THE EFFECT OF THE USE OF DIFFERENT ACCOUNTING STANDARDS BY PHARMACEUTICAL COMPANIES ON THEIR REPORTED FINANCIAL STATEMENTS
- Area of Honors:
- Bachelor of Arts
- Document Type:
- Thesis Supervisors:
- Dan Givoly, Thesis Supervisor
- Orie Edwin Barron, Honors Advisor
- The lack of uniform global accounting standards has reduced the comparability of financial statements prepared by firms using different sets of accounting standards making it difficult for investors to effectively compare the performance of companies. This non-comparability leads in turn to, non-optimal investment decisions and inefficient allocation of capital. Specifically, it shows that firms in this industry using International Financial Reporting Standards (IFRS) report a higher profit than they would have reported under U.S. Generally Accepted Accounting Principles (U.S. GAAP). This research examines the effect of different sets of accounting standards in the pharmaceutical industry. It is based on the analysis of the reported financial results of five pharmaceutical comapnies1, that identifies the material differences in accounting standards between IFRS and U.S. GAAP. It identifies a number of accounting differences relating to impairment losses, development costs, and litigation provisions. The study examines the effect of each of these reporting differences on the company’s level and volatility of reported earnings. The effects are expressed in terms of changes in financial ratios based on the financial statements and data presented in form “20-F . This study reaches the conclusion that, relative to the use of U.S. GAAP, the use of IFRS in the pharmaceutical industry in the years 2004, 2005, and 2006 resulted in higher reported net income by an average of 32.29% due primarily to impairment losses/gains and capitalization of development costs, a higher earnings per share by an average of 44.13% due to an increase in reported net income, a higher return on assets by an average of 42.86% due primarily to the increase in reported net income while maintaining a similar level of total assets under both sets of accounting standards, and less volatility in the reported earnings.