LONDON -- The troubled German auto industry may face an additional multi-billion euro tax charge against profits under international reporting standards, accountants Ernst & Young told Reuters on Monday.
The European Union adopted International Financial Reporting Standards (IFRS) in January in a bid to encourage investment by increasing the transparency and consistency of financial reporting globally.
One IFRS rule requires companies either to show that they will be able to use their accumulated but unused tax allowances -- so-called "deferred tax assets" -- or write them off to the profit and loss account.
"More than 4 billion euros of deferred tax assets are under review in the German automotive industry," said Ute Benzel, a tax partner at Ernst & Young in Germany.
When a company makes losses it can set them against future profits and so reduce future tax liabilities, but until that opportunity arises, they carry the sums on the balance sheet as deferred tax assets.
But because of the IFRS taxation standard and some changes to tax relief laws, companies are under pressure to prove they are likely to make future profits to justify carrying the tax assets in their balance sheet.
Slack sales and excess capacity have hit the auto industry's prospects for future profits, exerting downward pressure on prices even in the premium, high margin sports car business.
BMW expects only flat pretax earnings this year, given currency and raw materials headwinds. DaimlerChrysler aims to have a slight increase in operating profit this year, but only by excluding up to 1.2 billion euros in charges to restructure its loss-making minicar business Smart.
A big drop in deferred tax assets would add to the ugly outlook for a sector also facing high steel and commodity prices.
"The question is whether the sector has enough reserves to cover potential tax expenses," said Benzel. "It's important for the industry to be able to prove they can make a profit."
IFRS changes have been affecting companies in various ways, according to an E&Y report released on Monday.
Their survey showed that 10 percent of tax or finance directors at 276 European companies found they had significantly less time to deal with other tax projects because of the distraction of IFRS.
IFRS rules also require European companies to put their pension deficits on the balance sheet, often for the first time, which would result in a drop in shareholder equity and could reduce the ability of companies to pay dividends.
British Airways said on Monday that mainly as a result of the inclusion of its pension deficit, balance sheet reserves fell to 940 million pounds ($1.65 billion) under IFRS from 2.22 billion pounds under UK reporting standards, and that under IFRS there would be no distributable reserves from which to pay a dividend.