In particular, both earnings and balance sheets for fiscal 1996, the latest data available, of most Japanese companies are weaker than they appear. On the flip side, the Morgan team found the balance sheets of the U.S. and most European car makers are stronger than their reported numbers suggest. Morgan found that many of the global accounting differences resulted from how companies treated their retirement costs. U.S. auto makers charge certain pension costs to profits and fund them annually. The Europeans also generally charge pension costs to earnings annually, but generally don't fund them.
Japanese companies have large unrecorded pension obligations.
If the companies recognized the obligations, as Morgan and accounting experts recommend, they would effectively wipe out profits at several companies there. Morgan totaled the pension liabilities outstanding for each company and determined how much it would cost each company in the way of charges to service this debt on an annual basis. Doing so increased the liability and lowered the equity sides of the car makers' balance sheets, and also created higher interest charges to profits on the income statements. Morgan's adjustments effectively zapped fiscal 1996 profits at several Japanese auto makers, with earnings at Mitsubishi Motors Corp. and Mazda Motor Corp. getting hit the hardest. Mitsubishi and Mazda declined to comment.