IFRS Revs Up DaimlerChrysler’s Earnings

DaimlerChrysler finds that shifting from U.S. GAAP to IFRS, as required by the European Union, revved up the carmaker's earnings.

Even as the Securities and Exchange Commission considers allowing companies to choose between U.S. and international accounting standards, DaimlerChrysler’s latest financial statements show that such a choice may have a sizeable impact on reported financial results.

This quarter the company, which is listed on the New York Stock Exchange, was required by European Union law to report financial results for the first time using international financial reporting standards (IFRS). It has previously reported under U.S. generally accepted accounting principles (GAAP). The change resulted in an increase in the company’s reported revenues, net income, and earnings per share, although it reduced its group operating profit. The switch also reduced the loss suffered by the company’s Chrysler division — the only DaimlerChrysler unit to show a loss — from $1.5 billion to $682 million.

The change to IFRS increased DaimlerChrysler’s after-tax earnings by $819 million to $5.2 billion, while earnings per share increased by 68 cents. Operating profit, or earnings before interest and taxes, dropped by $38 million to $7.5 billion under IFRS. The company attributed most of the change to the way pension obligations are booked under IFRS. For example, retroactive pension-plan adjustments are immediately entered into the income statement under IFRS, whereas under U.S. GAAP the adjustments are distributed over the remaining service period.

DaimlerChrysler also recorded an increase to its balance sheet, mostly based on how asset-backed securities (ABS) are treated under IFRS. The net effect was a $30 billion increase, because IFRS requires that ABS remain on the balance sheet, while U.S. GAAP does not require consolidation.

While the DaimlerChrysler example illustrates the practical impact of adopting the new international standards, some observers are not concerned with the shift in accounting methodology and its effect on financial statements. “The difference [between reporting under U.S. GAAP and IFRS] is not that great in substance; the market should be indifferent,” noted Trevor Harris, managing director at Morgan Stanley. Speaking Thursday at an industry conference sponsored by Pace University’s Lubin School of Business, Harris asserted that the switch to IFRS would not change the fundamental value of a company, and that sophisticated investors would take such data into consideration in their analysis. The switch to IFRS “is not problematic,” he added.

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