Adjusting IFRS Reporters for US Peer Comparisons

Introduction

Shell reports under International Financial Reporting Standards (IFRS); ExxonMobil reports under US generally accepted accounting principles (US GAAP). At the end of 2025, Shell's net debt was $45.7 billion, of which $28.9 billion was lease liabilities. ExxonMobil's total debt of $43.5 billion excluded its operating leases entirely, and most of their annual cost, about $2.5 billion, sat in its operating expenses. Shell classified the $4.1 billion of interest it paid as a financing cash flow, outside its operating cash flow; ExxonMobil reports interest paid in operating cash flow, except the part capitalized into projects, which US GAAP places in investing: $1.5 billion of its $1.8 billion in 2025. Shell values its oil and chemical inventories on a first-in, first-out (FIFO) basis and strips the effect of oil price moves from its adjusted earnings; ExxonMobil uses last-in, first-out (LIFO), with inventories carried about $7 billion below their replacement cost.

Put the two companies' reported earnings before interest, taxes, depreciation and amortization (EBITDA), net debt and operating cash flow side by side, and every ratio built from them mixes two sets of rules. The work of adjusting an IFRS reporter for comparison with US peers is to find the few differences that move the key figures, quantify them from the notes and put every company on one basis. The broader map of differences between the frameworks is set out in GAAP vs IFRS differences for bankers; this article applies it.

Two decisions come first. The first is the direction: move the IFRS company onto the US basis, or the US peers onto the IFRS basis. The usual rule is to adjust toward the framework used by most of the peer set, or toward the basis the client and its lenders use. In a peer set of US oil majors with one European company, Shell would be adjusted; in a set of European majors with one US company, ExxonMobil would be.

The second is which items to adjust. A full restatement is never needed. For many companies, leases are the largest difference, followed in particular industries by development costs, inventory methods, impairment reversals and the classification of interest in the cash flow statement. Each adjustment should be material to a figure actually used in the analysis, sourced to a specific note and applied consistently to every company.

Under IFRS 16, almost every lease is a liability, and lease costs appear as depreciation and interest, below EBITDA. Under US GAAP, operating lease costs remain an operating expense and the lease liabilities are usually left out of debt in banker and company calculations, as explained in leases under IFRS 16. An IFRS company therefore reports higher EBITDA and higher debt than a US company with the same leases.

Shell's lease note gives what is needed. Its total lease payments in 2025, principal and interest together, were $7.1 billion, and its lease liabilities at year end were $28.9 billion. Treating all of those leases as if they were US operating leases gives an approximate US-basis view:

Both leverage ratios are internally consistent. What is not consistent is mixing them: dividing Shell's net debt excluding leases by its reported EBITDA, or its reported net debt by a US-basis EBITDA, produces a ratio that matches neither framework. The same logic applies to enterprise value multiples: an IFRS company's enterprise value including lease liabilities should be divided by EBITDA before lease costs, and a US company's by EBITDA after them.

International Accounting Standard 7 (IAS 7) has allowed companies to choose where to classify interest and dividends in the cash flow statement: interest paid as operating or financing, interest and dividends received as operating or investing. US GAAP has no such choice: interest paid and received and dividends received are operating cash flows, except interest capitalized into an asset, which is an investing outflow. A company that classifies interest paid as financing, as Shell does, reports higher operating cash flow than a US peer with the same business. Subtracting Shell's $4.1 billion of interest paid takes its 2025 operating cash flow from $42.9 billion to about $38.8 billion on that point alone; strictly, the roughly $0.5 billion Shell capitalized into projects would sit in investing on a US basis.

Leases add a second difference. Under IFRS, lease principal repayments are financing cash flows, while US GAAP operating lease payments are operating cash flows. Shell's lease payments, part of which is already in its interest paid, are therefore also outside its operating cash flow. A comparison of free cash flow, or of cash conversion, needs both adjustments, the classification issues covered in classifying interest, dividends and taxes paid.

The Effect of IFRS 18

The choices are narrowing. For annual periods beginning on or after January 1, 2027, IFRS 18 and its amendments to IAS 7 remove the options for companies whose main business is not providing finance or investing: interest paid will be classified as a financing cash flow and interest and dividends received as investing. That will make IFRS companies more consistent with each other, but it moves interest paid further from the US treatment, so the adjustment will remain necessary.

Inventory Costing

IFRS prohibits LIFO. US companies may use it, and many oil, chemicals and retail companies do. When prices rise, LIFO charges the most recent, higher costs to cost of goods sold, lowering profit and carrying inventory below its replacement cost; FIFO does the opposite. ExxonMobil's inventories were carried about $7 billion below replacement cost at the end of 2025, the LIFO reserve described in the LIFO reserve and LIFO liquidation. Shell's adjusted earnings remove the inventory effect through its current cost of supplies adjustment, which added $871 million before tax in 2025 as falling oil prices reduced the value of inventory held. For margins and earnings, the current cost figures of an IFRS refiner and the LIFO figures of a US one are broadly comparable; for the balance sheet, the US company's inventory can be restated using its LIFO reserve.

Current cost of supplies

A measure used by oil refiners and integrated companies reporting under IFRS, which must cost inventories using FIFO or weighted average. It restates the cost of goods sold at the current replacement cost of the crude and products used, removing the gains or losses from holding inventory while prices change, and so produces earnings close to those under LIFO.

Impairment Reversals

IFRS (IAS 36) allows impairment losses on assets other than goodwill to be reversed when the recoverable amount recovers; US GAAP prohibits reversals for assets held and used. Shell has recorded impairment reversals on property, plant and equipment in several recent years. Reversals are a non-cash gain that most analysts exclude, as Shell does in its adjusted earnings, but they also restore asset values on the balance sheet, which affects returns on capital and asset-based ratios. Over time, an IFRS company that has written assets down and back up can carry them at higher values than a US peer that could only write them down.

Development Costs and Other Items

For automotive, aerospace, engineering and some technology companies, capitalized development costs are often the next item to check: IFRS (IAS 38) requires qualifying development spending to be capitalized and amortized, which raises EBITDA, and usually operating income, relative to US peers that expense it, as covered in development costs under IFRS. Other differences, such as the measurement of provisions, the treatment of some convertible instruments and the option to revalue property, matter in particular cases and should be checked in the accounting policies note.

The output of the exercise is a set of figures for each company on one basis, with each adjustment documented: the reported figure, the adjustment, the source note and the adjusted figure. For Shell and ExxonMobil, that means EBITDA and net debt with or without leases for both, operating cash flow with interest and lease payments classified the same way, and earnings with inventory effects treated consistently. Only then can their margins, leverage, cash conversion and returns be compared meaningfully.

The adjustments rarely change the conclusion about which company is more profitable or more indebted, but they can change it materially at the margin, and they change the multiples. A peer set in which IFRS companies show EBITDA before lease costs and net debt that includes leases, while US companies show neither, will usually make the IFRS companies look cheaper on enterprise value to EBITDA and more indebted on net debt to EBITDA than they are, the kind of error that can move a valuation range or a covenant calculation. The multiple falls because lease liabilities are typically a smaller multiple of annual lease cost than the multiple at which the business trades: Shell's lease liabilities were about 4x its annual lease payments. Reading both companies' figures from the notes, as Shell's 2025 annual report and ExxonMobil's 2025 annual report allow, is what keeps the comparison honest.