected by the

consideration of standards from another regime (the U.S.) when the convergence between those

two sets of standards is incomplete.

Considering U.S. standards could affect how auditors apply an unconverged IFRS

standard in one of two ways. First, considering a U.S. standard could result in a positive relation

between the application of the unconverged IFRS standard and the implications of the U.S.

standard (an assimilation effect), such that auditors make judgments under IFRS that are closer

1
The first specific topic indicated in the AICPAs Content and Skill Specifications for the Uniform CPA
Examination with respect to the Financial Accounting and Reporting (FAR) section is Identify and understand the
differences between financial statements prepared on the basis of accounting principles generally accepted in the
United States of America (U.S. GAAP) and International Financial Reporting Standards (IFRS) (AICPA 2013, p.
12).

1
to judgments that would be made under the U.S. standard. This might occur if auditors rely on

U.S. GAAP in order to resolve some level of ambiguity inherent in the IFRS standard. In fact,

the IFRS hierarchy suggests that standards promulgated by other standard setting bodies are an

appropriate source of guidance under such circumstances (Mackenzie et al. 2011). Second,

considering a U.S. standard could result in a negative (inverse) relation between the application

of the unconverged IFRS standard and the implications of the U.S. standard (a contrast effect),

such that auditors make judgments under IFRS that are further from judgments that would be

made under the U.S. standard. This might occur if auditors interpret the difference between the

standards as supporting a more extreme interpretation of the IFRS standard. For example,

knowing that U.S. GAAP prohibits the reversal of inventory impairments might increase

auditors willingness to reverse an inventory impairment under IFRS (which allows these

reversals under some circumstances).2

We examine how U.S. GAAP affects application of an unconverged IFRS standard in

two between-subjects experiments. In both experiments, experienced auditors assess the

appropriateness of reversing a previously recognized inventory impairment under IFRS. U.S.

GAAP and IFRS are not converged with respect to this issue, with U.S. GAAP prohibiting

reversal (ASC Topic 330) but IFRS allowing reversal if the reasons for the impairment no longer

exist (IAS No. 2).

Experiment One uses a 1 x 2 between-subjects design, varying whether participants

consider U.S. GAAP with respect to inventory reversals before judging the appropriateness of

impairment reversal under IFRS. We find evidence of a significant contrast effect. Participants

2
As defined by Bless and Schwarz (2010), an assimilation effect occurs whenever [a] judgment reflects a positive
relation between the implications of some piece of information and the resulting judgment (p. 320). A contrast
effect occurs whenever [a] judgment reflects a negative (inverse) relation between the implications of some piece
of information and the resulting judgment (p. 320). These terms describe the direction of contextual influences;
they are silent with respect to the specific underlying process (p. 320).

2
judge impairment reversal as more appropriate under IFRS when they first consider that the U.S.

standard prohibits reversal.

Experiment One operationalizes a setting in which incomplete convergence exists

because IFRS explicitly reaches a different conclusion from U.S. GAAP. However, incomplete

convergence also can exist when U.S. GAAP provides detailed guidance in an area but IFRS

does not (e.g., revenue recognition under ASC Subtopic 605-25 and IAS No. 18). In Experiment

Two we investigate whether contrast effects also occur when IFRS lacks guidance. We expect

this setting to be less likely to produce contrast effects, as auditors are likely to follow U.S.

GAAP when IFRS lacks guidance in order to reduce their exposure to regulatory and litigation

costs.

In addition, Experiment Two modifies the task used in Experiment One to further test the

generality of contrast effects. Specifically, as in Experiment One we vary whether participants

consider U.S. GAAP prior to applying IFRS. However, unlike in Experiment One, the

participants who first consider the appropriateness of U.S. GAAP in Experiment Two actually

judge the appropriateness of reversal of the inventory impairment under U.S. GAAP and then

judge the appropriateness of reversal under IFRS. This treatment is designed to reflect the real-

world setting in which subsidiaries of foreign firms first prepare their financial statements in

accordance with their local GAAP (AICPA 2014) before converting those financial statements to

be in accordance with the parent companys financial reporting regime. Thus Experiment Two

uses a 2 x 2 between-subjects design varying (1) whether participants first apply a U.S. standard

that prohibits inventory impairment reversals and (2) whether participants are instructed to

assume either (a) that the relevant IFRS standard indicates that inventory impairments can be

3
reversed when the reasons for impairment no longer exist or (b) that the IFRS standard lacks

guidance about impairment reversals.

Consistent with results from Experiment One, we find that participants who apply current

IFRS guidance display a contrast effect, judging the impairment reversal as more appropriate

under IFRS when they first judge the appropriateness of impairment reversal under the U.S.

standard. In addition, we find that this contrast effect is reduced when participants are asked to

assume that IFRS does not provide guidance about reversing inventory impairments in future

periods, but only for the subset of participants who do not know that IFRS actually allows

reversal of inventory impairments in practice. Participants who are familiar with the actual IFRS

standard exhibit a contrast effect regardless of whether they are asked to assume that IFRS

allows reversing inventory impairments or lacks guidance about impairment reversals. Overall,

these findings suggest that auditors are most likely to exhibit contrast effects when auditors are

familiar with both IFRS and U.S. GAAP and the two sets of standards provide conflicting

resolutions of an accounting issue. Auditors are less likely to exhibit a contrast effect when IFRS

does not provide guidance on a particular accounting issue.

These findings contribute to our understanding of how between-regime differences in

accounting standards can influence auditors application of those standards. Because educators,

firms, and regulators commonly highlight the key differences between standards, auditors are

likely to become increasingly aware of the differences between IFRS and U.S. GAAP. This

knowledge prepares auditors to work in a global environment where they often provide

assurance services for both IFRS and GAAP clients. While the SEC has taken steps to identify

differences between IFRS and U.S. GAAP, they acknowledge that their analyses are not

informative as to the effect that the differences have or may have in practice (SEC 2011a, p. 8).

4
We provide timely evidence about these potential effects. Our results might also generalize to

other situations in which incomplete convergence exists (e.g., differences between PCAOB and

IAASB auditing standards), as well as to circumstances in which standards change over time

within a given regime.

Our findings also contribute to the literature on implementation guidance. IFRS guides

suggest that U.S. GAAP can effectively serve as implementation guidance for IFRS in some

circumstances (e.g., Mackenzie et al. 2011), and IAS 8 explicitly encourages referencing out-of-

regime guidance when IFRS lacks clear guidance. While prior work indicates that practitioners

who consult examples in implementation guidance use a similarity-based process that results in

an assimilation effect (Clor-Proell and Nelson 2007), our findings suggest that considering a U.S.

standard leads to a contrast effect when that U.S. standard conflicts with IFRS. This latter result

highlights the importance of IAS No. 8, which indicates that firms can rely on out-of-regime

guidance to develop accounting policies when IFRS lacks specific guidance on an issue but

should not consider out-of-regime guidance when that guidance conflicts with IFRS.

