NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

Accounting Standards Update (“ASU”) 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting. On January 1, 2017, we adopted the amendments to accounting standards codification (“ASC”) 718 which simplify accounting for share-based payment transactions. Prior to this amendment, excess tax benefits resulting from the difference between the deduction for tax purposes and the compensation costs recognized for financial reporting were not recognized until the deduction reduced taxes payable. Under the new method, we will recognize excess tax benefits in the current accounting period. In addition, prior to January 1, 2017, the employee share-based compensation expense was recorded net of estimated forfeiture rates and subsequently adjusted at the vesting date, as appropriate. As part of the amendment, we have elected to recognize the actual forfeitures by reducing the employee share-based compensation expense in the same period as the forfeitures occur. We have adopted these changes in accounting method using the modified retrospective method by recognizing one-time adjustments to retained earnings for excess tax benefits previously unrecognized and the change in accounting for forfeited awards.

ASU 2014-09, Revenue - Revenue from Contracts with Customers. On January 1, 2017, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.

A majority of our sales revenue continues to be recognized when products are shipped from our manufacturing facilities. For certain vehicle sales where revenue was previously deferred, such as vehicles subject to a guaranteed resale value recognized as a lease and transactions in which a Ford-owned entity delivered vehicles, we now recognize revenue when vehicles are shipped in accordance with the new revenue standard.

The new revenue standard also provided additional clarity that resulted in reclassifications to or from Revenue, Cost of sales, and Financial Services other income/(loss), net.

NOTE 2. NEW ACCOUNTING STANDARDS (Continued)

The cumulative effect of the changes made to our consolidated January 1, 2017 balance sheet for the adoption of ASU 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting and ASU 2014-09, Revenue - Revenue from Contracts with Customers were as follows (in millions):



	Balance at December 31, 2016		Adjustments Due to ASU 2016-09		Adjustments Due to ASU 2014-09			Balance at January 1, 2017
Balance Sheet
Assets
Trade and other receivables	$	11,102	$	—	$	(17	)	$	11,085
Inventories	8,898		—		(9		)	8,889
Other assets, current	3,368		—		307			3,675
Net investment in operating leases	28,829		—		(1,078		)	27,751
Deferred income taxes	9,705		536		(13		)	10,228

Liabilities
Payables	21,296		—		262			21,558
Other liabilities and deferred revenue, current	19,316		—		(1,429		)	17,887
Automotive debt payable within one year	2,685		—		326			3,011
Other liabilities and deferred revenue, non-current	24,395		—		(5		)	24,390

Equity
Capital in excess of par value of stock	21,630		6		—			21,636
Retained earnings	15,634		530		36			16,200

As part of ASU 2016-09, we retrospectively reclassified cash paid to taxing authorities related to shares withheld for tax purposes from operating activities to financing activities on our consolidated statement of cash flows. Cash paid to taxing authorities related to shares withheld for tax purposes was about $57 million and $56 million for the first half of 2016 and 2017, respectively. This standard did not have a material impact on our second quarter and first half 2017 consolidated income statement or June 30, 2017 consolidated balance sheet.

NOTE 2. NEW ACCOUNTING STANDARDS (Continued)

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet for the periods ended June 30, 2017 was as follows (in millions):



	Second Quarter							First Half
	As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)			As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)
Income statement
Revenues
Automotive	$	37,113	$	36,898	$	215		$	73,588	$	73,040	$	548
Financial Services	2,738		2,641		97			5,407		5,221		186

Costs and expenses
Cost of sales	33,349		33,184		165			66,057		65,630		427
Interest expense on Automotive debt	277		266		11			556		528		28
Non-Financial Services other income/(loss), net	658		679		(21		)	1,370		1,411		(41		)
Financial Services other income/(loss), net	74		171		(97		)	96		282		(186		)
Provision for/(Benefit from) income taxes	209		204		5			858		846		12
Net income	2,050		2,037		13			3,644		3,604		40



