Ford 2009 Annual Report Download - page 59

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2009 Annual Report 57
CRITICAL ACCOUNTING ESTIMATES
We consider an accounting estimate to be critical if: 1) the accounting estimate requires us to make assumptions about
matters that were highly uncertain at the time the accounting estimate was made, and 2) changes in the estimate that are
reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the
current period, would have a material impact on our financial condition or results of operations.
Management has discussed the development and selection of these critical accounting estimates with the Audit
Committee of our Board of Directors. In addition, there are other items within our financial statements that require
estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have
a material impact on our financial statements.
Warranty and Additional Service Actions
Nature of Estimates Required. The estimated warranty and additional service action costs are accrued for each vehicle
at the time of sale. Estimates are principally based on assumptions regarding the lifetime warranty costs of each vehicle
line and each model year of that vehicle line, where little or no claims experience may exist. In addition, the number and
magnitude of additional service actions expected to be approved, and policies related to additional service actions, are
taken into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our
assumptions could materially affect net income.
Assumptions and Approach Used. Our estimate of warranty and additional service action obligations is re-evaluated on
a quarterly basis. Experience has shown that initial data for any given model year can be volatile; therefore, our process
relies upon long-term historical averages until sufficient data are available. As actual experience becomes available, it is
used to modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting accruals
are then compared with present spending rates to ensure that the balances are adequate to meet expected future
obligations.
See Note 31 of the Notes to the Financial Statements for more information regarding costs and assumptions for
warranties and additional service actions.
Pensions
Nature of Estimates Required. The estimation of our pension obligations, costs, and liabilities requires that we make
use of estimates of the present value of the projected future payments to all participants, taking into consideration the
likelihood of potential future events such as demographic experience. These assumptions may have an effect on the
amount and timing of future contributions.
Assumptions and Approach Used. The assumptions used in developing the required estimates include the following
key factors:
• Discount rates. We base the discount rate assumption primarily on the results of a cash flow matching analysis,
which matches the future cash outflows for each major plan to a yield curve comprised of high quality bonds specific
to the country of the plan. Benefit payments are discounted at the rates on the curve and a single discount rate
specific to the plan is determined.
• Expected return on plan assets. The expected return on plan assets assumption reflects historical returns and long-
run inputs from a range of advisors for capital market returns, inflation, bond yields, and other variables, adjusted for
specific aspects of our investment strategy. The assumption is based on consideration of all inputs, with a focus on
long-term trends to avoid short-term market influences. Assumptions are not changed unless structural trends in the
underlying economy are identified, our asset strategy changes, or there are significant changes in other inputs.
• Salary growth. The salary growth assumption reflects our long-term actual experience, outlook, and assumed
inflation.
• Inflation. Our inflation assumption is based on an evaluation of external market indicators.
• Expected contributions. The expected amount and timing of contributions is based on an assessment of minimum
requirements, and additional amounts based on cash availability and other considerations (e.g., funded status,
avoidance of regulatory premiums and levies, and tax efficiency).
• Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.
• Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.