The second-largest U.S. automaker, Ford, announced that its 2016 net income will be cut by $2 billion due to a change in the way the company values pension and retirement benefits.
The automaker expects to lose $3 billion on pension and retirement plans. Of the $3 billion, $900 billion is associated with U.S. pension plans, $1.9 billion is for plans outside the U.S., and $200 million is for other retiree benefit plans globally, according to Ford.
The company is making changes to their system for pension and retiree-benefit plans. Ford is now counting pensions and other retiree obligations in the year they were incurred rather than spreading it out over several years.
The mark-to-market method will provide a “much better, transparent view of the operating performance of the business,” Chief Financial Officer Bob Shanks said in an interview.
The automaker said the pension loss will now be accounted for each year and listed as a special item, “since it is not reflective of the underlying operating results of our automotive business.”
“On an after-tax basis, the re-measurement loss will reduce our full-year net income by about $2 billion in 2016,” Ford said in a document filed with the U.S. Securities and Exchange Commission.
Re-measurement is the re-evaluation of the value of an asset or liability on a company’s financial statements.
According to the company, its pension plan was underfunded by $8.9 billion in 2016. By switching to the mark-to-market plan, Ford is following in the footsteps of many other companies, including Verizon Communications Inc., AT&T Inc. and Honeywell International Inc.
The pension accounting change will not affect the company’s pre-tax profits, according to the automaker. Ford is still expected to meet their projected $10.2 billion in adjusted pre-tax profit for 2016. This figure is down from $10.8 billion from the same time a year ago.
This step is one of many that Ford has taken in previous years to reduce their pension risk. The company also made $11 billion in 2012 to help fund its plans.
The accounting change will not affect profit sharing for UAW hourly workers.
The automaker plans to announce its fourth-quarter earnings on January 26. Ford does not release guidance for its net income.
In 2016, Ford reported a pre-tax profit of $3.8 billion in quarter 1, a pre-tax profit of $3.0 billion in quarter 2 and a pre-tax profit of $1.4 billion in quarter 3.