Ford 2009 Annual Report Download - page 16

Management’s Discussion and Analysis of Financial Condition and Results of Operations
14 Ford Motor Company | 2009 Annual Report
OVERVIEW
Generation of Revenue, Income and Cash
Our Automotive sector's revenue, income, and cash are generated primarily from sales of vehicles to our dealers and
distributors (i.e., our customers). Vehicles we produce generally are subject to firm orders from our customers and are
deemed sold (with the proceeds from such sale recognized in revenue) after they are produced and shipped or delivered to
our customers. This is not the case, however, with respect to vehicles produced for sale to daily rental car companies that
are subject to a guaranteed repurchase option or vehicles produced for use in our own fleet (including management
evaluation vehicles). Vehicles sold to daily rental car companies that are subject to a guaranteed repurchase option are
accounted for as operating leases, with lease revenue and profits recognized over the term of the lease. When we sell the
returned vehicle at auction, we recognize a gain or loss on the difference, if any, between actual auction value and the
projected auction value. In addition, revenue for finished vehicles we sell to customers or vehicle modifiers on
consignment is not recognized until the vehicle is sold to the ultimate customer. Therefore, except for the impact of the
daily rental units sold subject to a guaranteed repurchase option, those units placed into our own fleet, and those units for
which recognition of revenue is otherwise deferred, wholesale volumes to our customers and revenue from such sales are
closely linked with our production.
Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Credit. Upon Ford
Credit originating the wholesale receivable related to a dealer's purchase of a vehicle, Ford Credit pays cash to the
relevant legal entity in our Automotive sector in payment of the dealer's obligation for the purchase price of the vehicle.
The dealer then pays the wholesale finance receivable to Ford Credit when it sells the vehicle to a retail customer.
Our Financial Services sector's revenue is generated primarily from interest on finance receivables, net of certain
deferred origination costs that are included as a reduction of financing revenue, and such revenue is recognized over the
term of the receivable using the interest method. Also, revenue from operating leases, net of certain deferred origination
costs, is recognized on a straight-line basis over the term of the lease. Income is generated to the extent revenues exceed
expenses, most of which are interest, depreciation, and operating expenses.
Transactions between our Automotive and Financial Services sectors occur in the ordinary course of business. For
example, Ford Credit receives interest supplements and other support cost payments from the Automotive sector in
connection with special-rate vehicle financing and leasing programs that we sponsor. Ford Credit records these payments
as revenue, and, for contracts purchased prior to 2008, our Automotive sector made the related cash payments, over the
expected life of the related finance receivable or operating lease. Effective January 1, 2008, to reduce ongoing Automotive
obligations to Ford Credit and to be consistent with general industry practice, we began paying interest supplements and
residual value support to Ford Credit on an upfront, lump-sum basis at the time Ford Credit purchases eligible contracts
from dealers. See Note 1 of the Notes to the Financial Statements for a more detailed discussion of transactions and
payments between our Automotive and Financial Services sectors. The Automotive sector records the estimated costs of
marketing incentives, including dealer and retail customer cash payments (e.g., rebates) and costs of special-rate financing
and leasing programs, as a reduction to revenue. These reductions to revenue are accrued at the later of the date the
related vehicle sales to the dealer are recorded or at the date the incentive program is both approved and communicated.
Key Economic Factors and Trends Affecting the Automotive Industry
Global Economic and Financial Market Crisis. Beginning in 2008, the global economy entered a period of very weak
economic growth, led by the recession in the United States and followed by declines in other major markets around the
world. The financial market crisis set off a series of events that generated conditions more severe than those experienced
in several decades. The characteristics of the financial crisis were unique, in part due to the complex structure of housing-
related securities that were at the epicenter of the financial market turmoil. A steep housing correction, especially in the
U.S. and U.K. markets, along with downward valuations of mortgage-backed and related securities, combined to foster a
crisis in confidence. Although several other factors contributed to current economic and financial conditions, the influence
of these financial developments was very prominent. The interrelationships among financial markets worldwide ultimately
resulted in a synchronous global economic downturn, the effects of which became evident in the fourth quarter of 2008 as
major markets around the world all suffered setbacks.