Comparability of financial statement data is vital for investors. Although the widespread adoption of IFRS and past convergence of IFRS with US GAAP has greatly improved comparability, significant challenges remain – pension accounting being a prime example.
Many companies in the automotive sector have significant pension liabilities. Global comparison of these stocks, and even comparison of just the US GAAP reporters, often requires substantial adjustments. We explain the accounting, the lack of comparability, and what investors can do about it.
Although most companies have now fully or partially closed their defined benefit pension schemes for further benefit accrual (and some have even offloaded the liability to insurance companies), many still have significant legacy pension liabilities on their balance sheet. These continue to have a material impact on financial statements and equity valuation. Unfortunately for investors, the data presented may not be comparable – IFRS differs from US GAAP, and US GAAP reporters can adopt different approaches to recognising the effects of pensions in profit and loss.
The global autos sector illustrates the challenge for investors. While recent entrants to the industry, such as Tesla, have few pension liabilities to worry investors, the likes of old incumbents, such as General Motors, Ford and IFRS reporter Stellantis, are a different matter. The table below shows why investors need to consider the impact of pensions when comparing these companies.
Global Autos – selected pensions data
2024 financial statement data, except market capitalisation which is as of November 14, 2025
For each company, the pension deficit is material relative to market capitalisation and will therefore be an important component of enterprise value for valuation multiples, and the adjustments in the enterprise value to equity bridge when using DCF1This assumes that pension liabilities are regarded as financing in nature and treated as ‘debt equivalents’ in enterprise value based valuations, which is our recommendation. The amount included in these calculations would be net of the related deferred tax asset – the tax saving that the companies would obtain if the deficits were corrected through additional funding.. The underlying gross pension assets and liability are even more significant. The risk and return characteristics of these assets are arguably just as important as those of the operating businesses of these companies. Even if pensions are fully funded, you should not ignore the effects arising from the underlying gross assets and liabilities.
The pension service cost (the value of new benefits accruing in the year) is low relative to total employment costs, and much less than the current pension payments to retired employees. This indicates the schemes are both mature and restricted in terms of new benefits. Despite this, the absolute size of the legacy liabilities still makes the schemes important for investors.
Balance sheet pension data may not always be comparable
Investors may assume that the data in the table above is largely comparable, at least in terms of the accounting methods; however there are two reasons why this may not be correct.
- The asset ceiling adjustment: IFRS restricts the recognition of a pension fund surplus if the company does not expect to benefit from that surplus, such as through a repayment or by reducing contributions made in respect of new benefits2The asset ceiling restriction only applies to pension funds in surplus. Although Stellantis has an overall deficit, the group will have several pension funds, some of which must have a surplus to result in this adjustment.. US GAAP does not include the same requirements.
- Net asset value instead of fair value: Under IFRS, all pension assets are required to be measured at fair value3Under IFRS net asset value may be used if it approximates fair value but, unlike US GAAP, IFRS 13 Fair value measurement does not contain a specific ‘practical expedient’.. The same objective applies to US GAAP; however, companies are permitted to apply a ‘practical expedient’ to the measurement of holdings in investment funds (such as hedge funds, private equity and real estate funds) if there is no readily determinable fair value for the holding in the fund itself. For these, US GAAP permits the use of a net asset value (NAV). The underlying assets of the fund will still be at fair value, but the holding in the fund itself may not be a fair value if, for example, a discount would be expected to apply to the investment in the fund itself.
Generally, the asset ceiling adjustment is relatively small (as can be seen above for Stellantis). However, the effect of using net asset value in US GAAP could be more significant. For example, valuing a private equity fund at net asset value could materially overstate pension asset value considering that listed private-equity funds often trade at material discounts.
In 2024, Ford has 14% of its assets measured at net asset value and GM 41%. The asset allocation of the US pension plan assets of General Motors is shown below.
