Ford Swaps Accounting Over Interest Rates
Section 404 requirements were implemented by the Sarbanes-Oxley Act in 2004. Section 404 reporting on internal controls required many large filers to restate financial statements in order to correct misstatements. This report will focus on Ford Motor Company, and how they were affected by the new accounting rules. More specifically, it will discuss why restatements of Ford’s financials were necessary, and who prompted the change. Then, it will discuss the audit opinion on Ford prior to and after the restatements. Finally, it will explain the impact of the restatements on the financials, and ultimately who was to blame for the improper accounting treatment of certain transaction that caused a need for restatements.
There were many accounting issues that were affected by Section 404, but one that pertains to Ford in particular. SFAS 133, titled Accounting for Derivative Instruments and Hedging Activities, was the main subject of Ford’s restatements. Ford put out a press release related to this matter in 2006, which claimed “Ford Motor Company uses transactions involving derivatives, including swaps, forwards and options, to reduce economic risk and volatility in a disciplined and defensive manner” (Ford, 2006). Simply put, Ford found that they were able to minimize the risk of long-term debt issuances through interest rate swaps. Ultimately, it was determined that some of the interest rate swaps were not accounted for properly because they were not exempt from SFAS 133. Because these swaps were subject to SFAS 133, Ford would need to restate its financial statements in accordance with those accounting rules.
The derivative transactions briefly described above were not prevented or changed as a result of SFAS 133. Rather, it was necessary that Ford restate their financials as a result of improper accounting treatment for some transactions involving interest rate swaps. Ford was improperly accounting for...
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