Global Business

IFRS Fueled Much of Chrysler’s Huge Loss

Earnings report by Daimler, which still holds 19.9 percent of the Cerberus-controlled carmaker, shows impact of international accounting standards.
Stephen TaubApril 30, 2008

International accounting standards helped cause Daimler AG’s Chrysler unit to report its huge loss last year.

According to the Detroit Free Press, Daimler’s latest financial report indicated that Chrysler LLC, now majority-owned by private equity firm Cerberus Capital Management, lost about $6.8 billion. Most of the loss was during the final five months of 2007, if one computes the results using international accounting standards. That wiped out two-thirds of the value of Chrysler on the German automaker’s balance sheet, according to the report.

However, Daimler was quick to add in its report, “These results are by no means indicative for the results to be reported by Chrysler Holding LLC due to the substantial valuation differences between U.S. GAAP used by Chrysler and IFRS [international financial reporting] standards used by Daimler.”

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Katie Hepler, a Chrysler spokeswoman, told the paper that the “company has enjoyed positive operating earnings” since Cerberus took control of the carmaker in August. She also warned that it would “be misleading…to report on standards that are not used in the U.S.”

The filing by Daimler, which still holds 19.9 percent of Chrysler, showed that its Chrysler stake is worth about $850 million, which suggests the U.S. auto operations are worth a total of $4.2 billion, according to the Free Press. If that is correct, the total would be down by $6.8 billion since just August.

The paper pointed out that back then, Daimler figured its stake in Chrysler as worth closer to $2.2 billion, indicating that all of Chrysler was worth around $11 billion. Daimler said it reports Chrysler’s numbers after a 3-month lag.

The situation appeared to be much different a year ago, at least in terms of earnings. The report made in April 2007,when Chrysler was wholly owned by what was known as DaimlerChrysler, and still listed on the New York Stock Exchange, was the first in which European Union law required reporting under IFRS instead of GAAP. And the numbers then showed the change resulting in an increase in overall reported revenues, net income, and earnings per share, although group operating profit was reduced. 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.

For the past five years, the Financial Accounting Standards Board and the International Accounting Standards Board have been working to merge U.S. accounting rules with IFRS. But this so-called convergence is shaping up to be more of a takeover than a merger of equals — many who favor a single global standard hope to wipe out GAAP altogether.

However, as we pointed out earlier this month, experts at the Big Four accounting firms say a Securities and Exchange Commission mandate for all U.S. publicly traded companies to use IFRS is inevitable.

The SEC does plan to release a road map in late spring for transitioning U.S. public companies to the international standards, but it has not yet said whether adopting IFRS will be mandatory. Still, many SEC watchers expect the agency to eventually scrap GAAP.