2. Background and Hypothesis Development

Awareness of Out-of-Regime Guidance

As the accounting profession becomes more global in nature, auditors are becoming more

familiar with out-of-regime standards and how these standards differ from their home GAAP.

For example, accountants from one regime might intentionally consult standards from another

regime to guide their application of their home GAAP. In fact, IAS No. 8 and IFRS guides

recommend consulting U.S. GAAP when IFRS lacks guidance (e.g., Mackenzie et al. 2011).

Even when auditors do not intentionally consult out-of-regime guidance, they are likely to

possess knowledge of those outside standards. The SEC has published papers analyzing IFRS

5
and comparing it to U.S. GAAP (SEC 2011a; SEC 2011b), and auditing firms produce

documents outlining differences between U.S. GAAP and IFRS (e.g., Ernst & Young 2013;

PricewaterhouseCoopers 2014) as well as cases that require auditors to determine how to account

for the same transaction under U.S. GAAP and IFRS (e.g., Deloitte 2013). Similarly, accounting

textbooks highlight specific differences in standards between regimes (e.g., Spiceland et al.

2016), and the CPA exam tests knowledge of differences between U.S. GAAP and IFRS

(AICPA 2013).

Understanding the differences between U.S. GAAP and IFRS prepares auditors for the

wide array of global opportunities now offered by international accounting firms, as working

abroad early in a career is becoming relatively common.3 As U.S. auditors take advantage of

these opportunities, they are increasingly being assigned to IFRS clients given that many

multinational companies no longer file under U.S. GAAP (AICPA 2014). Similarly, as

businesses continue to become more global, auditors may have responsibility for financial

reports prepared under different reporting regimes for subsidiary companies (AICPA 2014).

Potential Effects of Out-of-Regime Standards

As a result of this globalization of accounting standards, auditors often will be aware of

the implications of out-of-regime standards when determining the appropriate accounting

treatment for their clients event or transaction. While its possible that out-of-regime standards

could be disregarded and have no effect, prior research suggests that accessible information is

often difficult to ignore (e.g. Kennedy 1995; Early, Hoffman and Joe 2008), so some effect from

knowledge of differences in standards is likely. Two possible effects could result when

differences between standards are salient.

3
For example, PwCs website indicates that employees often take advantage of these global opportunities three to
four years after joining [the firm] (http://www.pwc.com/gx/en/careers/early-pwc-international-challenge-
programme-intro.jhtml; accessed 8/29/2014).

6
 First, an assimilation effect could occur, whereby the interpretation of the target standard

is influenced towards the interpretation indicated by the out-of-regime standard. Assimilation

would be evident if considering a U.S. standard results in an application of IFRS that is closer to

the treatment indicated by the U.S. standard. Assimilation might occur when a U.S. standard is

used to resolve some of the ambiguity inherent in the IFRS standard, and as discussed above, the

IFRS hierarchy suggests that standards promulgated by other standard setting bodies are an

appropriate source of guidance under certain circumstances (Mackenzie et al. 2011). Similar

effects arise when practitioners intentionally apply implementation guidance within a particular

regime (Clor-Proell and Nelson 2007).

Second, a contrast effect could occur, whereby the interpretation of the target standard is

influenced away from the treatment indicated by the out-of-regime standard. Contrast effects

have been observed in a variety of contexts. For example, Sumer and Knight (1996) provide

evidence of contrast effects in performance evaluation. Bhattacharjee et al. (2007) investigate

contrast effects in judgments of the quality of internal audit departments by auditors who work

on multiple clients, providing evidence that judgments about a current client are influenced away

from judgments about a previous client. Maletta and Zhang (2012) provide evidence of contrast

effects in earnings forecasts by investors who receive earnings preannouncements by multiple

firms.

Prior research in psychology indicates that assimilation effects are likely to occur when

two objects are moderately dissimilar, but contrast effects become increasingly likely as two

objects become more dissimilar. For example, Herr (1986) provides participants with a

description of a target person and finds that participants perceive that target person as being more

(less) hostile when participants are primed with an example of a moderately hostile (moderately

7
non-hostile) individual an assimilation effect. However, participants perceive that target person

as being less (more) hostile when participants are primed with an example of an extremely

hostile (extremely non-hostile) individual a contrast effect. Similarly, Mussweiler and

Bodenhausen (2002) find that when people make a judgment about another person, they

spontaneously compare that person to themselves. This comparison process results in

assimilation effects when the individual belongs to a similar in-group but results in contrast

effects when the individual belongs to a dissimilar out-group.

Prior demonstrations of contrast effects regard two objects that are considered from the

perspective of a single standard. For example, auditors contrast multiple internal audit

departments (Bhattacharjee et al. 2007) and investors consider multiple firms (Maletta and

Zhang 2012). We extend this literature to examine the potential for assimilation and contrast

effects when one object (a single accounting case) is considered from the perspective of two

standards (IFRS and U.S. GAAP) that potentially could apply to it.

When IFRS conflicts with U.S. GAAP, the two sets of standards are highly dissimilar.

For example, IFRS permits the reversal of previously impaired inventory when the cause of the

impairment no longer exists, but reversal is not allowed under U.S. GAAP. As a result, we

expect that IFRS judgments made after considering conflicting U.S. guidance will result in

judgments that are further from the accounting indicated by that conflicting guidance (a contrast

effect).

H1: When IFRS conflicts with U.S. GAAP, considering a related U.S. standard prior to
applying IFRS will result in a negative (inverse) relation between auditor
judgments under IFRS and the accounting treatment indicated by the related U.S
standard.

8
 H1 focuses on the setting where both IFRS and U.S. GAAP provide guidance about a

particular accounting issue, but the guidance has different implications regarding the appropriate

accounting treatment. However, incomplete convergence between accounting standards from

different regimes can also arise when one regime provides guidance for a particular accounting

issue while another regime does not. For example, IFRS might lack specific guidance on a

particular issue for which U.S. GAAP provides explicit guidance. Contrast effects may be less

likely to occur in this setting for two reasons.

First, the IFRS hierarchy explicitly encourages practitioners to consider out-of-regime

guidance when IFRS lacks guidance on a particular accounting issue (IAS No. 8). Accordingly,

auditors might intentionally opt to keep their judgments consistent with U.S. GAAP in order to

reduce exposure to potential regulatory and litigation costs.

