In a move that will give the company’s bottom line an immediate, $1.5 billion boost, Ford Motor Company is changing its method for reporting pension and other post-retirement employee benefits.
The change will provide a clearer view of Ford’s operating performance and segment results, according to Bob Shanks, the maker’s chief financial officer. In addition, Ford’s 2015 pre-tax profit, excluding special items, is now expected to increase to somewhere between $10 billion and $11 billion when the company issues its yearly financial statement late this month.
Ford retrospectively applied this change and revised prior quarterly results. For the first nine months of 2015, the maker now says it made $8.2 billion, compared to the originally reported $7 billion in net earnings. The changes were felt in a number of regions, perhaps most significantly in Europe which has been struggling to get back into the black for a decade. Instead of another loss for the first three quarters, Ford now says it earned $128 million there.
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The change will have no effect on cash, pension funding requirements or employees’ pension or other post-employment benefits, or OPEBs, Shanks said.
“Ford has delivered consistently strong operating results since 2010. The change we are announcing today in how we report accumulated costs related to our pension and OPEB plans will show that our operating results were even stronger, particularly in North America and Europe,” said Shanks.
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But not everyone is convinced that this so-called “smoothing” policy really is as transparent as claimed. Some feel it actually papers over some of the financial challenges Ford faces.
Shanks, however, insisted, “The change better aligns our operating results with our operating cash flow and makes our results more comparable to our major competitors. Taking this step was enabled by the pension de-risking strategy we announced in 2012 and have been implementing ever since.”
Mark-to-market, also known as immediate recognition accounting, has been adopted by many large U.S. corporations.
Under this method, which Ford adopted on Dec. 31, 2015, Ford will recognize retirement-related gains and losses in the year incurred. The calculation will usually be made during the fourth quarter, rather than amortizing them over many years.
In terms of pensions and other employee retirement benefits, there should be no change whatsoever.
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Despite the maker’s positive assessment of the move, the announcement didn’t reverse the ongoing slump in Ford’s stock price, shares tumbling by roughly 10% since the days leading into the long year-end holiday. The maker dipping to around $12.70 during mid-afternoon trading, a loss of around $0.40 for the day.
Ford will reveal its actual 2015 earnings on January 28th.
(Paul A. Eisenstein contributed to this report.)