Ford May Add $10 Billion To Net Income Through A Simple Accounting Change
In a 10-K report filed with the SEC, it was revealed that Ford Motor Company (NYSE:F) could add $10 billion to their net income with a mere account change. Not only is the accounting change very legit, but they are obliged to make the accounting change.
The 10-K said:
“[O]ur current low effective tax rate is primarily the result of our valuation allowance against deferred tax assets. Sustained levels of profitability are expected to lead to reversal of the majority of this valuation allowance, which could occur as early as the second half of 2011.”
Ford has a valuation allowance. A valuation allowance is a reserve held on the company books when they believe it doesn’t expect to use a tax loss in the near future. Meaning they know they will keep losing money for a while. Ford can hang on to a credit that they could have applied to its taxes until they return to a sustained profitability — or profits that they actually pay taxes on.
In 2006 Ford’s accounting team created the allowance after anticipating that there would be several years of financial struggle. At the end of 2010, the valuation allowance was worth $15.7 billion.
Ford will be able to use their $31.4 billion worth of losses between 2005-2009 for offsetting tax obligations for the next several years even if Ford continues to remain profitable.
[Fool.com]This article was written by Amit Chowdhry. You can follow me at @amitchowdhry or on Google+ at +AmitChowdhry