NEW YORK -- Different accounting standards throughout the world led Morgan Stanley Dean Witter executives to devise a more unified accounting approach to evaluate financial statements.
The approach, dubbed Apples to Apples, seeks to identify the major accounting practices affected by dissimilar accounting standards in a particular market sector or region.
After identifying where the differences occur, Morgan Stanley analysts suggest adjustments to selected financial statement numbers, with the goal of allowing for better investment decisions.
Pension fund accounting and management proved to be a big issue in Morgan Stanley's first two formal analyses.
"Accounting is supposed to represent the economics of the business," said Linda Riefler, principal and a project manager for the Apples to Apples team.
But because different accounting standards were created with different end goals in mind, the true business operation of a company is not represented, she said.
"The theory that accounting reflects the economics is just not right," Ms. Riefler said.
With global investing on the upswing, Morgan Stanley executives set out to create a way to identify the economics behind a company, from a shareholder's perspective.
As a result, they found that the vast majority of the economic differences among accounting systems are captured in six areas. They are:
* Pension and other post-retirement benefits, which many firms are "seriously understating," according to a Morgan Stanley report on the Apples to Apples methodology.
* Depreciation and revaluation of long-lived assets, which should not be ignored, the report says.
* Foreign exchange, where "confusion reigns."
* Taxation issues, which can distort income and net assets.
* Acquisition and good-will accounting.
* Consolidation and group reporting.
Which issues are most important or need significant adjustment will vary by industry and or region, Ms. Riefler said.
In Morgan Stanley's analysis of the global automotive industry, the major accounting adjustments concerned depreciation, pension obligations and taxes.
Morgan Stanley also identified some other areas of concern, such as foreign exchange's impact on results, but because of lack of disclosure, could not make any adjustments.
The auto company analysis, the results of which were published in a Morgan Stanley research report Feb. 6, boost the apparent competitiveness of Ford, BMW and Daimler Benz.
The report also says unrecognized pension liabilities are "a major headache" for the world's auto makers, and shows which companies are hit hardest by the problem, primarily Japanese companies.
"In general, we find Japanese companies have been using unrealistic assumptions in their pension obligations," the report states.
Mitsubishi and Mazda were the most aggressive in setting rates, while Honda and Toyota "are in better shape," Morgan Stanley states.
The company's estimates would triple Mazda's loss for the period analyzed and reduce Toyota's by 45%.
Similarly, an April 13 report on Morgan Stanley's analysis of Japanese companies reporting under U.S. accounting rules highlights the problems Japanese companies will have in dealing with underfunded pension plans.
Accounting results for U.S. auto companies are distorted by Generally Accepted Accounting Principles, the U.S. standard, with reported earnings reduced by rules requiring amortization of certain pension obligations.
Morgan Stanley executives are working to apply the methodology across the organization, and will produce more reports as it completes its analyses.