Second, prior work in psychology and accounting suggests that this setting is likely to be

less amenable to contrast effects. As discussed above, contrast effects are more likely to occur

when two objects are highly dissimilar. When IFRS and U.S. GAAP provide conflicting

guidance for a particular accounting issue, the two standards are highly dissimilar as they

explicitly indicate different accounting treatments for a given issue. When IFRS lacks guidance,

the accounting treatment indicated by U.S. GAAP constitutes an acceptable alternative under

IFRS. As such, the difference between the two standards is less stark. Prior research in

psychology and accounting suggests the potential for assimilation effects in such settings. For

example, individuals who do not know the answer to a difficult question exhibit the anchoring-

and-adjustment heuristic, using the answer to a related question as a starting point. While prior

work indicates that individuals routinely exhibit this type of strategy, the adjustments tend to be

insufficient, leading to responses that are predictably biased towards their starting point (e.g.,

9
Tversky and Kahneman 1974; Quattrone 1982; Epley 2004). Also, auditors who seek out

implementation guidance may overstate the similarity between their circumstance and those

depicted in the guidance, tending to rely more on the guidance than is justified (Clor-Proell and

Nelson 2007). This finding is consistent with prior work in psychology suggesting that

similarity-based processes tend to produce assimilation effects (see Mussweiler 2003).

To the extent that auditors rely on U.S. GAAP to reduce their exposure to regulatory and

litigation costs when IFRS lacks guidance on a particular issue, this reliance should work against

the contrast effect predicted by H1. Similarly, to the extent that IFRS and U.S. GAAP are less

dissimilar when IFRS lacks guidance rather than explicitly conflicting with U.S. GAAP, the

contrast effect predicted by H1 should be less likely to occur.

H2: When IFRS lacks guidance on a particular accounting issue, considering a related
U.S. standard prior to applying IFRS will be less likely to result in a negative
(inverse) relation between auditor judgments under IFRS and the accounting
treatment indicated by the related U.S standard, relative to when IFRS conflicts
with U.S. GAAP.

We test our hypotheses in two experiments. Experiment One provides a test of H1, and

Experiment Two provides tests of both H1 and H2.

3. Experiment One: Method

Experiment One tests H1 by examining judgments under IFRS when the guidance

provided by IFRS and U.S. GAAP clearly contradict.

Participants

A total of 31 experienced U.S.-based auditors from an international auditing firm

participate in Experiment One.4 All participants complete the experimental instrument in an

4
U.S. auditors are increasingly expected to know and understand the differences between U.S. GAAP and IFRS and
sometimes audit foreign companies filing under IFRS. Thus, even when a company reports under IFRS (as in our

10
online format as a part of their firms training program. The auditors have an average of 14 years

of experience (16 managers, 1 senior manager, 9 directors, and 5 partners).

Design

Participants read a case about a hypothetical company that had previously recorded an

inventory impairment. In the current period, there is some indication that the circumstances

surrounding the impairment may have changed. Nevertheless, uncertainty remains about whether

the company will be able to capitalize on the change in circumstances (see Appendix A). Given

this background, participants evaluate the appropriateness of reversing the inventory impairment

under IFRS. The IFRS standard allows reversing previously recognized inventory impairments

when the circumstances that previously caused inventories to be written down below cost no

longer exist or when there is clear evidence of an increase in net realizable value because of

changed economic circumstances. The language of the standard is adapted from IAS 2 (see

Appendix B).

We manipulate in a 1 x 2 between-subjects design whether participants consider a related

U.S. standard before or after applying the IFRS standard. The U.S. standard prohibits reversing

previously recognized inventory impairments, and the language of the standard is adapted from

SAB Topic 5.BB (see Appendix B). Participants who consider U.S. GAAP before applying IFRS

(denoted U.S. GAAP Before) read the U.S. standard before viewing the case materials and

evaluating the appropriateness of reversing the impairment under IFRS. This condition is

analogous to a situation where the differences between IFRS and U.S. GAAP are salient to

practitioners. For example, as discussed previously, educators, firms, regulators, and the C.P.A.

exam now highlight key differences between IFRS and U.S. GAAP. Participants who do not

experiments), U.S.-based auditors might perform the work. In these situations, the related U.S. standard is likely to
be highly accessible.

11
consider U.S. GAAP before applying IFRS (denoted U.S. GAAP After) only read the U.S.

standard after viewing the case materials and evaluating the appropriateness of reversing the

impairment under IFRS. This condition is analogous to a situation where the differences between

IFRS and U.S. GAAP are not salient to practitioners, providing us with a benchmark that allows

us to test how considering U.S. GAAP affects participants evaluations of the appropriateness of

the impairment reversal under IFRS.5

Materials & Procedure

Figure 1 depicts the experimental procedures for Experiment One. Prior to accessing any

other case materials, participants in the U.S. GAAP Before condition view both the U.S. standard

and the IFRS standard. They also rate the general appropriateness of reversing a previously

recorded inventory impairment under each standard if the circumstances surrounding the

impairment significantly improve. Participants in the U.S. GAAP After condition view only the

IFRS standard and rate the general appropriateness of reversing a previously recorded inventory

impairment under IFRS if the circumstances surrounding the impairment significantly improve.

Participants respond on an 11-point scale anchored at 1 (Not at all appropriate) and 11 (Very

appropriate). Participants are then informed that the next page will contain information about a

company that reports under IFRS.

[INSERT FIGURE 1]

On the following page, participants are provided with background information about a

hypothetical company (XYZ Company) that is based in Germany and reports according to

IFRS (see Appendix A). The company recorded an inventory impairment in the previous quarter,

5
Our participants are experienced auditors who are familiar with U.S. GAAP, so the relevant U.S. standard is likely
to be accessible to some degree for all participants. Our manipulation is designed to affect the extent to which
participants consider that standard. Any tendency for all participants to spontaneously consider U.S. GAAP biases
away from finding a significant treatment effect.

12
and the best estimate of the inventorys net realizable value is above its current book value.

However, the case also indicates that there is uncertainty about whether the reasons for the

impairment have changed sufficiently to warrant reversing the inventory impairment. Thus,

while IFRS indicates that an inventory impairment can be reversed in some circumstances, there

is uncertainty about whether a reversal is appropriate.

The next screen repeats the IFRS standard, reminds participants that XYZ presents their

financial statements in accordance with IFRS, and asks participants to judge the appropriateness

of reversing the inventory impairment by responding to the following question: How

appropriate would it be for XYZ to write up inventory by $1,760, increasing it to $62,845?6

Participants respond on an 11-point scale anchored at 1 (Not at all appropriate) and 11 (Very

appropriate). This measure serves as our primary dependent variable.