General Motors asset allocation extract (USA pension plans only)
General Motors 2024 financial statements
Comparability of balance sheet metrics may be further compromised by the use of estimates. The gross liability is highly sensitive to the chosen discount rate4Both IFRS and US GAAP use a high quality corporate bond rate (generally assumed to be ‘AA’ bond yield or curve). This is itself somewhat controversial, a subject we examined in our article ‘A pension asset may be an economic liability’. and, if pension assets are not traded in an active market, the asset value is dependent on the valuation methods and assumptions.
Differences in assumptions and valuation methods can also present problems
Although companies may disclose different discount rates applied to measure the pension liability, these differences could simply reflect different characteristics of the liability, such as a different duration of the payments. It is not easy to identify what is a warranted difference and what is not.
On the asset side, some asset values may be based on valuation models (level 3 values) rather than market data. Although the level 3 fair values in the General Motors table above is relatively small, some of the funds measured at net asset value will include assets measured at level 3 (there is no requirement to disclose this amount). One of the challenges of analysing pension data is the lack of clarity regarding the actual composition of the assets – simply labelling $10bn of pension assets as “investment funds” does not give much indication as to their nature and risk characteristics.
Adjusting the disclosed asset and liability values is difficult. It might be possible to estimate which companies are more or less prudent in their valuation assumptions, but the complexity of the calculations means that investors are largely left having to trust the figures presented by management.
The incomparability of profit and loss
Although the balance sheet data and pension service cost reported in profit and loss may be largely comparable, the same cannot be said of the rest of the gains and losses in the income statement.
The overall gain or loss from a defined benefit pension scheme arises from the change in the funded status5Funded status is simply the value of the pension fund assets less the present value of the scheme obligations., after adjusting for cash flow effects. For example, if the pension fund deficit rises by 100 in a year and the company pays a net 50 into the fund, an overall loss of 150 is recognised. The loss is simply the change in funded status, excluding the effects of cash flows.
This overall gain or loss is the total amount reported in comprehensive income (the total of the effects on profit and loss and OCI). If the balance sheet position is comparable, this total gain or loss in comprehensive income should also be comparable.
The overall aggregate pension income or expense is comparable, but probably not very useful
However, simply showing a single gain or loss is unlikely to be very useful for investors, considering the components of this gain or loss have different characteristics. For example, part of the increase in a pension deficit may be due to the benefits accruing in the year, while a further increase could be due to a reduction in the value of the pension assets that fund existing liabilities. Combining these very different components into a single gain or loss would not be helpful.
Disaggregation of the overall pension income or expense
Both IFRS and US GAAP use a similar disaggregation to provide investors with more useful performance metrics. The differences in accounting relate to the presentation of gains and losses, including whether some are recognised in OCI instead of proifit and loss.
Disaggregation of total pension expense
The disaggregation provided by our three auto companies is shown below, along with our explanation of how this is affected by the different accounting methods applied.
Accounting differences – Remeasurement and accretion
The key difference between IFRS and US GAAP pension accounting is the treatment of changes in the measurement of pension assets and liabilities (the combined effects of asset return and liability accretion and remeasurement in the table above).
IFRS net interest method (Stellantis)
Under IFRS, companies must recognise the interest accretion (measured at the liability discount rate) on the net pension deficit or surplus – the so-called net interest method. This net interest expense on a deficit (or income on a surplus) may be presented as a single item or as a separate interest accretion expense on the gross liability and interest income on the gross asset. The remaining remeasurement changes in assets and liability, often called ‘actuarial gains and losses’ are reported in OCI. Unlike for US GAAP, there is no subsequent recycling of OCI back into profit and loss6The recycling or reclassification of amounts previously recognised in OCI simply means that the gain or loss is added back in OCI in a subsequent period and reported in profit and loss instead. Recycling does not affect total comprehensive income as the add back in OCI is offset by what is included in profit and loss..
