Ford Motor Co.’s 2015 profit will get an unexpected boost of $1.5 billion after an accounting change that provides more transparency on the state of its retiree benefit investments.
The automaker (F) said its 2015 pre-tax profit, which will be reported Jan. 28, is now estimated at $10 billion to $11 billion following the shift.
The company said it would now recognize gains or losses attributable to pensions and retiree health care benefit investments immediately, instead of amortizing the costs over a period of several years.
The pivot comes as many major U.S. companies are making a similar change to abandon what actuarial experts call “smoothing,” a technique designed to spread the impact of investment gains or losses over several years.
Critics say the “smoothing” practice disguises the true impact of investment losses on a company’s financial health. Defenders say it’s necessary to ensure one-time swings don’t have an out-sized effect, under the assumption that investments will be more stable over a longer period.
Ford said future swings in pensions and health care investments will no longer be calculated as part of the automotive business unit going forward. Instead, it will be accounted for as a special item every year.
The change shows that “our operating results were even stronger, particularly in North America and Europe,” Ford Chief Financial Officer Bob Shanks said in a statement. “The change better aligns our operating results with our operating cash flow and makes our results more comparable to our major competitors.”
The change became effective Dec. 31. Ford said it would not affect retirement benefits.