Next, participants in the U.S. GAAP After condition are provided with the U.S. GAAP

rule and assess the general appropriateness of reversing a previously recorded inventory

impairment under U.S. GAAP. This provides a check on comprehension of the U.S. standard,

and also ensures that subsequent questions are answered holding constant that all participants

have judged appropriateness under both the U.S. GAAP and IFRS standards.

Finally, we elicit participants beliefs about how their application of the IFRS standard

would be affected by U.S. GAAP. Specifically, using the same IFRS standard that participants

previously used to evaluate the case, we ask participants to evaluate how their judgment under

that IFRS standard would be affected by U.S. GAAP under two scenarios: one in which U.S.

GAAP prohibits impairment reversals and one in which U.S. GAAP is identical to the IFRS

standard (i.e., converged). Participants choose one of three responses: (1) they would apply IFRS

no differently in these two scenarios, (2) they would be more likely to reverse inventory
6
Numbers are in thousands, and participants are told the amount of the write-up is considered material.

13
impairments under IFRS if U.S. GAAP prohibits impairment reversals, or (3) they would be

more likely to reverse inventory impairments under IFRS if U.S. GAAP is identical to the IFRS

standard.7 This question is intended to elicit participants beliefs about how the lack of

convergence between U.S. standard would affect the application of IFRS. The experiment

concludes with debriefing and demographic questions.

4. Experiment One: Results

Manipulation Check

To test whether participants appropriately considered the implications of the U.S.

standard, we ask participants to rate the appropriateness of reversing an inventory impairment

under the U.S. standard on an 11-point scale (1 = Not at all appropriate; 11 = Very

appropriate). Given that the U.S. standard prohibits impairment reversals, we view 1 as being

the most appropriate answer. Twenty-six participants out of 31 answered 1 (84 percent). The

median response was 1.00 and the mean response was 1.77, indicating that most participants

understood the U.S. standard.8

Test of Hypothesis

H1 predicts that participants will provide higher appropriateness ratings for reversing the

inventory impairment under IFRS when they consider U.S. GAAP before applying IFRS. Table

1, Panel A provides descriptive statistics (means, standard deviations, and medians) for

participants appropriateness judgments. As indicated in Panel B, we find that participants who

consider U.S. GAAP before applying IFRS provide significantly higher appropriateness

judgments (mean = 5.000) than participants who do not (mean = 2.786) (p < 0.001, one-sided).

7
The order of the two scenarios and the order of the responses are counterbalanced.
8
Excluding the 5 participants who did not answer 1 on this question does not alter our results. Including U.S.
GAAP appropriateness judgments as a covariate in our analyses of judgments under IFRS does not alter any of our
statistical inferences, nor is the variable itself statistically significant.

14
This result indicates that when U.S. GAAP and IFRS conflict, considering U.S. GAAP prior to

making a judgment under IFRS leads experienced auditors to exhibit a contrast effect (i.e., they

view the inventory impairment reversal as more appropriate under IFRS than they would have

otherwise).

[INSERT TABLE 1]

Within-Subjects Analyses

After providing appropriateness judgments, participants indicate their beliefs about the

effect of a U.S. standard that is different from IFRS rather than converged with IFRS. Seventy-

four percent of participants indicate that their appropriateness judgment under IFRS would not

be influenced by whether the U.S. standard is converged with the IFRS standard (no effect).

Nineteen percent indicate that their appropriateness judgment under IFRS would be higher if

U.S. GAAP were converged to also allow reversals of inventory impairments when

circumstances have changed (an assimilation effect). Only seven percent indicate that their

appropriateness judgment under IFRS would be higher when U.S. GAAP prohibits reversals of

inventory impairments (a contrast effect).9 This analysis suggests that the contrast effect is likely

unintentional. More than ninety percent of our participants report that a difference between U.S.

GAAP and IFRS either has no bearing on their judgments under IFRS or would lead to

assimilation, and relatively few participants anticipate that a contrast effect should occur when

U.S. GAAP prohibits the reversal of inventory impairments.10

9
These proportions are significantly different from chance (p < 0.001, two-sided), with fewer participants expecting
a contrast effect than no effect (p < 0.001, one-sided). Inferences are unchanged if we include these beliefs as a 3-
level categorical covariate in our analyses of IFRS appropriateness judgments, and the belief measure is
insignificant as a covariate and does not interact with our manipulation (all p > 0.400, two-sided). Inferences are also
unchanged if we exclude individuals whose belief was consistent with contrast effects.
10
These results also suggest that participants do not interpret the difference between U.S. GAAP and IFRS as a
signal encouraging the reversal of inventory impairments under IFRS (beyond what is warranted by the standard on
its own). If this were the case, we would expect participants to indicate that reversing an inventory impairment

15
5. Experiment Two: Background and Method

In Experiment One, we find evidence of a contrast effect, with auditors judgments under

IFRS further from the accounting indicated by a conflicting U.S. standard when they consider the

U.S. standard before applying IFRS. In Experiment Two, we test an important boundary

condition of this effect. Specifically, we examine whether this contrast effect is less likely to

occur when IFRS lacks detailed guidance rather than providing guidance that directly conflicts

with IFRS (as predicted by H2). In addition, we modify our manipulation of U.S. GAAP

consideration to capture two settings in which consideration of U.S. GAAP is likely to vary

systematically in practice. We describe these aspects of Experiment Two in greater detail below.

Except as noted, the method used in Experiment Two is the same as that used in Experiment

One.

Participants

Participants are 79 auditors with an average of 5.82 years of work experience (12 senior

associates, 60 managers, 3 senior managers, and 4 unspecified). All participants completed the

experimental instrument in an online format and were randomly assigned to experimental

conditions.11

Design

Experiment Two uses a 2 x 2 between-subjects design, manipulating U.S. GAAP

consideration (varying whether participants judge the appropriateness of a reversal under U.S.

GAAP before judging the appropriateness of the reversal under IFRS) and IFRS Guidance

would be more appropriate under IFRS when U.S. GAAP prohibits impairment reversals (where this signal exists)
than if U.S. GAAP were to be converged with IFRS (where this signal does not exist).
11
We recruited participants in two ways. Sixteen participants are alumni of a top accounting program (44 were
invited to participate, for a response rate of 36.4%). Sixty-three participants were contacted by a national partner for
an international accounting firm (96 were invited to participate, for a response rate of 65.6%). All inferences are
unchanged if we include the source of participants (alumni vs. firm) as a covariate in our analyses.

16
(varying whether IFRS lacks or provides guidance about the appropriateness of reversing

inventory impairments).

