Ford reported a $6.6 billion profit for 2010, its highest in more than 10 years. This year, they could add $13 billion to the profit line, without selling an extra car. How will Ford pull off the miracle of the loaves and profits? With a simple bookkeeping entry.
In this week’s 10-K filing, Ford said that they might strike a valuation allowance held against deferred tax assets. The reserve was created in 2006, when Ford became a serial lossmaker. Eliminating the allowance could add $10 billion to $13 billion to Ford’s net income this year, says Automotive News [sub].
According to Robert Willens, a New York corporate tax specialist, “this is a very positive statement from Ford. If you take the radical step of eliminating your valuation allowance, then you’ve developed a high degree of confidence in your future profit-making ability.”
At the end of 2010, the reserve stood at a hefty $15.7 billion. Once a company believes it has entered a sustained period of profitability, it must remove the item from its books, Willens said.
But wait, won’t that cost Ford a load of taxes? Ford hasn’t paid U.S. taxes since 2005, and probably won’t until the end of the decade, said Brian Johnson, a Chicago-based analyst with Barclays Capital Management. Ford is sitting on $31.4 billion in operating losses from 2005 to 2009. Only when those losses are used up, the taxman can come and collect again.