Ford will restate previous financial results from 2001 to the end of the second quarter of 2006 to correct the accounting for certain derivative transactions under the Statement of Financial Accounting Standards (SFAS) 133, Accounting forDerivative Instruments and Hedging Activities.
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In a statement, the automaker said the correction to the accounting does not affect the economics of the derivative transactions, nor have any impact on the company’s cash. However, the restatements are expected to affect the preliminary financial results Ford announced on Monday for its 2006 third quarter.
Ford has discovered that since 2001, certain interest rate swaps Ford Motor Credit Company had entered into to hedge the interest rate risk inherent in certain long-term fixed rate debt were accounted for incorrectly under SFAS 133 because they did not satisfy the standard’s technical accounting rules to qualify for exemption from the more strict effectiveness testing requirements. FMCC uses transactions involving derivatives, including swaps, forwards and options, to reduce economic risk and volatility in a disciplined and defensive manner.
PricewaterhouseCoopers, the company’s independent registered public accounting firm, audited Ford’s 2001 through 2005 financial statements, which included a review of these swaps.
“This is a very complicated accounting standard, and interpretation of its proper application has continued to evolve,” said executive vice president and chief financial officer Don Leclair. “Our overall hedging strategy is sound. We will correct our accounting for these types of derivative instruments. We remain committed to strong internal controls and reporting transparency.”
FMCC’s interest rate swaps were entered into as part of the unit’s asset-liability management strategy. The swaps economically hedge the interest rate risk associated with long-term debt issuances. Although the final restatement amounts have not yet been determined, executives estimate, based on the information to date, that Ford and Ford Motor Credit Company’s results in 2002 will improve materially.
Other periods are still under study.
