Ford 2009 Annual Report Download - page 62

Management’s Discussion and Analysis of Financial Condition and Results of Operations
60 Ford Motor Company | 2009 Annual Report
Nature of Estimates Required – Held-for-Sale Operations. We perform an impairment test on an asset group to be
discontinued, held for sale, or otherwise disposed of when management has committed to the action and the action is
expected to be completed within one year. We estimate fair value to approximate the expected proceeds to be received.
An impairment charge is recognized when the carrying value of the asset group exceeds the estimated fair value less
transaction costs.
Automotive Sector
Assumptions and Approach Used. We measure the fair value of a reporting unit or asset group based on market prices
(i.e., the amount for which the asset could be sold to a third party), when available. When market prices are not available,
we estimate the fair value of the reporting unit or asset group using the income approach and/or the market approach. The
income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and
estimates derived from a review of our operating results, approved business plans, expected growth rates, and cost of
capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about
future economic conditions and other data. Many of the factors used in assessing fair value are outside the control of
management, and these assumptions and estimates may change in future periods.
Changes in assumptions or estimates can materially affect the fair value measurement of a reporting unit or asset
group, and therefore can affect the amount of the impairment. The following are key assumptions we use in making cash
flow projections:
• Business projections. We make assumptions about the demand for our products in the marketplace. These
assumptions drive our planning assumptions for volume, mix, and pricing. We also make assumptions about our
cost levels (e.g., capacity utilization, cost performance, etc.). These projections are derived using our internal
business plans that are updated at least annually and reviewed by our Board of Directors.
• Long-term growth rate. A growth rate is used to calculate the terminal value of the business, and is added to the
present value of the debt-free interim cash flows. The growth rate is the expected rate at which a business unit's
earnings stream is projected to grow beyond the planning period.
• Discount rate. When measuring possible impairment, future cash flows are discounted at a rate that is consistent
with a weighted-average cost of capital that we anticipate a potential market participant would use. Weighted-
average cost of capital is an estimate of the overall risk-adjusted after-tax rate of return required by equity and debt
holders of a business enterprise, which is developed with the assistance of external financial advisors.
• Economic projections. Assumptions regarding general economic conditions are included in and affect our
assumptions regarding industry sales and pricing estimates for our vehicles. These macro-economic assumptions
include, but are not limited to, industry sales volumes, inflation, interest rates, prices of raw materials
(i.e., commodities), and foreign currency exchange rates.
The market approach is another method for measuring the fair value of a reporting unit or asset group. This approach
relies on the market value (i.e., market capitalization) of companies that are engaged in the same or similar line of
business.
Automotive Sector – Goodwill
We had $34 million of Automotive goodwill on our balance sheet at December 31, 2009, all related to Ford of Europe.
Volvo goodwill is reflected as part of held-for-sale assets (see Note 24 of the Notes to the Financial Statements for
additional detail).
Ford Europe. We performed our annual goodwill testing in the fourth quarter of 2009 and assessed that the carrying
value of our Ford Europe reporting unit at December 31, 2009 did not exceed its fair value.
Volvo. As previously disclosed, in the fourth quarter of 2007 we recorded a $2.4 billion impairment of our Volvo
goodwill. We estimated at that time that a 0.5 percentage point decrease in the long-term growth rate would have
decreased our fair value estimate by about $250 million. A 0.5 percentage point increase in the discount rate assumption
would have decreased the fair value estimate by about $350 million.
In the fourth quarter of 2008, we performed annual goodwill impairment testing for our Volvo reporting unit. We
compared the carrying value of our Volvo reporting unit to its fair value, and concluded that the goodwill was not impaired.
We performed this measurement relying primarily on the income approach, applying a discounted cash flow methodology.