Manipulation of U.S. GAAP Consideration

In Experiment One, we manipulated consideration of U.S. GAAP by varying whether

participants consider the U.S. standard before or after viewing the case materials and evaluating

the appropriateness of reversing the impairment under IFRS. This manipulation reflects the idea

that educators, firms, regulators, and the C.P.A. exam now highlight key differences between

IFRS and U.S. GAAP, thereby increasing knowledge of out-of-regime guidance. However, the

extent to which out-of-regime guidance is considered and applied before applying within-regime

guidance also can vary situationally. For example, companies that are subsidiaries of foreign

firms commonly prepare their financial statements in accordance with their local GAAP (AICPA

2014). Then, as part of the consolidation process, these companies convert those financial

statements to be in accordance with the parent companys financial reporting regime.12 We

operationalize that setting in Experiment Two. Participants in the U.S. GAAP Consideration

condition judge the appropriateness of a reversal under U.S. GAAP and then judge the

appropriateness of a reversal under IFRS. Participants in the No U.S. GAAP Consideration

condition only judge appropriateness under IFRS.

Guidance Manipulation

Participants in the IFRS Guidance condition are provided with the same IFRS guidance

used in Experiment One (i.e., with IFRS explicitly indicating that inventory impairments can be

reversed if the circumstance surrounding the impairment has changed). Participants in the No

IFRS Guidance condition are asked to assume that IFRS provides no guidance relating to the

12
Discussions with current and former auditors indicate that firms often first prepare financial statements in
accordance with their local GAAP because local lenders often prefer financial statements prepared in accordance
with local accounting practices.

17
appropriateness of reversing a write-down of inventory in future periods. All other descriptions

of U.S. and IFRS standards are identical to those used in Experiment One.13

Materials & Procedure

Figure 2 depicts the experimental procedures for Experiment Two. Participants begin by

reading background information about XYZ Company and a prior-period inventory impairment

(see Appendix C). Participants in the U.S. GAAP Consideration condition are then told that

XYZ prepares financial statements in accordance with U.S. GAAP at the end of each quarter.

They are provided with the U.S. standard related to reversing inventory impairments and are

asked to rate the appropriateness of reversing the impairment under U.S. GAAP.

[INSERT FIGURE 2]

All participants are then informed that XYZ is a subsidiary of a multinational company

that prepares its financial statements in accordance with IFRS. To facilitate the consolidation

process, XYZ prepares financial statements in accordance with IFRS at the end of each quarter

and provides this information to its parent company. Participants in the IFRS Guidance

condition are provided with the same IFRS standard as in Experiment One, which indicates that

inventory impairments can be reversed in some circumstances. Participants in the No IFRS

Guidance condition are asked to assume that IFRS provides no guidance relating to the

appropriateness of reversing a write-down of inventory in future periods. All participants then

rate the appropriateness of reversing the inventory impairment under IFRS.

Next, participants answer a series of follow-up questions. First, participants answer a

13
A potential concern with this approach is that participants in the No IFRS Guidance condition have to assume that
IFRS provides no guidance on this issue when in fact it does. We alleviate this concern by measuring participants
knowledge of the actual guidance provided by IFRS in practice, as we discuss below. An alternative approach would
have been to vary the accounting issue so that participants in the No IFRS Guidance condition made a judgment for
an issue on which IFRS actually lacks guidance. However, this alternative approach would have confounded the
presence/absence of guidance with the accounting issue and case information.

18
manipulation check about the content of the IFRS standard in the study. Second, we measure

whether participants know whether IFRS actually allows reversing inventory impairments if the

circumstance that gave rise to the original impairment has changed. Third, participants answer a

within-subjects question indicating their beliefs about the effect of a U.S. standard that is

different from, rather than converged with, the IFRS standard in the study (depending on

condition). Finally, participants answer demographic questions.

6. Experiment Two: Results

Manipulation Check

As a manipulation check, participants were asked to indicate what they were asked to

assume about IFRS in the study (i.e., whether IFRS provides guidance that allows reversing an

inventory impairment if the circumstance that gave rise to the original impairment has changed).

Seven out of 79 (8.9%) participants answered the manipulation check incorrectly. Inferences are

unchanged if we exclude these participants.

Tests of Hypotheses

H1 predicts that first judging appropriateness under the U.S. standard will lead to higher

appropriateness ratings for impairment reversals under IFRS when the guidance provided by

U.S. GAAP and IFRS conflict. H2 predicts that this contrast effect will be less pronounced when

IFRS lacks detailed guidance (see Figure 3, Panel A). Table 2, Panel A provides descriptive

statistics (means, standard deviations, and medians) for participants appropriateness judgments.

[INSERT FIGURE 3]

[INSERT TABLE 2]

Figure 3, Panel B graphs our results. As indicated in Table 2, Panel B, we find that

participants judge the reversal as being more appropriate when IFRS provides guidance allowing

19
the reversal under some circumstances than when IFRS provides no guidance (p < 0.001, two-

sided).14 Consistent with H1, we find that participants judge the reversal as being more

appropriate under IFRS when they first apply U.S. GAAP and then convert to IFRS than when

they only apply IFRS (p = 0.004, one-sided). However, inconsistent with our expectations, this

effect is not moderated by the content of the IFRS standard (p = 0.440, two-sided). This result

does not support H2.

Our expectation was that the contrast effect would be reduced when IFRS lacked

guidance. However, many of the experienced auditor participants likely were aware that, in

practice, IFRS provides guidance that conflicts with U.S. GAAP. Because these participants

might have difficulty ignoring the actual IFRS standard, our IFRS Guidance manipulation is

likely less effective for these participants. To examine this possibility, we use debriefing data in

which we assessed participants knowledge of whether IFRS allows reversals of inventory

impairments in current practice. Twenty-seven participants (34%) knew that IFRS allows

reversals under some circumstances while fifty-two participants (66%) did not know IFRS

allows reversals under some circumstances.15 Results for these two subsamples are depicted in

Figure 3, Panel C.

We find that participants knowledge of IFRS indeed influences participants

appropriateness judgments, as we find a three-way interaction among U.S. GAAP Consideration,

IFRS Guidance, and participants knowledge of IFRS (p = 0.027, one-sided, not tabulated).

14
Prior literature suggests that imprecise standards provide more latitude for practitioners to take aggressive
accounting positions (e.g., Cuccia, Hackenbrack, and Nelson 1995) but that practitioners dont always take
advantage of this latitude because of concerns about second-guessing (e.g., Agoglia, Doupnik, and Tsakumis 2011).
While the directional effect of our IFRS standard manipulation seems consistent with this idea, it is important to
note that our case materials did not provide any incentive for aggressive reporting.
15
Of the fifty-two participants who did not know IFRS allows reversals under some circumstances, forty-six
indicated they were unsure whether IFRS allows reversals while six believed that IFRS does not allow reversals. All
inferences are unchanged if we exclude the six participants who believed that IFRS does not allow reversals.
Participants level of experience did not affect whether they knew or did not know that IFRS allows reversals under
some circumstances (p = 0.709, two-sided).

