Ford 2005 Annual Report Download - page 47

Ford Motor Company Annual Report 2005 44 Ford Motor Company Annual Report 2005 45
Managementʼs Discussion and Analysis of Financial
Condition and Results of Operations
Accumulated Depreciation on Vehicles Subject to Operating Leases
Accumulated depreciation on vehicles subject to operating leases reduces the value of the leased vehicles in our operating lease
portfolio from their original acquisition value to their expected residual value at the end of the lease term. These vehicles primarily
consist of retail lease contracts for Ford Credit and vehicles sold to daily rental car companies subject to a guaranteed repurchase
option ("rental repurchase vehicles") for the Automotive sector.
We monitor residual values each month, and we review the adequacy of our accumulated depreciation on a quarterly basis. If we
believe that the expected residual values for our vehicles have changed, we revise depreciation to ensure that our net investment in
operating leases (equal to our acquisition value of the vehicles minus accumulated depreciation) will be adjusted to reflect our revised
estimate of the expected residual value at the end of the lease term. For retail leases, such adjustments to depreciation expense would
result in a change in the depreciation rates of the vehicles subject to operating leases, and are recorded on a straight-line basis.
For retail leases, each lease customer has the option to buy the leased vehicle at the end of the lease or to return the vehicle to the
dealer. If the customer returns the vehicle to the dealer, the dealer may buy the vehicle from us or return it to us. Over the last three
years, about 68% of Ford Creditʼs North America operating lease vehicles have been returned to us. For rental repurchase vehicles,
practically all vehicles are returned to us.
Nature of Estimates Required. For vehicles subject to operating leases, we establish an expected residual value for the vehicle.
We estimate the expected residual value by evaluating historical auction values, historical return volumes for our retail leased
vehicles, industry-wide used vehicle prices, our marketing plans and vehicle quality data.
Assumptions Used. For retail leases, our accumulated depreciation on vehicles subject to operating leases is based on our
assumptions of:
•Auction value. The market value of the vehicles when we sell them at the end of the lease; and
•Return volume. The number of vehicles that will be returned to us at lease end.
See Note 12 of the Notes to the Financial Statements for more information regarding accumulated depreciation on vehicles subject
to operating leases.
Sensitivity Analysis. For returned vehicles, we face a risk that the amount we obtain from the vehicle sold at auction will be less
than our estimate of the expected residual value for the vehicle. At year-end 2005, if future auction values for retail operating leases
on Ford, Lincoln and Mercury brand vehicles in the United States were to decrease by one percent from our present estimates, the
impact would be to increase our depreciation on these vehicles by about $40 million. Similarly, if return volumes for our existing
portfolio of retail operating leases on Ford, Lincoln and Mercury brand vehicles in the United States were to increase by one percent
from our present estimates, the impact would be to increase our depreciation on these vehicles by about $5 million. These increases in
depreciation would be charged to depreciation expense during the 2006 through 2008 period so that the net investment in retail
operating leases at the end of the lease term for these vehicles is equal to the revised expected residual value. Adjustments to the
amount of accumulated depreciation on retail operating leases will be reflected on our balance sheet in Net investment in operating
leases and on our income statement in Depreciation, in each case under the Financial Services sector.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion
No. 20 and SFAS No. 3. This statement changes the requirements for accounting and reporting of a voluntary change in accounting
principle and changes required by an accounting pronouncement when the specific transition provisions are absent. This statement
requires retrospective application to prior periods' financial statements of changes in accounting principle. If it is impracticable to
determine either the period-specific effects or the cumulative effect of the change, this statement requires that the new accounting
principle be adopted prospectively from the earliest practicable date. SFAS No. 154 is effective in fiscal years beginning after
December 15, 2005. We do not expect any impact on our financial position and results of operations.