Ford 2009 Annual Report Download - page 65

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2009 Annual Report 63
Changes in assumptions or estimates may materially affect the fair value measurement of an asset group, and therefore
may affect the amount of the impairment. The following are key assumptions we use in making cash flow projections for
Ford Credit's operating leases:
• Auction values. Ford Credit's projection of the market value of the vehicles when Ford Credit sells them at the end of
the lease.
• Return volume. Ford Credit's projection of the number of vehicles that will be returned at lease-end.
• Discount rate. Ford Credit's estimation of the discount rate, reflecting hypothetical market assumptions regarding
borrowing rates, credit loss patterns, and residual value risk.
See Notes 15 of the Notes to the Financial Statements for more information regarding impairment of long-lived assets.
Sensitivity Analysis. Higher fuel prices and the weak economic climate in the United States and Canada during the
second quarter of 2008 caused a more pronounced and accelerated shift in consumer preferences away from full-size
trucks and SUVs to smaller, more fuel-efficient vehicles. This shift in consumer preferences, combined with the weak
economic climate, caused a significant reduction in auction values for used full-size trucks and SUVs (as discussed in
Note 15 of the Notes to the Financial Statements). Recognizing these rapidly-changing market conditions, Ford Credit
tested its U.S. and Canadian investments in operating leases for recoverability. As a result of this testing, Ford Credit
concluded that the operating lease portfolio was impaired and we and Ford Credit recorded a pre-tax charge of $2.1 billion
in second quarter 2008 financial statements. This charge represents the amount by which the carrying value of certain
vehicle lines in Ford Credit's lease portfolio, primarily full-size trucks and SUVs, exceeded their fair value. See "Residual
Risk" discussion above for additional information regarding the significant decrease in auction values.
At the time of the impairment, Ford Credit estimated that a one percent decrease in the auction value of the impaired
vehicles assumed in the impairment testing would have decreased the fair value estimate by about $50 million. A one
percentage point increase in the return rate of the impaired vehicles assumed in the impairment testing would have
decreased the fair value estimate by about $30 million. A one percentage point increase in the discount rate assumed in
the impairment testing would have decreased the fair value estimate by about $100 million.
Although at this time we do not anticipate additional impairment charges, a deterioration of the business climate would
impact the assumptions we use in future impairment testing and could result in additional impairments.
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.
U.S. GAAP standards of accounting for income taxes require 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 as a likelihood of
more than 50%) 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. U.S. GAAP 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.