Behind Ford’s Stellar Quarter, Extraordinary Accounting

By Nizar Manek
Columbia Journalism School ’12 

Thousands of employees helped Ford Motor achieve a 68-fold increase in net income during the fourth quarter, but none deserve more credit than the company’s accountants.

Of the $13.6 billion Ford earned during the last three months of 2011, most of it came from a rare quirk of tax accounting. As a result, the automaker’s headline earnings number hinted that the company had been far more profitable than it was.

In fact, Ford’s operating profit, which is more representative of its performance, was a letdown. The company reported operating income of about $1.1 billion for the fourth quarter, a year-over-year decline of about $189 million. The company earned 20 cents a share, a nickel less the average estimate of 15 analysts surveyed by Bloomberg.

Ford was transparent in its earnings release and explained that an extraordinary item had inflated its headline results. The item was a result of the company reversing its valuation allowance, which – though a tax expense – is recorded on the asset side of the income statement. The effect was a one-time accounting adjustment of $12.4 billion.

Although the valuation allowance largely negates Ford’s headline earnings number, it does suggest optimism within the company.

When a company first takes an allowance, it means management does not anticipate profits in the near future and is less likely to use its tax credit. Ford incurred substantial losses from 2006 to 2008, so it reduced its deferred tax assets by raising its valuation allowance.

When a company reverses that allowance, it indicates optimism in generating profits (and an ability to use those deferred tax assets).

For Ford, bringing tax expenses in line with tax payments is part of a strategy to reduce long-term debt and decrease interest expenses. The goal is to bring the company’s debt profile more in line with that of GM, which has no long-term debt and has been able to undercut Ford on prices.

That Ford had confidence to take back this allowance in one fell swoop suggests the company assumed it would be profitable and able to use the tax credits. In other words, the special item hinted at Ford’s faith that better years are ahead.


This article was written for the Columbia Journalism School’s seminar on business and economics journalism in the spring of 2012.

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