Unrelenting low interest rates and rising currency volatility, among other factors, mean that debt as reported on European companies' balance sheets under International Financial Reporting Standards (IFRS) needs careful analysis, says Moody's Investors Service in a report published today.
"In the current environment, there is a significant risk that the amount reported as debt will fail to represent either the amount owed to the lenders, or the future cash outflow needed to discharge the obligation" says Trevor Pijper, Vice President - Senior Credit Officer at Moody's.
Moody's report, "Non-Financial Corporates - EMEA: Five Drawbacks in the Presentation of Debt on Today's Balance Sheets"
In its report, Moody's identifies five drawbacks that distort the meaning of the amount reported as debt. These include not incorporating the hedging of foreign currency risk, the use of fair value hedge accounting for interest rate swaps, the treatment of accrued interest payable, the adjustment made when a subsidiary is acquired, and the treatment of the cost of borrowing the money.
"Companies voluntarily disclosing additional information not required under IFRS helps us to identify and address the above distortions, and factor them into our credit metrics where material," adds Mr. Pijper.