Whether the net interest expense is included in operating profit or as a component of the net finance expense is not currently specified under IFRS. The majority approach (and that adopted by Stellantis) is as part of the finance expense, which is also consistent with how we think this should be analysed. Once IFRS 187 IFRS 18 is the recently introduced standard on the presentation and disclosure of financial statements. Our view on how this impacts investors can be found here – ‘Why IFRS 18 is good news for investors’. becomes mandatory in 2027, all companies must report the net pension interest expense below operating profit as a component of finance income or expense.
Stellantis – Pension expense and OCI disclosures
Profit and loss (income)/expense
OCI gain/(loss)
Stellantis 2024 financial statements
US GAAP expected return method with OCI and recycling (General Motors)
Under US GAAP, the expected return on gross pension assets and the interest accretion on the gross liability are included as separate components of the overall pension expense. Unlike IFRS, where effectively the asset return is set to the liability discount rate, the expected asset return in US GAAP reflects the nature of the assets – higher risk investments should attract a higher expected return. This approach reduces the pension expense in profit and loss by the spread between the assumed asset return and liability discount rate.
The impact of this on the results of General Motors is not insignificant. For its US plans in 2024 there is a 1.19% spread between the expected return on assets (6.27%) and rate of interest accretion on the liability (5.08%). The net income contribution resulting from this of $608m (2,740 – 2,192) produces an overall net gain from their USA pensions in profit and loss. Had the IFRS net interest method been used, the net financial result from the scheme would have been negative – see our analysis below. Interestingly, the effect is much smaller for the non-US plans, presumably there is a more prudent liability-matching investment strategy for these.
General Motors – Pension expense and OCI disclosures
Profit and loss (income)/expense
OCI gain/(loss)
General Motors 2024 financial statements
Similarly to IFRS, the remaining change in pension assets and liability due to financial effects and cash flow estimate changes is reported in OCI. This is mainly the difference between the expected and actual asset return and the effect of discount rate changes on the liability.
Unlike IFRS, however, the recognition in OCI is temporary. The gain or loss is gradually recycled (reclassified) into profit and loss over a period equal to the average remaining service lives of employees. In the extract above it is called ‘Amortization of net actuarial (gains) / losses’. The reason why the recycled amount is relatively small is that the recycling is only triggered if the cumulative balance in OCI in respect of pensions exceeds the so-called ‘corridor’, which is 10% of either the scheme assets or liability. This accounting is often called the ‘corridor method’ as a result.
The total accumulated actuarial gains and losses in OCI will eventually be reclassified to profit and loss. Unfortunately GM does not disclose the cumulative actuarial gain or loss in OCI8The total cumulative loss reported in OCI (AOCI) is $11.2bn as at the end of 2024. However, this is not disaggregated to show how much is attributable to pensions; some also relates to translation exchange differences. This makes it difficult to estimate what the future ‘amortization’ effects will be..
US GAAP expected return method, except no OCI (Ford)
Although most US GAAP reporters apply the corridor method for pension accounting, an alternative is permitted. This is where the actuarial gains and losses deferred in OCI are instead immediately recognised in profit and loss. This also eliminates the recycling of past actuarial gains and losses.
Ford uses this approach. In the extracts below, the line ‘Net remeasurement (gain)/loss’ is the item that would have been reported (and subsequently recycled, subject to the corridor effect) in OCI. Notice that there is still a pension item in OCI – this is the past service cost and the recycling of this into profit and loss is shown as ‘Amortisation of prior service costs’ in the profit and loss expense disaggregation.
Ford – Pension expense and OCI disclosures
Profit and loss (income)/expense
OCI gain/(loss)
Ford 2024 financial statements.
Both Ford and GM only report the service cost within operating expenses, the remainder, including the interest accretion and expected asset return, is presented as part of ‘other’ below operating profit. This is similar to the placement of the net interest expense under IFRS, except that this is reported as part of the net finance expense by Stellantis.
Smoothing of the expected asset return may also impair comparability
A further difference that may impact comparability is that, under US GAAP, companies are permitted two methods of calculating the expected asset return. This can either be based on the opening reported pension asset value (largely fair value) or a ‘market-related value’ that is effectively a smoothed fair value (companies can choose how). Ford does not apply this approach, choosing to base the expected return on fair values. General Motors does use the market-related approach with value changes smoothed over 5 years.
