Ford 2006 Annual Report Download - page 59

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57
Notes to the Financial Statements
57
NOTE 2. SUMMARY OF ACCOUNTING POLICIES (Continued)
Marketing Incentives and Interest Supplements
Marketing incentives, including customer and dealer cash payments and costs for special financing and leasing
programs paid to the Financial Services sector, are recognized by the Automotive sector as revenue reductions. These
revenue reductions are accrued at the later of the date the related vehicle sales to the dealers are recorded or the date
the incentive program is both approved and communicated. Costs of these marketing incentives are measured based on
assumptions regarding the number of vehicles that will have a specific incentive applied against them. The Financial
Services sector identifies payments for special financing and leasing programs as interest supplements or other support
costs and recognizes them consistent with the earnings process of the underlying receivable or operating lease.
Sale of Receivables
Ford Credit securitizes finance receivables and sells retail installment sale contracts in whole-loan sale transactions to
fund operations and to maintain liquidity. Most securitizations do not qualify for off-balance sheet treatment. As a result,
the securitized receivables and associated debt remain on our balance sheet and no gain or loss is recorded for these
transactions.
We record our sales of receivables as off-balance sheet when the following criteria are met:
x The receivables are isolated from the transferor; we transfer the receivables to bankruptcy-remote special
purpose entities ("SPEs") or other independent entities.
x The receivables are transferred to an entity that has the right to pledge or exchange the assets, or to a
qualifying SPE whose beneficial interest holders have the right to pledge or exchange their beneficial interests.
In our off-balance sheet transactions, we generally use a qualifying SPE or we sell the receivables to an
independent entity. In either case, we do not restrict the transferee from pledging or exchanging the
receivables or beneficial interests.
x The transferor does not maintain control over the receivables; we are not permitted to regain control over the
transferred receivables or cause the return of specific receivables, other than through a "cleanup" call.
For off-balance sheet sales of receivables, gains or losses are recognized in the period in which the sale occurs. We
retain certain interests in receivables sold in off-balance sheet securitization transactions. In determining the gain or loss
on each sale of finance receivables, the investment in the sold receivables pool is allocated between the portions sold and
retained based on their relative fair values at the date of sale. Retained interests may include residual interest in
securitizations, restricted cash held for the benefit of securitization investors and subordinated securities. These interests
are recorded at fair value with unrealized gains recorded, net of tax, as a separate component of Accumulated other
comprehensive income/(loss) ("OCI"). Residual interests in securitizations represent the present value of monthly
collections on the sold finance receivables in excess of amounts needed for payment of the debt and other obligations
issued or arising in the securitization transactions. We do not retain any interests in the whole-loan sale transactions but
continue to service the sold receivables.
In both off-balance sheet securitization transactions and whole-loan sales, we also retain the servicing rights and
generally receive a servicing fee. The fee is recognized as collected over the remaining term of the related sold finance
receivables. When the servicing fee adequately compensates us for retaining the servicing rights, we do not establish a
servicing asset or liability. Interest supplement payments due from affiliates related to receivables sold in off-balance
sheet securitizations or whole-loan sale transactions are recorded, on a present value basis, as a receivable in Other
assets on our balance sheet at the time the receivables are sold. Present value accretion is recognized in Financial
Services revenues.