Risk Management

Ford Files Restated Results

The accounting revisions concerned interest-rate swaps.
Stephen TaubNovember 14, 2006

Ford Motor restated its results for the past five years to correct accounting for derivative transactions at its Ford Motor Credit arm. The revisions boosted net income by a total of over $800 million for the period.

The change in accounting concerned interest-rate swaps, which the company asserted did not affect the economics of the derivative transactions involved, nor did it have any effect on Ford Motor Credit’s cash.

The revisions boosted 2002 net income by nearly $1.8 billion and 2001 earnings by $656 million. The restatement cut 2005 earnings by $588 million, 2004 earnings by $444 million, and 2003 results by $592 million. Ford filed its revised earnings five days late, albeit within the allowable extension time.

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Ford reported that it restated its results after discovering that a number of interest rate swaps that the company had entered into didn’t satisfy the requirements of a provision of SFAS 133, that Financial Accounting Standards Board stricture that would have exempted the swaps from periodic assessments of their effectiveness.

The automaker noted SFAS 133 states that hedge accounting is appropriate only for those hedging relationships that a company expects will be highly effective in offsetting changes in fair value or cash flows attributable to the risk being hedged.

Although the swaps are “highly effective” economic hedges, nearly all the swaps failed to meet certain exemption requirements, according to Ford. “SFAS 133 precludes the company from retroactively testing the effectiveness of these transactions in order to continue to apply hedge accounting,” the company added.

As a result, the restatement reflects changes in the fair value of the swaps as derivative gains and losses during the affected periods. At the same time, the company didn’t record any offsetting change in the value of the debt they were hedging. “We have fully remediated the material weakness in our internal controls over financial reporting related to SFAS 133,” said K.R. Kent, vice chairman and CFO.