Ford 2006 Annual Report Download - page 58
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Notes to the Financial Statements
56
NOTE 2. SUMMARY OF ACCOUNTING POLICIES (Continued)
Asset Impairments
Held-for-Sale and Discontinued Operations. We perform an impairment test on an asset group to be discontinued,
held for sale, or otherwise disposed of when management has committed to the action and the action is expected to be
completed within one year. We estimate fair value to approximate the expected proceeds to be received, less transaction
costs, and compare it to the carrying value of the asset group. An impairment charge is recognized when the carrying
value exceeds the estimated fair value. A gain is recognized upon disposal if the estimated fair value exceeds the
carrying value of the asset group.
Held-and-Used Long-Lived Assets. We monitor the carrying value of long-lived asset groups held for potential
impairment when certain triggering events have occurred. These events include current period losses combined with a
history of losses or a projection of continuing losses. When a triggering event occurs, a test for recoverability is
performed, comparing projected undiscounted future cash flows (utilizing current cash flow information and expected
growth rates) to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the
asset group fair value is measured relying primarily on the discounted cash flow methodology. Additionally, we consider
various market multiples (e.g., revenue and earnings before interest, taxes and depreciation and amortization ("EBITDA"))
and consult with external valuation experts. An impairment charge is recognized for the amount by which the carrying
value of the asset group exceeds its estimated fair value.
Revenue Recognition — Automotive Sector
Sales are recorded when the risks and rewards of ownership are transferred to our customers (generally dealers and
distributors). In the majority of our sales arrangements, this occurs when products are shipped from our manufacturing
facilities. When vehicles are shipped to customers or modifiers on consignment, revenue is recognized when the vehicle
is sold to the ultimate customer. We also sell vehicles to daily rental car companies subject to guaranteed repurchase
options. These vehicles are accounted for as operating leases. At the time of sale, the proceeds are recorded as
deferred revenue in Accrued liabilities and deferred revenue. The difference between the proceeds and the guaranteed
repurchase amount is recognized in Automotive sales over the term of the lease, using a straight-line method. Also at the
time of sale, the cost of the vehicles is recorded as an operating lease in Other current assets. The difference between
the cost of the vehicle and the estimated auction value is depreciated in Automotive cost of sales over the term of the
lease. At December 31, 2006 and 2005, included in Accrued liabilities and deferred revenue was $3.6 billion and
$4.6 billion, respectively, and included in Other current assets was $3.2 billion and $4.1 billion, respectively, for these
vehicles.
Income generated from cash and cash equivalents, investments in marketable securities, loaned securities and other
miscellaneous receivables is reported in Automotive interest income and other non-operating income/(expense), net.
Revenue Recognition — Financial Services Sector
Revenue from finance receivables is recognized using the interest method. Certain origination costs on receivables
are deferred and amortized, using the interest method, over the term of the related receivable as a reduction in financing
revenue. Rental revenue on operating leases is recognized on a straight-line basis over the term of the lease. Initial
direct costs related to leases are deferred and amortized on a straight-line basis over the term of the lease. The accrual
of interest on receivables is discontinued at the time a receivable is determined to be uncollectible.
Income generated from cash and cash equivalents, investments in marketable securities, and other miscellaneous
receivables is reported in Financial Services revenues.