Why Did Ford Restructure Its Accounting For Pension And Other Post-Retirement Benefits?

Ford Motor Company F announced today that it will be switching to “mark-to-market” accounting for its pension and retiree-benefit plans.

While accounting nuances may not the optimal source of earnings growth, the move will likely have a meaningfully positive impact on Ford’s 2016 earnings.

In the past, Ford has utilized accounting techniques that gradually “smooth” losses from these plans into earnings results over time. However, the mark-to-market approach now means that losses from these plans will be included in company earnings in the year in which they occur.

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In terms of immediate impact, the change means that Ford will revise its earnings dating all the way back to 2011 to include backdated pension losses.

Looking forward, these losses will no longer weigh on 2015 earnings, and will provide a $1.5 billion boost to Ford’s pretax 2015 income.

Auto rivals General Motors Company GM and Fiat Chrysler Automobiles NV FCAU have previously made the same transition to mark-to-market accounting on pension losses.

Disclosure: the author holds no position in the stocks mentioned.