To avoid a 25% duty applicable to cargo vehicles, Ford (F) imported Transit Connect vehicles as “passenger wagons” that were later converted into cargo vans. The creativity resulted in Ford paying the 2.5% duty applicable to certain passenger vehicles imported from Turkey, saving the company millions of dollars.

In 2013, the U.S. Customs and Border Protection (CBP) ruled that imported Transit Connects weren’t really passenger vehicles and were subject to the 25% duty. After years of challenges and appeals that resulted in a Federal Appeals Court siding with the CBP, The Supreme Court refused to hear Ford’s appeal and the company paid the increased duties it owed.

In its latest 10-K, Ford revealed the CBP isn't done punishing the company:

“... on November 18, 2021, CBP assessed against us a monetary penalty of $1.3 billion and additional duties of $181 million, plus interest.”

Though Ford plans to “contest” the penalties, the CBP is clearly angry over Ford’s behavior. To skirt the import rules, Ford is accused of installing what amounts to a dummy back seat— to qualify as a passenger van rather than a cargo van— which was designed to immediately be removed once the vehicle passed Customs.

The company has recorded a reserve for the penalty.

Separately, Ford is understating its future lease liabilities, offering investors an incomplete picture of its future financial obligations. The annual report indicates Ford has more than $1.53 billion in future undiscounted operating lease liabilities. This understates Fords true liability since the company doesn’t count leases not yet commenced. The exclusion is buried in the footnotes and states:

“Excludes approximately $252 million in future lease payments for various operating leases commencing in a future period.”

On an undiscounted basis, Ford’s $252 million in not yet commenced leases are 16.37% of the company’s total future lease obligations.

Under an accounting loophole, companies can omit from the balance sheet leases that haven’t started as well as corporate offices under construction or build-to-suit arrangements. It’s seemingly inconsistent with FASB’s guidance on the topic which states if a lease is legally binding— as Ford acknowledges— Topic 842 (ASU 2016-02) makes clear it must be accounted for on the balance sheet:

“A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)...”