Will a Single Accounting Standard Help?

For instance, Moody's typically treats securitization transactions as collateralized loans, and adjusts debt accordingly. It also routinely capitalizes all operating leases and recognizes a related debt obligation. In the study, the largest absolute increases in gross debt — excluding derivatives — under IFRS were reported by Daimler ($27 billion), Fiat ($17.2 billion), Deutsche Telekom ($9.3 billion), and and France Telecom ($7.6 billion).

Nevertheless, three factors explain nearly 90 percent of the $60.8 billion increase in debt reported by the four companies, said the report: The consolidation of $45 billion in previously off-balance-sheet borrowings linked to securitization and factored receivables; $3.2 billion worth of liabilities related to leased asset; and the reclassification of $5 billion worth of hybrid financing instruments.

Moody's also pointed out that while underlying cash flows were unaffected by the choice of accounting method, many cash flow statements were restated under IFRS because of how transactions with third-parties are classified and reported. In fact, Moody's attributed material cash-flow-statement changes reported by 11 companies to "special factors."

For example, five carmakers — Daimler, Fiat, PSA Peugeot Citroen, Renault, and Volvo — saw major changes to their cash flow statements after converting to IFRS. But the special reasons for the adjustments were similar, and included the consolidation of previously off-balance-sheet receivables, the capitalization of product development costs, and the reversal of some sales with buyback commitments.

On the plus side, IFRS provided more comprehensive and transparent reporting, said Moody's. Under the single reporting standard, cash flow statements are mandatory, which is helpful in assessing whether a company is generating sufficient cash from operations to service its debt, noted the authors. Prior to the adoption of IFRS, Italy and Spain were not required to include a cash-flow statement in their annual reports.

Further, pension obligations are "more comprehensively disclosed" under IFRS, as are obligations related to leased assets. IFRS also mandates additional disclosures, as compared to some local GAAP, related to changes in reserve amounts related to contingent liabilities.

What's more, balance sheets prepared under IFRS probably will not include as many "questionable" pension assets as financial statements prepared under local GAAP. Moody's explained that while "smoothing" still exists under the accounting rule known as IAS 19, balance sheets prepared under IFRS are less likely to include assets that result from delayed recognition of pension-related actuarial losses.

It is also likely that under IFRS more companies will report financing transactions as loans because, under the global standards, special-purpose entities used to securitize assets must be consolidated when the substance of the relationship indicates that the assets are controlled by the transferor. In addition, if the sale of a financial asset leaves substantially all the risks and rewards of ownership with the seller, the seller must continue to recognize the asset on its balance sheet with the sale proceeds being reported as a liability.

The report emphasized that IFRS still has some overarching problems that need to be addressed. That includes a lack of standardization, especially with regard to companies choosing one of two consolidation standards — proportionate consolidation or the so-called "one-line" equity method. A revised standard from IASB sorting out the discrepancy is due out in 2009.

Standardization problems also exist with regard to the way some companies capitalize interest, when others expense it. And cash flow can be presented under different headings in the cash flow statements, depending on which local GAAP is being used.

Moody's has also encountered diverse practice interpretations, in which the same underlying accounting principle is applied differently. For instance, one of the thornier issues is trying to define "control", says Moody's, referring to IAS 27 and the guiding principle that says consolidated financial statements should include all the entities that are controlled by the parent company.

In one instance, Moody's found that two French companies applied IAS 27 differently regarding de facto control, with one company claiming that an entity that was less than 50 percent owned by the parent could be fully consolidated if the parent had de facto control of the business. The other French company said that because IFRS does not recognize de facto control, the subsidiaries' results were not consolidated.

Lease accounting is another problem area, as Moody's pointed out that deciding what constitutes a lease under IFRS is still up in the air. Under IAS 17, and its supporting guidance IFRIC 4, a lease is defined based on the substance of the arrangement. But since this requires judgment based on case-specific facts and circumstances, Moody's contended that some arrangements that appear broadly similar are dealt with differently.

Indeed, UK energy provider Centrica includes the payments for long-term power agreements with renewable providers as contingent rents. But German energy provider RWE, which is audited by the same firm as Centrica, does not include purchase-power agreements in its lease disclosures. The same disparity can be seen with regard to ship leases. UK-based BP classifies bareboat charters, time charters and spot charters for ships as operating leases, while the Australian mining company BHP Billiton concludes that ship chargers are "other expenditure commitment" that are not part of operating leases under IAS 17.

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