Ford Motors Co: Financial Analysis
Property, Plant and Equipment
The property, plant and equipment valued at $ 24813 which shows an increase of 11 % as compare to 2011. Property, plant and equipment includes land, buildings and manufacturing plants and other machinery and tools and other assets that are used by the company in their routine business operations. Ford Motors Co. records all its assets at cost net of depreciation and other impairments. The company has a policy of capitalizing newly acquired assets when they intend to utilize them for longer periods which is usually more than one accounting year. The cost of maintaining assets and other repair and related costs are expensed when they are incurred.
Ford Motors Co. has a policy of depreciating assets using straight line method over their useful life. The company has a diversified range of machinery and equipment used primarily for the assembling of vehicles. Such equipments have an estimated life of minimum 3 years and maximum 10 years (Corporate.ford.com, 2013).
The factory premises and office building has an estimated useful life of 30 years and 36 years respectively. The company usually updates its software every three years and computers and other electronic devices are depreciated according to their warranty life. These assets are replaced before the warranty expires and gain or loss on disposal is recorded accordingly. Special tools are amortized using straight line method over an estimated life. Machinery and equipments represents a major portion of total noncurrent assets owned by the company. The annual report 2012 discloses $ 35,040 millions of machinery and equipment which was $ 34,363 in 2011. The figure for Land improvement and Building increased at $ 10,249 million in 2012 against $ 10,129 million reported in 2011. The land value has increased to $ 423 million which is 10 % percent more as compare to 2011. The software capitalization has declined to $ 1813 million from 1917 million of preceding year and construction in process estimated to be $ 1783 million which is significantly high than 2011. To date accumulated depreciation charges disclosed are $ 32,835 million and the total reported value of special tools less amortization is $ 8340 million. Therefore; the net property, plant and equipment reported is $ 24,813 million which shows an increase of almost 3% from $ 22,229 million reported in 2011. The total depreciation expense for the period in review is $ 1794 million and amortization for special tools expensed at $ 1861 million. The depreciation expense in the year 2011 was reported at $ 1759 million and amortization of special tools was disclosed at $1774 million (Robertson and Sibley, 2009).
Lease Commitments
The capital lease is an arrangement where the customer choices the assets which is then purchased by the lessor. The customer leases the asset from the lessor and utilizes it to generate business revenue. The amount of that asset is mutually agreed and paid out in installments and all risk and rewards of ownership are transferred to the lessee when the tenure expires. The lease to be classified as capital lease or finance lease has to meet certain criteria. The title must be transferred to the lessee at the expiration of the lease tenure. The lease term should be in accordance with the estimated useful life of an asset. The capital lease agreement allows the lessee to cancel the lease agreement but has to pay any costs associated with the cancellation. One of most significant feature of capital lease is that any gains or losses arising as a result of change in fair value will fall to the borrower. A part from totally owned assets, the company has lease commitment and obligations as well. Ford Motors Co. has leased land, building and other equipments under separate agreements for different contractual periods (Watkins and Rogers, 2009).
The annual report 2012 discusses the minimum operating lease obligations at a value of $ 217 for the year 2013 and $ 189 for 2014. The non cancellable operating lease commitments for the year 2015, 2016 and 2017 are reported at $ 144 million, & $ 98 million and $ 74 million respectively. The recorded expense against operating lease for automotive sector is $ 404 million and for financial service sector is $ 106 million. Ford Motors Co. owes costs related to legal obligations to settle post retirement benefits under IAS 19. The opening balance of liabilities for company’s conditional asset retirement obligations is $ 266 million and during the year $ 8 million has been paid for settlement. The reported closing value after revision estimates is $ 267 million which is slightly higher than $ 266 million of year 2011 (Corporate.ford.com, 2013).
Intangible Assets
The net carrying amount of intangible assets is $ 87 million which is 13% less than 2011. Intangible assets at Ford Motors comprise of license, advertising contract, property rights, patents, brands, customer contracts, and technology. All these intangible assets are amortized over its determinable life. The gross carrying amount of license and advertising contracts is $ 118 million excluding an accumulated depreciation of $ 54 million. The net carrying amount is $64 million which is 73 % of the total net carrying amount of intangible assets. The gross carrying amount of patents, land rights and others are $ 27 million which is slightly higher than $ 26 million of 2011. The gross carrying amount of land rights has been consistent at $ 23 million. The gross carrying value of patents was $ 26 million in 2011 which has increased to $ 27 million in 2012.
