By on March 4, 2011

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.

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16 Comments on “$6.6 Billion Profit For Ford? Bah Humbug! Wait Until The End Of This Year!...”


  • avatar
    johnny ro

    Any finance people here?

    Reversing a GAAP allowance is not a taxable event, so no new taxes will be due.

    “GAAP” taxes are purely imaginary, although they are audited and form a very important part of GAAP “earnings”. They presume fixed tax rate, whether tax dodges and changing rates reduce this to zero or not.
     
    “Tax” taxes are cash on the barrel head delivered to the IRS.
     
    As you can see they are two different numbers.
     
    So, the amount they actually pay in tax is different than what they record as a tax expense for GAAP. If they find that over previous years they have recorded more “taxes” for GAAP than they actually paid, then this means they have a cushion, for GAAP, for future GAAP earnings that exceeds future “Tax” earnings and they wont have to pay “Tax” taxes on the future GAAP earnings. This is a Deferred Tax Asset for GAAP.

    An imaginary asset.  Its an accumulated difference between a real number and an imaginary number.
     
    The “allowance” is where they said in the past, when sales tanked, and they really lost real money, “we are unlikely to have future GAAP earnings so the future imaginary asset is not likely to be realized” and they recorded a bad imaginary number (the allowance) that offsets the happy imaginary asset to zero on the balance sheet. But we already know its not real.
     
    So now they have optimism. They reverse prior pessimism. They zero out the allowance, restoring the imaginary asset to its full glory on balance sheet.  The amount of allowance they zero out, they call this “GAAP earnings”. You can’t pay bills with this kind of earnings. Except imaginary bills. You do get headlines though. Nice headlines.
     
    Don’t blame Ford. This is what GAAP requires. GAAP accounting for taxes is an unhappy weird committee compromise.
     
    The good news is they are on the rebound and have objective evidence (to convince the auditors that they can reverse their imaginary allowance). Thats the best headline. They will make some decent product and sell it and make money.
     

  • avatar
    GS650G

    Let’s get the stock price back up so I can make some money.

  • avatar
    Zackman

    Anyone who can gloat over GM’s problems and cheer on Ford need to re-evaluate their feelings. Ford is in deep trouble, just delayed. With Mercury gone and Lincoln seemingly on life support, I wouldn’t champion them too much, but wait and see if something positive comes out of all this. I still see a major shake-out of all the car companies of the world, either by disappearing completely, or being absorbed like Chrysler is in the process of, with certain “branded” platforms to carry on a name, like “Zenith”, “Crosley” and a few others. It’s the future, and I accept it. All this talk of “profit” is just funny-money and legal-eze musical chairs for now.

    • 0 avatar
      sitting@home

      I don’t think the demise of Lincoln and Mercury will have much effect on the future of Ford. “Ford” is a global brand which is pretty well respected in most parts of the world, Lincoln and Mercury are footnotes in the North American market only. Most of Toyota’s worldwide income comes from the “Toyota” brand and Ford can do the same. Maybe in a few years when people have forgotten the baleen-grilled re-badged Ford-as-Lincolns, the Lincoln brand can be re-introduced worldwide with some unique sheetmetal as a proper luxury marque.

    • 0 avatar
      srogers

      Who’s going to miss Lincoln if it goes? Same guys who pine for lost Mercurys, I guess.
      Ford is fine without those weak brands.

    • 0 avatar
      Zackman

      @sitting@home: Yes, you have a good point there. I hope you’re right for Ford’s sake, as I wish failure on no one.

  • avatar
    Steven02

    Adding to what Zackman said…
    Perhaps for should take some of this profit and invest it into Lincoln which is doing so badly.  Either that, or Ford will be out of the luxury business soon.

    • 0 avatar
      WRohrl

      Methinks that by selling off Jaguar, Land Rover, Aston Martin, and Volvo that Ford has no interest in being IN the luxury business.  Compared to at least 3 of the above, Lincoln is a complete also-ran for any real luxury perception….Note that none of the above were particularly (if at all) profitable while under Ford’s tutelage, but ALL improved significantly (well, maybe not Volvo) from a quality and durability standpoint during that time.

    • 0 avatar
      Educator(of teachers)Dan

      Note that none of the above were particularly (if at all) profitable while under Ford’s tutelage, but ALL improved significantly (well, maybe not Volvo) from a quality and durability standpoint during that time.
       
      I wonder if Tata sends Bill Ford a Christmas card and a goodie basket for turning Jaguar’s quality around before he sold it to them?

  • avatar
    GS650G

    The luxury business is fickle at best. The most respected names don’t have low end offerings, witness GM trying to sell crappy Chevies as Caddies.
    Ford has a lot of promise, I don’t see them going the way of the other two.

  • avatar
    Lorenzo

    Okay, you’ve convinced me that the happy profit headline is imaginary accounting. How are you going to convince Ford’s UAW workers that they’re not entitled to hefty pay raises from those imaginary profits they read about in the headlines?

  • avatar

    Maybe UAW workers will get imaginary pay raises?

    • 0 avatar
      Lorenzo

      Would that be followed by an imaginary strike?
       
      That reminded me of a cartoon of picketers holding up sticks with no signs.
      The sign painters’ union was on strike.


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