The effect of restating Canadian financial statements to US GAAP on accounting ratios, debt ratings, and market-to-book value

Scope and method of study. The purpose of this study was to determine whether the restatement of Canadian financial statements to US GAAP provides incremental information value for debt ratings and market-to-book values. Using annual reports and reconciliations filed with the United States Securities and Exchange Commission, financial statements of 137 Canadian companies dated from December 1994 to December 1995 were restated to US GAAP. The Wilcoxon signed ranks test was used to determine the effect of restatement on eight ratios. The multiple-partial F test was used to determine whether ratios in US GAAP provide incremental information value.;Findings and conclusions. The results of the Wilcoxon signed ranks test indicate that the values of ratios were significantly changed when restated to US GAAP. A regression model consisting of eight ratios and two other variables was used to test whether restatement to US GAAP provides information in explaining debt ratings. The results of these tests failed to show that restatement provides significant information in explaining the debt ratings of 32 Canadian companies. The results of the debt rating tests fail to provide support for reconciliation. A regression model consisting of seven accounting ratios was used to test whether the restatement to US GAAP provides information in explaining the market-to-book ratio. Because the model violated assumptions of homoskedasticity and normality of the error term, a nonparametric model was used. With the nonparametric approach, ratios restated to US GAAP were found to provide significant incremental information in explaining the market-to-book values of 87 Canadian companies. These results provide support for the reconciliation requirement.