20
Table 3 presents results for participants who did not know that IFRS actually allows reversing

inventory impairments under some circumstances. For these participants, we find support for

both H1 and H2. Specifically, we find that the effect of U.S. GAAP Consideration is moderated

by whether IFRS lacks guidance or provides guidance that conflicts with U.S. GAAP (p = 0.054,

one-sided). Among these participants, applying U.S. GAAP before applying IFRS leads to a

contrast effect when IFRS provides guidance that conflicts with U.S. GAAP (p = 0.014, one-

sided), but not when IFRS lacks guidance (p = 0.886, two-sided).

Among participants who knew that IFRS allows reversing inventory impairments under

some circumstances, we find that the reversal is judged as being more appropriate when

participants apply U.S. GAAP before applying IFRS (p = 0.004, one-sided, not tabulated). The

IFRS Guidance manipulation does not affect their appropriateness judgments as a main effect (p

= 0.333, two-sided, not tabulated) or as an interaction with U.S. GAAP Consideration (p = 0.189,

two-sided, not tabulated). Together, these results indicate that the IFRS Guidance manipulation

affected participants judgments differently when they knew the actual IFRS standard,

suggesting they were unable to fully ignore that knowledge. As a consequence, these participants

exhibited a contrast effect independent of whether they are asked to assume that IFRS provides

guidance relating to the appropriateness of reversing a write-down of inventory in future periods.

[INSERT TABLE 3]

Within-Subjects Analyses

As in Experiment One, we also asked participants to judge whether they would be more

likely to reverse the inventory impairment if U.S. GAAP was different from IFRS, more likely to

reverse the inventory impairment if U.S. GAAP was converged with the IFRS standard (which

varied by condition), or whether there would be no difference. As was the case in Experiment

21
One, most participants do not anticipate a contrast effect in these settings, suggesting that the

observed contrast effect is unintentional.

7. Conclusion

This paper reports the results of two experiments that examine how U.S. GAAP affects

auditors judgments under IFRS when the two sets of standards are not fully converged. Results

from Experiment One provide evidence that when IFRS and U.S. GAAP provide conflicting

guidance, considering U.S. GAAP before applying IFRS produces judgments under IFRS that

are further from the treatment indicated by U.S. GAAP. Results from Experiment Two replicate

this result in a setting that mirrors a common circumstance in which subsidiaries first prepare

financial statements in local (U.S.) GAAP and then revise them to reflect parent (IFRS) GAAP

(AICPA 2014). In addition, we provide evidence that this contrast effect is reduced when IFRS

lacks guidance.

Our study provides timely evidence about the potential effects of out-of-regime guidance

when applying professional standards. Practitioners and standard setters have previously

recognized that U.S. GAAP might sometimes serve as appropriate implementation guidance for

vague IFRS standards (Mackenzie et al. 2011). However, our results indicate that U.S. GAAP

can also influence auditors judgments under IFRS in a manner that is unlikely to be intended by

them or standard setters. Specifically, our results indicate that auditors exhibit a contrast effect

when they consider out-of-regime guidance that directly conflicts with IFRS. This finding

underscores the wisdom of IAS No. 8, which explicitly states that firms should not consider out-

of-regime guidance that conflicts with IFRS. The finding of no contrast effect when IFRS lacks

guidance is consistent with IAS No. 8s indication that out-of-regime guidance can form a

reasonable basis for judgments under IFRS when IFRS lacks guidance.

22
 We see these results as indicating that auditors should be aware that knowledge of

alternative accounting standards could affect their judgment in predictable ways, even when they

do not believe that the alternative standards are relevant to their decision and do not think an

effect will occur. As U.S. GAAP (incompletely) converges with IFRS and as international

auditing standards follow a similar convergence process, important differences in standards are

likely to persist. As education and certification requirements continue to focus on key differences

between alternative standard-setting regimes, auditors are likely to be more aware of these

differences than has historically been the case. In addition, as audit teams become more global,

U.S. auditors will increasingly be called upon to audit international subsidiaries or affiliates

which report under IFRS. Under these circumstances, it is likely that outside standards will be

highly accessible as auditors make decisions. Therefore, we expect these effects to be relevant to

practice for the foreseeable future.

One limitation of our study is that we did not measure process data such as participants

weighting of the case facts or their beliefs about the benefits or costs of reversing vs. not

reversing the impairment. In addition, when IFRS lacks guidance, we cannot distinguish between

whether participants intentionally rely on U.S. GAAP (consistent with IAS 8) or unintentionally

rely on U.S. GAAP (e.g., an anchoring effect). Future research could shed additional light on the

specific process or processes underlying our results and investigate ways to reduce contrast

effects that occur when auditors and other practitioners apply professional standards. For

example, future work might examine whether these contrast effects can be reduced through

consultation with other auditors. Further, research could investigate whether assimilation

becomes increasingly likely as the similarity between standards increases or the distinctiveness

of the conclusions indicated by standards decreases. In particular, assimilation might be more

23
likely when standards both allow the same alternatives but differ in the extent to which they

allow them, as opposed to one standard precluding an alternative altogether. Finally, future

research could extend our findings from cross-sectional differences in standards from different

regimes to circumstances in which standards change over time within a given regime or for a

given standard, such that predecessor standards lead to assimilation or contrast effects in the

application of new, superseding standards.

24
 APPENDIX A
Case Information Experiment One

Background Information

XYZ Company has been manufacturing high-end sporting goods for over 20 years. Although
XYZ is based in Germany, it listed its stock on the New York Stock Exchange when it became a
public company in early 2001. XYZ presents their financial statements in accordance with
International Financial Reporting Standards (IFRS).

During the third quarter of 2010, demand had slowed significantly for one of XYZs primary
product lines. Therefore, XYZ recorded a $5,000 write-down of their inventory to the estimated
net realizable value. That write down reduced third quarter pre-tax income by $5,000.

You are considering the appropriate entry for the fourth quarter of 2010. During the fourth
quarter of 2010, the products of a primary competitor were responsible for several high-profile
injuries due to safety violations. XYZ now believes it may be able to recapture some of the
market and charge higher prices, although this outcome is not certain. The current book value
and estimated net realizable value are below:

Current Book Value (after $5,000 write- Current Estimated Net Realizable Value
down, in thousands) (in thousands)
$61,085 $62,845

If the company revalued inventory to $62,845, the write-up from $61,085 would be $1,760. This
amount is considered material.

According to XYZs business analysts, the best estimate of net realizable value is uncertain. The
competitors brand might not be significantly harmed by the safety violations, and even if it is
XYZ might not be able to capture the new market share. Thus, although the best estimate
indicates that inventory should be increased, there is uncertainty associated with the estimate of
value.