General Motors accounting policy for expected pension asset return
General Motors 2024 financial statements
Other differences – Past service cost, curtailments and settlements
There are other differences between IFRS and US GAAP that affect comparability. Under IFRS, past service costs are recognised immediately in profit and loss, while under US GAAP these amounts are initially recognised in OCI and subsequently recycled to profit and loss. The US GAAP OCI approach for past service costs applies whether or not the OCI approach has been chosen for the actuarial gains and losses. This is why Ford has a recycled amount included in its overall pension expense, in addition to the immediate recognition of the actuarial gains and losses.
There is also a difference in the measurement of gains and losses due to settlements and curtailments of penson liabilities. These are immediately recognised in both IFRS and US GAAP; however, for US reporters the amount also includes part of the actuarial gains and losses previously accumulated in OCI.
IFRS and US GAAP also differ in terms of presentation, with costs related to past service, settlements and curtailments are reported in operaitng profit by Stellantis, but below operating profit and part of ‘other income and expenses’ by Ford and GM.
These differences are probably not going to worry investors too much as it is likely that these will be considered ‘non-recurring’ items in profit and loss and (if material) removed from underlying performance metrics, and assumed to be zero in analysts’ forecasts.
Here is our summary of the 2024 pension gains and losses for our global auto companies. We think only the service cost line is comparable in terms of both measurement and presentation across all three companies.
Global Autos: Comparison of pension expense disaggregation and presentation
2024 financial statements
- Ford includes actuarial gains and losses in profit and loss instead of OCI
- OCI for US GAAP includes past service costs and is net of recycled amounts
Our view on IFRS versus US GAAP
We think the accounting for pensions is unnecessarily complex, largely due to the use of OCI, and particularly in the case of US GAAP due to the associated recycling. In our view, the US GAAP recycled amounts shown by GM and Ford have little relevance for investors.
Under the US GAAP approach all gains and losses recognised in OCI are eventually recycled such that profit and loss complies with ‘clean surplus’ accounting. There is some merit in having a clean surplus9Clean surplus is where all gains and losses are included in profit with none included reported directly in shareholder’s equity. For more about clean surplus accounting, how it relates to the use of OCI, and its relevance for valuations see our article ‘Residual income valuation: OCI and clean surplus accounting’., but not in using recycling to achieve it. Including an arbitrary portion of gains and losses that may have arisen many years ago in current period profit and loss, and restricting this by applying an arbitrary corridor filter, is just meaningless.
Financial reports would be more transparent without OCI, especially OCI with recycling
We prefer the IFRS approach of using OCI without recycling. Even better would be to not use OCI at all and recognise all gains and losses (with suitable disaggregation) in profit and loss. The justification for the use of OCI seems to be that the gains and losses can be big and volatile, and investors might be confused if these are included in profit and loss. However, other gains and losses arising from remeasurements and value changes already appear in profit and loss, which investors seem to analyse without issue, so why have a different approach for pensions?
The merits of the other main difference between IFRS and US GAAP – net interest versus expected asset return – is more nuanced. Although we prefer the IFRS approach, we think there are valid arguments in favour of both.
The problem with the expected asset return approach is that this amount is very subjective, particularly if the asset portfolio includes growth assets such as private equity or hedge funds. Indeed, the large observed variation in these estimates was one factor that persuaded the IASB to remove the expected asset return from IAS 19 in 2011 (previously IFRS also used the expected return).
The expected return approach also artificially separates risk and return. In the General Motors financial statements the expected spread for investing in risky assets is reported in profit and loss, but the manifestation of risk for these investments – the volatile residual change in value – is reported in OCI. Hopefully investors can ‘join the dots’, but there is a danger that the investment risk is largely ignored. Under IFRS both the risk and (excess) return arising from pension investments are reported in the same place.