The accumulated amortization for land rights remained at $ 8 million in 2012 whereas amortization for license and advertising has increased to $ 54 million in 2012 from 47 million of 2011. The pre-tax amortization expense for the period is reported at $ 10 million which is less than $ 12 million of 2011. The company’s amortization periods range from 5 years to 25 years for their license and advertising agreements. The period for property rights usually ranges from 40 years to 50 years. For patents and brands, the period normally ranges between 7 years to 17 years. According to an estimate the amortization cost will remain $ 10 million for the subsequent periods. The net carrying amount of other intangible assets is $ 1 million in 2012. The other intangible assets were quite significant in prior periods. The gross carrying amount in the year 2011 was $ 27 million excluding an accumulated amortization of $ 22 million. The pre-tax amortization expense for the year 2011 was $ 12 million. Ford Motors Co. has investments in subsidiaries and associates but surprisingly the company does not have any reported goodwill on their financial statements (Corporate.ford.com, 2013).
Short and Long term Liabilities
The total liabilities for the year ended 2012 is $ 174,243 million which was $ 163,277 in 2011. The long term debt represents a significant portion of total liabilities. In the year 2011, the total debt was $ 99,488 million which has increased to $ 105,058 million in 2012. The company’s short term payables or creditors have increased to $ 19,308 million as compare to 17,724 of 2011. The long term debt has been acquired to expand manufacturing facility to meet the rising market demand. The deferred income taxes have declined to $ 470 million from $ 696 million of 2011. The current liabilities comprise of accrued interest, employee benefit plans, pension, dealer and customer allowances and claims. The accrued interest for the year is $ 277 million which is comparatively high of the preceding period (Watkins and Rogers, 2009).
The company’s long term debt is composed of short-term and long-term unsecured debt securities, convertible debt securities, and unsecured and secured borrowings from different financial institutions and individual lenders. The company offers assets backed source of financing with the help of lending institutions and capital market investments. Ford Motors Co has a policy of recording debt on their balance sheet at par value adjusted for unamortized discount or adjustments related to fair value hedges. The associated costs with debt instruments is usually capitalized and amortized over the life cycle of debt instrument and the interest expense is recorded using prevailing market interest or using the effective interest method. Gains and losses on the settlement of financial instruments are recorded in the income statement and adjustments are made accordingly.
The total debt payable within one year is $ 1386 million and the fair value of automotive sector debt payable after one year is $ 14, 867 which is slightly higher than $ 13,451 of 2011. The convertible notes remained same at $ 908 million while the unamortized discount reduced to $ 142 million from $ 172 million. The total long term debt for the financial sector is reported at $ 90,802 which is almost 5 % higher than the previous years. The fair value of long term loan reported in the balance sheet reflects interest payable which is not yet paid. Interest owed on automotive loan is reported under accrued liabilities and deferred revenue and is $194 million and $205 million at the closing of December 31, 2012 and 2011, respectively. Interest accrued on Financial Services loan is $744 million and $836 million as on December 31, 2012 and 2011, respectively (Corporate.ford.com, 2013).
The total automotive sector debt to be matured is $ 1382 million, $ 689 million, $ 1895 million, $1476 million, $ 699 million, and $ 8115 million in the year from 2013 to 2017 and thereafter. The total amounts of automotive debt to be matured in five years period will $ 14256 million. The total financial service sector debt to be matured in succeeding five years is $ 105,058 million. The breakup amount is $ 38,790 million, $ 17,013 million, $ 15,871 million, $ 7721 million, $ 8877 million and $ 16,786 million from 2013 to 2017 and thereafter. The asset backed debt is $ 43, 581 while the fair value adjustments are estimated to be $ 791 million in the next five years. The proportion of unsecured debt is almost 40 % of the total debt for financial services sector (Corporate.ford.com, 2013).
The interest expense for the year 2012 is $ 3115 million and in 2011 it was $ 3614 million whereas the depreciation expense reported in the income statement is $ 2524 million in the current year against $ 1843 million of 2011. The cash flow from financing activities represents that proceeds from issuance of debt instruments is $ 32,436 million in 2012 which is less than $ 35,921 of 2011. The principal payments on other long term debts are $ 29,210 million in 2012 whereas it was $ 43,095 in 2011.The annual report contains nothing about contingent liabilities and as far as depreciation of fixed assets are concerned we have already discussed above that Ford Motors Co. prefers straight line method over an estimated life of assets (Robertson and Sibley, 2009).
References
Corporate.ford.com (2013). Ford Motor Company Annual Reports - Annual Ford Financial Reports. [online] Retrieved from: http://corporate.ford.com/our-company/investors/reports-financial-information/annual-reports [Accessed: 8 Nov 2013].
Robertson, L. and Sibley, C. (2009). CIMA managerial level. Oxford: Elsevier.
Watkins, J. and Rogers, M. (2009). CIMA operational level. Oxford: Elsevier.