25
 APPENDIX B
Accounting Standards

U.S. Standard (Experiments One and Two):

Please assume that U.S. GAAP provides the following guidance relating to the
appropriateness of reversing a write-down of inventory in future periods:

[A] write-down of inventory to the lower of cost or market at the close of a fiscal period creates
a new cost basis that subsequently cannot be marked up based on changes in underlying facts
and circumstances.

IFRS Standard Guidance (Experiments One and Two):

Please assume that IFRS provides the following guidance relating to the appropriateness of
reversing a write-down of inventory in future periods:

A new assessment is made of net realizable value in each subsequent period. When the
circumstances that previously caused inventories to be written down below cost no longer exist
or when there is clear evidence of an increase in net realizable value because of changed
economic circumstances, the amount of the write-down is reversed (i.e. the reversal is limited to
the amount of the original write-down) so that the new carrying amount is the lower of the cost
and the revised net realizable value.

IFRS Standard No Guidance (Experiment Two):

Please assume that IFRS provides no guidance relating to the appropriateness of reversing
a write-down of inventory in future periods.

26
 APPENDIX C
Case Information Experiment Two

Background Information

XYZ Company has been manufacturing high-end sporting goods for over 20 years.

During the third quarter of 201X, demand had slowed significantly for one of XYZs primary
product lines. Therefore, XYZ recorded a $5 million impairment of their inventory. That write
down reduced third quarter pre-tax income by $5 million.

You are considering the appropriate entry for the fourth quarter of 201X. During the fourth
quarter of 201X, XYZ identified a foreign market in which to sell this product line, and initial
sales suggest that it may be able to charge high enough prices to recover more of the cost of the
inventory.

If the company revalued inventory, the write-up would be $1.76 million. This amount is
considered material.

According to XYZs business analysts, the best estimate of net realizable value is uncertain.
Sales in the foreign market may not continue at a level capable of sustaining the initial inventory
valuation. Thus, although the best estimate indicates that the original cost of inventory will be
recovered, there is uncertainty associated with that estimate.

27
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30
FIGURE 1
Experimental Procedures (Experiment 1)

Participants are randomly assigned to a U.S. GAAP Consideration condition.

U.S. GAAP Before U.S. GAAP After

Participants are presented with the U.S. standard

prohibiting impairment reversals and assess the
general appropriateness of reversing an
inventory impairment under U.S. GAAP.

Participants are presented with the IFRS standard Participants are presented with the IFRS standard
and assess the general appropriateness of and assess the general appropriateness of
reversing an inventory impairment under IFRS. reversing an inventory impairment under IFRS.

Participants read the background information Participants read the background information
that indicates a German firm that reports that indicates a German firm that reports
according to IFRS is considering reversing an according to IFRS is considering reversing an
inventory impairment. inventory impairment.

Participants are presented with the IFRS standard Participants are presented with the IFRS standard
again and assess the appropriateness of reversing again and assess the appropriateness of reversing
an inventory impairment under IFRS (our an inventory impairment under IFRS (our
primary dependent variable). primary dependent variable).

Participants are presented with the U.S. standard

prohibiting impairment reversals and assess the
general appropriateness of reversing an
inventory impairment under U.S. GAAP.

Participants are again presented with the IFRS standard and indicate whether they would be more likely to
write up inventory under IFRS if U.S. GAAP prohibited impairment reversals, more likely to write up
inventory if U.S. GAAP were identical to IFRS, or if their decision would be no different in the two scenarios.

The experiment concludes with participants answering debriefing and demographic questions.

31
FIGURE 2
Experimental Procedures (Experiment 2)

Participants read the background information that indicates a firm is considering reversing an inventory
impairment.

Participants in the U.S. GAAP Consideration condition are presented with the U.S. standard prohibiting
impairment reversals and assess the appropriateness of reversing the inventory impairment under U.S. GAAP.
Participants in the No U.S. GAAP Consideration condition are not presented with the U.S. standard and do
not assess the appropriateness of reversing the inventory impairment under U.S. GAAP.

All participants are told that the firm is a subsidiary of a multinational company that prepares its financial
statements in accordance with IFRS. To facilitate the consolidation process, the firm prepares financial
statements in accordance with IFRS at the end of each quarter and provides this information to the parent
company.

Participants in the IFRS Guidance condition are presented with the IFRS standard indicating that IFRS allows
reversing inventory impairments under some circumstances

Participants in the No IFRS Guidance condition are asked to assume that IFRS provides no guidance relating
to the appropriateness of reversing a write-down of inventory in future periods.

All participants assess the appropriateness of reversing the inventory impairment under IFRS (our primary
dependent variable).

Participants answer a manipulation check about the content of the IFRS standard in the study and a knowledge
question about whether IFRS actually allows reversing inventory impairments if the circumstance that gave rise
to the original impairment has changed.

Participants are again presented with the IFRS standard and indicate whether they would be more likely to
write up inventory under IFRS if U.S. GAAP prohibited impairment reversals, more likely to write up
inventory if U.S. GAAP were identical to IFRS, or if their decision would be no different in the two scenarios.

The experiment concludes with participants answering debriefing and demographic questions.

32
FIGURE 3
Predicted and Actual Patterns of Results, Experiment Two

Panel A: Predicted Pattern of Results:

Panel B: Actual Pattern of Results (Full Sample, n = 79):

Panel C: Actual Pattern of Results for Participants who Did Not Know that IFRS Allows
Reversals of Inventory Impairments in Current Practice (n = 52)

33
Figure 3 depicts the predicted pattern of results (Panel A) and the observed pattern of results (Panels B and C) for
Experiment Two, examining how participants judgments about the appropriateness of reversing an inventory
impairment are affected by whether participants apply U.S. GAAP before applying IFRS and by whether IFRS
provides guidance that conflicts with U.S. GAAP. To manipulate U.S. GAAP Consideration, we vary whether
participants rate the appropriateness of an inventory impairment reversals under the U.S. GAAP standard and the
IFRS standard (U.S. GAAP Consideration condition) or only under the IFRS standard (No U.S. GAAP
Consideration condition). To manipulate whether IFRS provides guidance that conflicts with U.S. GAAP, we vary
whether participants are asked to assume that IFRS allows reversing inventory impairments if the circumstances
surrounding the impairment has changed (IFRS Guidance condition) or that IFRS lacks guidance about the
appropriateness of reversing inventory impairments (No IFRS Guidance condition). Participants rate the
appropriateness of an inventory impairment under IFRS (11-point scale anchored at Not at all appropriate and
Very appropriate). Seventy-nine experienced auditors participate in Experiment Two.

