Ford switch to mark-to-market pension accounting: are more to follow?

Ford today announced a switch to mark-to-market reporting for pension gains and losses. A handful of other major corporations already use this approach, and Ford’s move could be a sign that others will follow.

Mark-to-market in the earnings statement

The mark-to-market pension accounting question has been rumbling on for a while. Although corporate balance sheets update every year to reflect the latest market value of pension assets and liabilities, those market adjustments are—in most cases—dripped into earnings statements over a period of several years. Five years ago, a few corporations—notably Verizon Communications, AT&T, Honeywell and UPS—chose to abandon the amortization approach for their earnings statements and mark-to-market instead. At the time, we noted that “with these firms having beaten the path, it will be easier for others to follow”¹: after all, accounting is an area where it generally makes sense to follow similar approaches to everyone else.

But others did not, by and large, follow. Or not until recently. Last summer, Federal Express announced the adoption of mark-to-market. And then came today’s announcement from Ford.

Ford switch to mark-to-market pension accounting: are more to follow? Source: Corporate 10-K filings, Russell Investments. See endnote for corporate ticker identification.

There are two reasons that this could prove to be a harbinger of more to follow. One is that changes like this tend to come in waves: peer comparisons are constantly being made. Ford’s CFO Bob Shanks explicitly noted that the change “makes our results more comparable to our major competitors.” Those competitors are, of course, Chrysler, which is owned by Fiat and hence follows international accounting standards (which have been marked to market since 2013) and General Motors.

GM is in an unusual position: it does not currently mark gains and losses to market, but it did so, in effect, as a one-off when it entered bankruptcy in 2009. As the chart above shows, this has led to much smaller impact from gains and losses for GM than for the other members of the $20 billion club that are shown. So GM’s situation seems to be a factor in Ford’s decision, and Ford’s action could presumably lead to GM (and others) considering whether they might want to move, too.

So the effect of peer comparisons is one reason that Ford’s announcement may be followed by others.

Favorable timing?

The other reason is timing. The impact of changing to mark-to-market varies greatly from year-to-year, depending on whether there are accumulated gains or accumulated losses that are yet to be amortized under the previous approach. Ford noted that the change led to a one-off bump in reported earnings of around $1.5 billion. And, based on the indicative numbers provided in last year’s 10-K statements, we estimate that the short-term impact on every corporation in the $20 billion club who have not switched to mark-to-market would be positive if they were to make the switch this year. In a couple of cases, the impact could well exceed Ford’s $1.5 billion.

Even though this is not “real” money (in the sense that it represents how results are reported rather than any change in the underlying economics of a corporation), it’s easier to make a change that makes results look better rather than worse. In other words, if CFOs would like to change to mark-to-market, now may prove a favorable time to do so.

So Ford’s announcement is notable. We’ll be watching carefully if others follow.

Endnote. The twenty corporations shown are: IBM (IBM); General Motors (GM); General Electric (GE); Ford (F); Boeing (BA); AT&T (T); Exxon Mobil (XOM); Lockheed Martin (LMT); United Parcel Service (UPS): United Technologies (UTX); Hewlett Packard (HPQ); Northrop Grumman (NOC); E.I. DuPont de Nemours (DD); Pfizer (PFE); Dow Chemical (DOW); Johnson & Johnson (JNJ); Raytheon (RTN); Verizon Communications (VZ); Federal Express (FDX); Honeywell (HON).
¹R. Collie and J, Gannon (2011) Pre-empting FASB: mark-to-market pension cost accounting. Russell Practice Note.