	June 30, 2017
	As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)
Balance Sheet
Assets
Trade and other receivables	$	10,159	$	10,199	$	(40	)
Other assets, current	3,291		2,951		340
Net investment in operating leases	28,597		29,553		(956		)
Deferred income taxes	10,145		10,170		(25		)

Liabilities
Payables	23,568		23,285		283
Other liabilities and deferred revenue, current	19,958		21,393		(1,435		)
Automotive debt payable within one year	2,911		2,511		400
Other liabilities and deferred revenue, non-current	24,840		24,845		(5		)
Deferred income taxes	735		735		—

Equity
Retained earnings	18,437		18,361		76

NOTE 2. NEW ACCOUNTING STANDARDS (Continued)

ASU 2017-07, Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On January 1, 2017, we adopted the amendments to ASC 715 that improve the presentation of net periodic pension and postretirement benefit costs. We retrospectively adopted the presentation of service cost separate from the other components of net periodic costs. The interest cost, expected return on assets, amortization of prior service costs, net remeasurement, and other costs have been reclassified from Cost of Sales and Selling, administrative, and other expenses to Non-Financial Services other income/(loss), net. We elected to apply the practical expedient which allows us to reclassify amounts disclosed previously in the retirement benefits note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. On a prospective basis, the other components of net periodic benefit costs will not be included in amounts capitalized in inventory or property, plant, and equipment.

The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other postretirement employee benefits (“OPEB”) plans on our consolidated income statement for the periods ended June 30, 2016 was as follows (in millions):



	Second Quarter						First Half
	As Revised		Previously Reported		Effect of Change Higher/(Lower)		As Revised		Previously Reported		Effect of Change Higher/(Lower)
Income statement
Cost of sales	$	32,522	$	32,348	$	174	$	63,039	$	62,629	$	410
Selling, administrative, and other expenses	2,784		2,661		123		5,474		5,223		251
Non-Financial Services other income/(loss), net	686		389		297		1,454		793		661

We also adopted the following standards during 2017, none of which had a material impact to our financial statements or financial statement disclosures:



Standard		Effective Date
2017-05	Gains and Losses from the Derecognition of Nonfinancial Assets - Clarifying the Scope of Asset Derecognition Guidance	January 1, 2017
2017-04	Goodwill and Other - Simplifying the Test for Goodwill Impairment	January 1, 2017
2017-03	Accounting Changes and Error Corrections and Investments - Equity Method and Joint Ventures	January 1, 2017
2017-01	Business Combinations - Clarifying the Definition of a Business	January 1, 2017
2016-17	Consolidation - Interests Held through Related Parties That Are under Common Control	January 1, 2017
2016-07	Equity Method and Joint Ventures - Simplifying the Transition to the Equity Method of Accounting	January 1, 2017
2016-06	Derivatives and Hedging - Contingent Put and Call Options in Debt Instruments	January 1, 2017
2016-05	Derivatives and Hedging - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships	January 1, 2017
2016-04	Extinguishments of Liabilities - Recognition of Breakage for Certain Prepaid Stored-Value Products	January 1, 2017
2017-09	Stock Compensation - Scope of Modification Accounting	April 1, 2017

Accounting Standards Issued But Not Yet Adopted

The following represent the standards that will, or are expected to, result in a significant change in practice and/or have a significant financial impact to Ford.

ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which replaces the current incurred loss impairment method with a method that reflects expected credit losses. The new standard is effective as of January 1, 2020, and early adoption is permitted as of January 1, 2019. We will adopt the new credit loss guidance by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. We are assessing the potential impact to our financial statements and disclosures.

NOTE 2. NEW ACCOUNTING STANDARDS (Continued)

ASU 2016-02, Leases. In February 2016, the FASB issued a new accounting standard which provides guidance on the recognition, measurement, presentation, and disclosure of leases. The new standard supersedes the present U.S. GAAP standard on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We plan to adopt the new standard at its effective date of January 1, 2019. We anticipate adoption of the standard will add between $1.5 billion and $2 billion in right-of-use assets and lease obligations to our balance sheet and will not significantly impact pre-tax profit. We are in the early stages of implementation.