34
TABLE 1
Between-Participants Descriptive Statistics and Tests of Hypotheses, Experiment One

Panel A. Descriptive Statistics for Appropriateness Judgment: Mean, (Standard Deviation), and
[Median]

Appropriateness
Condition Judgments

5.000
U.S. GAAP (2.936)
Before [4.00]
n = 14

2.786
U.S. GAAP (1.718)
After [2.50]
n = 17

4.000
(2.671)
Combined
[3.00]
n = 31

Panel B. Test of Differences on Appropriateness Judgments between Conditions

Comparison Difference d.f. t-value p-value

U.S. GAAP Before > U.S. GAAP After 2.214 26 2.61 <0.001

Table 1 presents results for Experiment One, examining the effect of considering U.S. GAAP before judging the
appropriateness of reversing an inventory impairment under IFRS after receiving evidence that the circumstances
that previously caused inventory to be written down below cost may no longer exist. We manipulate whether
participants rate the general appropriateness of inventory reversals under the U.S. GAAP standard and the IFRS
standard (U.S. GAAP Before condition) or only under the IFRS standard (U.S. GAAP After condition) before rating
the appropriateness of the appropriateness of reversing an inventory impairment for a firm that reports under IFRS
(11-point scale anchored at Not at all appropriate and Very appropriate). Thirty-one experienced auditors
participate in Experiment One. We use a separate-variance t-test to evaluate our effect.

one-tailed test (or equivalent)

35
TABLE 2
Descriptive Statistics and Tests of Hypotheses, Experiment Two

Panel A. Descriptive Statistics for Appropriateness Judgment: Mean, (Standard Deviation),

and [Median]

U.S. GAAP IFRS Guidance Condition

Consideration IFRS No IFRS
Condition Guidance Guidance Combined

8.263 5.053 6.658

U.S. GAAP (2.353) (3.566) (3.395)
Consideration [9.00] [6.00] [7.00]
n = 19 n = 19 n = 38

5.905 3.750 4.854

No U.S. GAAP (3.659) (2.149) (3.175)
Consideration [7.00] [3.00] [4.00]
n = 21 n = 20 n = 41

7.025 4.385 5.722

(3.293) (2.961) (3.385)
Combined
[8.00] [4.00] 6.00]
n = 40 n = 39 N = 79

Panel B. Analysis of Variance (ANOVA)

Source S.S. d.f. M.S. F-statistic p-value

U.S. GAAP Consideration 66.06 1 66.06 7.24 0.004
IFRS Guidance 141.89 1 141.89 15.55 <0.001
U.S. GAAP Consideration x IFRS 5.49 1 5.49 0.60 0.440
Guidance
Error 684.19 75 9.12

Table 2 presents results for Experiment Two, examining how participants judgments about the appropriateness of
reversing an inventory impairment under IFRS are affected by applying U.S. GAAP prior to applying IFRS and by
whether IFRS provides guidance that conflicts with U.S. GAAP. To manipulate U.S. GAAP Consideration, we vary
whether participants rate the appropriateness of an inventory impairment reversal under the U.S. GAAP standard
and then IFRS standard (U.S. GAAP Consideration condition) or only under the IFRS standard (No U.S. GAAP
Consideration condition). To manipulate whether IFRS provides guidance that conflicts with U.S. GAAP, we vary
whether participants are asked to assume that IFRS allows reversing inventory impairments if the circumstances
surrounding the impairment have changed (IFRS Guidance condition) or that IFRS lacks guidance about the
appropriateness of reversing inventory impairments (No IFRS Guidance condition). Participants rate the
appropriateness of an inventory impairment under IFRS (11-point scale anchored at Not at all appropriate and
Very appropriate). Seventy-nine experienced auditors participate in Experiment Two.

one-tailed test (or equivalent)

36
TABLE 3
Descriptive Statistics and Tests of Hypotheses for Participants who Did Not Know that
IFRS Allows Reversals of Inventory Impairments in Current Practice, Experiment Two

Panel A. Descriptive Statistics for Appropriateness Judgment: Mean, (Standard Deviation),

and [Median]

U.S. GAAP IFRS Guidance Condition

Consideration IFRS No IFRS
Condition Guidance Guidance Combined

8.300 3.786 5.667

U.S. GAAP (2.791) (3.167) (3.726)
Consideration [9.00] [6.00] [6.00]
n = 10 n = 14 n = 24

5.333 3.625 4.357

No U.S. GAAP (3.892) (2.247) (3.118)
Consideration [5.00] [3.00] [3.00]
n = 12 n = 16 n = 28

6.681 3.700 4.962

(3.682) (2.667) (3.441)
Combined
[8.00] [3.00] [4.50]
n = 22 n = 30 n = 52

Panel B. Analysis of Variance (ANOVA)

Source S.S. d.f. M.S. F-statistic p-value

U.S. GAAP Consideration 30.83 1 30.83 3.34 0.037
IFRS Guidance 122.05 1 122.05 13.23 <0.001
Accessibility x Guidance 24.82 1 24.82 2.69 0.054
Error 442.87 48 9.23

Panel C. Planned Comparisons

Comparison df F-stat p-value

U.S. GAAP Consideration > No U.S. GAAP 1 4.10 0.014

Consideration given IFRS guidance conflicts with GAAP

U.S. GAAP Consideration = No U.S. GAAP 1 6.44 0.886

Consideration given IFRS provides no guidance

37
Table 3 presents results for a subsample of participants from Experiment Two. Participants are included in this
analysis if they indicated they did not know that IFRS allows the reversal of inventory impairments in current
practice. Experiment Two examines how participants judgments about the appropriateness of reversing an
inventory impairment under IFRS are affected by applying U.S. GAAP prior to applying IFRS and by whether IFRS
provides guidance that conflicts with U.S. GAAP. To manipulate U.S. GAAP Consideration, we vary whether
participants rate the appropriateness of an inventory impairment reversal under the U.S. GAAP standard and the
IFRS standard (U.S. GAAP Consideration condition) or only under the IFRS standard (No U.S. GAAP
Consideration). To manipulate whether IFRS provides guidance that conflicts with U.S. GAAP, we vary whether
participants are asked to assume that IFRS allows reversing inventory impairments if the circumstances surrounding
the impairment have changed (IFRS Guidance condition) or that IFRS lacks guidance about the appropriateness of
reversing inventory impairments (No IFRS Guidance condition). Participants rate the appropriateness of an
inventory impairment under IFRS (11-point scale anchored at Not at all appropriate and Very appropriate).
Seventy-nine experienced auditors participate in Experiment Two. Fifty-two of these participants did not know that
IFRS allows the reversal of inventory impairments in current practice.

one-tailed test (or equivalent)

38