Ford Motor Company Case Lecture 4 Ford Motor

Ford Motor Company Case Lecture 4

Ford Motor Company Case Main SFAS #94 concerns 2

Ford Motor Company Case Main SFAS #94 concerns • Debt concerns – what information would Ford’s existing creditors know about Ford Motor Company & First Nationwide Financial? – would this information have been reflected (if known) in the lending decisions of Ford’s creditors? – what happens to existing & future debt contracts? • Effect on incentive compensation contracts 3

Ford Motor Company Case Nature of the agreement • Profit-sharing arrangement under which eligible hourly employees share in the consolidated “pre-tax profits” provided certain defined return on sales targets have been met (as defined in Part B, II) • Aimed at profits on US-based automotive operations (Part B, I [19]) • If SFAS #94 applied to Ford’s 1986 accounts, the substance of the agreement would be substantially altered • Adjusting the agreement to minimize the effect of SFAS #94 would not be trivial (resolution requires arbiter) 4

Ford Motor Company Case Agreement affect Ford’s reaction? • Yes. – In 1986 $372 million shared with employees (exhibit 4 note) – Mandatory consolidation of financial subsidiaries affects“adjusted income before tax” (section B, I 19) & the sales numbers that determine the sharing rate and so could significantly redistribute wealth between the UAW & shareholders • the plan includes FMCC but not FNCC income whether they are consolidated or not. FMCC’s income is currently included on an after-tax basis, with consolidation it would enter on a pretax basis • currently both FMCC and FNCC sales are excluded from the sales number entering the return on sales & sharing rate calculation. With consolidation FMCC’s sales are included &affect return on sales & the sharing rate 5

Inclusion of FMCC income, exclusion of FNCC income • • • B I 19(a) excludes subsidiary categories 2&5 in figure 1 B I 19(b) excludes subsidiary category 4 That leaves as the profit-sharing base those subsidiaries that are either consolidated (category 1) or equity accounted (category 3) subject to B I 28’s definition of US operations FMCC is currently in category 3 so that its after-tax income is included in the base FNCC is excluded from the base both before and after consolidation because it was acquired after October 1, 1984 6

Inclusion of FMCC income, exclusion of FNCC income 7

Inclusion of FMCC sales • As B I 22 stands unconsolidated subsidiary sales (including those of FNCC & FMCC) do not enter consolidated sales • Post SFAS #94 both subsidiary sales are included in consolidated sales, but FNCC’s are removed via the operation of B I 22(a)(i) 8

Quantification sales effect 9

Quantification income effect 10

Quantification UAW profit share UAW share increases by $49 million of 13. 4% 11

Ford Motor Company Case Epilogue • In 1988 Ford consolidated its previously unconsolidated financial subsidiaries having renegotiated the agreement with the UAW as part of the October, 1987 collective bargaining agreement • On October 7, 1987 Ford signed a supplemental agreement with the UAW that stated: “In the event the proposed FASB rule regarding consolidation of majority-owned subsidiaries becomes final, appropriate adjustments will be made to “Profits” and “Sales and Revenues” for the purpose of the Profit Sharing Plan. These adjustments will be made to achieve the same results as would be achieved under the present practice of reporting the after-tax results of unconsolidated subsidiaries (majority-owned ‘nonhomogeneous’ operations) on a single-line basis in the consolidated results of the parent Corporation and of excluding the revenues of these subsidiaries. ” 12

Ford Motor Company Case Appendix 1 13

Ford Motor Company Case Appendix 2 14

Ford Motor Company Case Appendix 3 15