Ford 2007 Annual Report Download - page 44

Management’s Discussion and Analysis of Financial Condition and Results of Operations
42 Ford Motor Company | 2007 Annual Report
See Notes 2, 12 and 13 of the Notes to the Financial Statements for more information regarding the costs and
assumptions for impairment of goodwill and long-lived assets.
Sensitivity Analysis. Due to changes in business conditions (discussed in Note 13 of the Notes to the Financial
Statements) our fourth quarter 2007 impairment testing of goodwill included changes in our assumptions used to measure
the fair value of Volvo, a component of PAG. Specifically, we changed our business projections (most notably, lowering
net revenues and new vehicle volumes), our projected growth rates, and our assumptions of economic projections
(specifically foreign currency exchange rates). As a result, we recorded a $2.4 billion goodwill impairment.
After the impairment, $1.4 billion of goodwill remains in PAG related solely to Volvo. A worsening of the business
climate would impact the assumptions we use in performing our future impairment tests and could result in additional
impairment of goodwill. We estimate that a 0.5 percentage point decrease in the long-term growth rate would decrease the
fair value estimate by about $250 million. A 0.5 percentage point increase in the discount rate assumption would decrease
the fair value estimate by about $350 million.
Valuation of Deferred Tax Assets
Nature of Estimates Required. Deferred tax assets and liabilities are recognized based on the future tax consequences
attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure
deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary
differences to be recovered or paid.
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes ("SFAS No. 109"),
requires a reduction of the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the
available evidence, it is more likely than not (defined by SFAS No. 109 as a likelihood of more than 50 percent) such assets
will not be realized. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences
of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for
deferred tax consequences represents our best estimate of those future events. Changes in our current estimates, due to
unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.
Assumptions and Approach Used. In assessing the need for a valuation allowance, we consider both positive and
negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available
evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance. The
weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be
objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income
exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting
losses. SFAS No. 109 states that a cumulative loss in recent years is a significant piece of negative evidence that is
difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets.
This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence,
including the following:
• Nature, frequency, and severity of current and cumulative financial reporting losses – A pattern of objectively
measured recent financial reporting losses is heavily weighted as a source of negative evidence. In certain
circumstances, historical information may not be as relevant due to changed circumstances;
• Sources of future taxable income – Future reversals of existing temporary differences are heavily-weighted sources
of objectively verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary
differences are a source of positive evidence only when the projections are combined with a history of recent profits
and can be reasonably estimated. Otherwise, these projections are considered inherently subjective and generally
will not be sufficient to overcome negative evidence that includes relevant cumulative losses in recent years,
particularly if the projected future taxable income is dependent on an anticipated turnaround to profitability that has
not yet been achieved. In such cases, we generally give these projections of future taxable income no weight for the
purposes of our valuation allowance assessment pursuant to SFAS No. 109; and