Accounting & Tax

Ford Restatement Triggered by SFAS 133

Derivative accounting trips up automaker and forces six years worth of restatements. Still, officials say results for 2002 "will improve."
Stephen TaubOctober 23, 2006

Ford Motor Co. said it will restate its results from 2001 through the second quarter of 2006 to correct the accounting for certain derivative transactions. The embattled auto giant added that the final restatement amounts have not yet been determined.

However, company officials did say that that Ford and Ford Motor Credit Co.’s results in 2002 “will improve materially.” Other periods are still under study, they added. The company also said the correction to the accounting does not affect the economics of the derivative transactions, nor have any impact on the company’s cash.

Ford said it expects to finalize restatement amounts for the current period and all previous periods by the time its files its quarterly report for the September 30 three-month period. It explained that Ford Motor Credit’s interest rate swaps were entered into as part of the unit’s asset-liability management strategy. The swaps economically hedge the interest rate risk associated with long-term debt issuances.

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The automaker elaborated that officials discovered that since 2001, certain interest rate swaps entered into by Ford Motor Credit to hedge interest rate risk inherent in certain long-term, fixed rate debt were accounted for incorrectly under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. The reason: the record keeping did not satisfy the standard’s technical accounting rules to qualify for exemption from the more strict effectiveness testing requirements.

Ford stressed in its announcement that Ford Motor Credit uses transactions involving derivatives, including swaps, forwards, and options, to reduce economic risk and volatility “in a disciplined and defensive manner.” PricewaterhouseCoopers LLP audited Ford’s 2001 through 2005 financial statements, which included a review of these swaps.

“This is a very complicated accounting standard, and interpretation of its proper application has continued to evolve,” said Executive Vice President and Chief Financial Officer Don Leclair, in a statement. “Our overall hedging strategy is sound.”