Ford 2007 Annual Report Download - page 47

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2007 Annual Report 45
Assumptions Used. Ford Credit makes projections of two key assumptions:
• Frequency. The number of finance receivables and operating lease contracts that Ford Credit expects will default
over a period of time, measured as repossessions; and
• Loss severity. The expected difference between the amount a customer owes Ford Credit when Ford Credit
charges off the finance contract and the amount Ford Credit receives, net of expenses, from selling the repossessed
vehicle, including any recoveries from the customer.
Ford Credit uses these assumptions to assist in estimating its allowance for credit losses. See Note 6 of the Notes to
the Financial Statements for more information regarding allowance for credit losses.
Sensitivity Analysis. Changes in the assumptions used to derive frequency and severity would affect the allowance for
credit losses. The effect of the indicated increase/decrease in the assumptions is shown below for Ford, Lincoln and
Mercury brand vehicles in the United States retail and lease portfolio (in millions):
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* Reflects the number of finance receivables and operating lease contracts that Ford Credit expects will default over a period of time relative to the
average number of contracts outstanding.
Wholesale and Dealer Loan Portfolio. The wholesale and dealer loan portfolio is evaluated by segmenting individual
loans into risk pools, which are determined by the risk characteristics of the loan (such as the amount of the loan, the
nature of collateral, and the financial status of the dealer). The risk pools are analyzed to determine if individual loans are
impaired, and an allowance is estimated for the expected loss of these loans.
Changes in Ford Credit's assumptions affect the Provision for credit and insurance losses on our income statement and
the allowance for credit losses contained within Finance receivables, net and Net investment in operating leases on our
balance sheet, in each case under the Financial Services sector.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, Fair Value
Measurements ("SFAS No. 157"). This standard defines fair value, establishes a framework for measuring fair value in
U.S. GAAP, and expands disclosures about fair value measurements. SFAS No. 157 does not introduce new
requirements for when fair value measures must be used, but focuses on how to measure fair value. SFAS No. 157
establishes a fair value hierarchy to classify the sources of information used to measure fair value. SFAS No. 157 is
effective for us as of January 1, 2008. We are assessing the potential impact on present fair value measurement
techniques, on our disclosures, and on our financial position.
In September 2006, the FASB issued SFAS No. 158. This standard has certain recognition and disclosure
requirements that we adopted as of year-end December 31, 2006. Additionally, SFAS No. 158 requires an employer to
measure the funded status of a plan as of the date of its year-end statement of financial position. This requirement is not
effective until December 2008. The measurement date for substantially all of our worldwide postretirement benefit plans is
December 31. The potential impact on our financial condition for those plans in which we have not adopted the
requirement to measure plan assets and benefit obligation as of the date of our present statement of financial position is
minimal.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
– Including an amendment of FASB Statement No. 115 ("SFAS No. 159"). This standard permits entities to measure
certain financial assets and liabilities at fair value. The fair value option may be elected on an instrument by instrument
basis and any election is irrevocable. Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for us as of