Finally, the option in US GAAP to use a smoothed market-related asset value to measure the expected return further impairs comparability. While smoothing may result in lower earnings volatility, it produces out of date amounts that further exacerbates the lack of comparability.
However, the expected return approach does result in an unbiased measure of performance (assuming the estimated return is realistic and based on fair values not market-related values) – higher risk investments can be expected to produce a higher return. Under IFRS this higher return is effectively reported in OCI.
Adjustments required to derive comparable data
The merits of the different accounting methods for pensions is perhaps somewhat academic. More important for investors is how to eliminate the differences and obtain comparable data.
It is impossible to fully reconcile the pension expense and adjust for all the accounting differences, but some key adjustments that will help improve comparability are relatively straight-forward..
Operating versus financing consistancy
Although US GAAP reporters should have a consistent operating versus below-operating split, adjustments may be required for comparisons across IFRS and US GAAP. We think it is best to treat pension liabilities as financing rather than operating in nature. Therefore, if operating profit includes asset return or interest expense (particularly the net interest amount in IFRS) reclassify these as part of the net financing income or expense.
There could be other operating profit presentation differences regarding past service costs, curtailments and settlements, but these are likely to be less of an issue and, for forecasts, will probably be assumed to be zero anyway.
Recycling and actuarial gains and losses
Recreating the recycling of OCI for a company that does not apply this method is pretty much impossible. This, combined with our view that the recycled amounts are themselves meaningless, suggests you should not try and create comparable numbers based on this version of US GAAP – i.e. that applied by General Motors.
To obtain comparability, we think it best to exclude recycled amounts and any actuarial gains and losses from profit and loss. This could either be done by simply including these items as part of your adjustments when deriving non-GAAP performance metrics, or by reclassifying them as components of OCI – in other words applying the IFRS approach.
Expected asset return and net interest expense
The expected pension asset return of US GAAP reporters may not be fully comparable due to the option to use a market-related value, but attempts at adjusting are probably not worthwhile. For global comparability (and to compare US companies if you are concerned about the effects of different expected asset return assumptions or methods) we suggest adopting the IFRS net interest approach. This means replacing the expected asset return and liability accretion under US GAAP with a net interest amount based on the net funding position.
It is impossible to accurately calculate an IFRS net interest expense for US GAAP reporters, although two methods could be used to derive an estimate:
- Recalculate the expected asset return by multiplying by the ratio of the disclosed percentage discount rate divided by the disclosed percentage asset return.
- Calculate a net interest accretion by multiplying the opening net surplus or deficit by the disclosed liability discount rate.
We have applied the second of these to General Motors and Ford in the table below.
Finally, remember that if you are adjusting a post-tax earnings metric, make sure you apply a tax adjustment.
Global Autos: Expected pension asset return spread adjustment
2024 financial statement data and Footnotes Analyst estimates
(1) Tax is calculated using an appriximate combined statutory marginal tax rate for the USA of 25.6%.
(2) Reported earnings is the net income attributable to common shareholders before any non-GAAP adjustments.
Notwithstanding that our adjustments are estimates, it does appear that the expected pension asset return spread included in the US GAAP results of General Motors and Ford is material. Only by removing this will the results of these three companies be comparable.
Insights for investors
- Balance sheet pension data should be largely comparable, subject to the ‘asset ceiling’ test applied in IFRS but not US GAAP. However, watch out for differences in assumptions, estimates and investment funds measured at net asset value.
- For US GAAP reporters, the presentation of actuarial gains and losses in either profit and loss or in OCI (with subsequent recycling) impairs the comparability of earnings. The comparability of operating profit may be affected by where the financial income and expense is located.
- The comparability of IFRS and US GAAP reporters is mainly affected by the use of the net interest method compared with the expected asset return, and by differences in the treatment of actuarial gains and losses.
- To achieve international comparability, and to achieve greater relevance for equity analysis, we suggest amending US GAAP data to be consistent with IFRS.