Ford 2002 Annual Report Download - page 53

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER POST RETIREMENT BENEFITS (RETIREE HEALTH CARE AND LIFE INSURANCE)
See Note 20 of the Notes to our Financial Statements for more information regarding costs and assumptions for other post
retirement benefits.
Nature of Estimates Required: The measurement of our obligations, costs and liabilities associated with other post retirement
benefits (e.g., retiree health care) requires that we make use of estimates of the present value of the projected future payments
to all participants, taking into consideration the likelihood of potential future events such as health care cost increases, salary
increases and demographic experience, which may have an effect on the amount and timing of future payments.
Assumptions and Approach Used: The assumptions used in developing the required estimates include the following key factors:
• Health care cost trends • Inflation
• Discount rates • Expected return on plan assets
• Salary growth • Mortality rates
• Retirement rates
Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment
of likely long-term trends. We base the discount rate assumption on investment yields available at year-end on corporate
long-term bonds rated AA. Our inflation assumption is based on an evaluation of external market indicators. The salary growth
assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation. The expected return on plan
assets reflects history and asset allocation. Retirement and mortality rates are based primarily on actual plan experience. The
effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore,
generally affect our recognized expense in such future periods.
Sensitivity Analysis: The effect of the indicated increase/decrease in the selected assumptions is shown below (assuming
no changes in benefit levels); the 2003 expense effect includes the impact on service cost and interest cost as well as
amortization of gains or losses (in millions):
Effect on U.S. and Canadian Plans:
December 31, 2002
Percentage Point Obligation 2003 Expense
Assumption Change Higher/(Lower) Higher/(Lower)
Discount rate +/- 0.5 pts. $(1,700)/$1,700 $(130)/$130
Health care cost trend +/- 1.0 pts. 3,900/(3,300) 560/(460)
ALLOWANCE FOR CREDIT LOSSES
See Note 10 of the Notes to our Financial Statements for more information regarding our allowance for credit losses.
The allowance for credit losses is our estimate of the probable credit losses related to impaired finance receivables and
operating leases as of the date of the financial statements. Significant judgment is required in estimating this amount because
credit losses vary substantially over time, and estimating probable losses requires a number of assumptions about matters
which are uncertain.
Nature of Estimates Required: We estimate the probable credit losses related to impaired finance receivables and operating
leases by evaluating several different factors with econometric models. These factors include historical credit loss trends, the
credit quality of our present portfolio, trends in historical and projected used vehicle values, and general economic measures.
Assumptions and Approach Used: The factors listed above result in a projection of two key assumptions:
• Frequency –the percentage of finance receivables and operating leases that we expect to default over a period of time,
which is measured principally by the repossession rate (the ratio of the number of vehicles repossessed in a time period
divided by the average number of accounts outstanding in the same time period).
• Loss severity – the difference between the amount a customer owes us when we charge off the finance contract and the
amount we receive, net of expenses, from selling the repossessed vehicle, including any recoveries from the customer.
We estimate the expected frequency and loss severity with econometric models. We monitor credit loss performance monthly
and assess the adequacy of our allowance for credit losses quarterly.
Sensitivity Analysis: We believe the present level of our allowance for credit losses is adequate to cover the probable losses
related to impaired finance receivables and operating leases; however, changes in the assumptions to derive frequency and
severity would have an impact on the allowance for credit losses. Over the past three years, repossession rates for our U.S.
retail and lease portfolio have varied between 2% and 3%.