Ford 2010 Annual Report Download - page 112

Notes to the Financial Statements
110 Ford Motor Company | 2010 Annual Report
NOTE 9. ALLOWANCE FOR CREDIT LOSSES (Continued)
Ford Credit makes projections of two key assumptions to assist in estimating the consumer allowance for credit losses:
• Frequency – the number of finance receivables that are expected to default over the loss emergence period,
measured as repossessions
• Loss severity – the expected difference between the amount a customer owes when the finance contract is
charged off and the amount received, net of expenses from selling the repossessed vehicle, including any
recoveries from the customer
The consumer receivables portfolio allowance is evaluated primarily using a collective loss-to-receivables ("LTR")
model that based on historical experience indicates that credit losses have been incurred in the portfolio even though the
particular receivables that are uncollectible cannot be specifically identified. The LTR model is based on the most recent
years of history. Each LTR is calculated by dividing credit losses by average end-of-period receivables excluding
unearned interest supplements and allowance for credit losses. A weighted-average LTR is calculated for each class of
consumer receivables and multiplied by the end-of-period receivable balances for that given class.
The loss emergence period ("LEP") is a key assumption within Ford Credit's models and represents the average
amount of time between when a loss event first occurs to when it is charged off. This time period starts when the
borrower begins to experience financial difficulty. It is evidenced later, typically through delinquency, before eventually
resulting in a charge-off. The loss emergence period is a multiplier in the calculation of the collective consumer allowance
for credit losses.
For consumer receivables greater than 120 days past due, the uncollectible portion of the receivable is charged-off, such
that the remaining recorded investment in the loan is equal to the estimated fair value of the collateral less costs to sell.
After the establishment of this allowance for credit losses, if management believes the allowance does not reflect all
losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant factors, an
adjustment is made based on management judgment.
Non-Consumer Receivables
Ford Credit estimates the allowance for credit losses for non-consumer receivables based on historical LTR ratios,
expected future cash flows, and the fair value of collateral.
Collective Allowance for Credit Losses. Ford Credit estimates an allowance for non-consumer receivables that are not
specifically identified as impaired using a LTR model for each financing product based on historical experience. This LTR
is a weighted average of the most recent historical experience and is calculated consistent with the consumer receivables
LTR approach. All accounts that are specifically identified as impaired are excluded from the calculation of the non-
specific or collective allowance.
Specific Allowance for Impaired Receivables. The wholesale and dealer loan portfolio is evaluated by grouping
individual loans into risk pools determined by the risk characteristics of the loan (such as the amount of the loan, the
nature of the collateral, and the financial status of the debtor). The risk pools are analyzed to determine if individual loans
are impaired, and a specific allowance is estimated based on the present value of the expected future cash flows of the
receivable discounted at the loan's effective interest rate or the fair value of any collateral adjusted for estimated costs to
sell.
After establishment of the collective and the specific allowance for credit losses, if management believes the allowance
does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions or other
relevant factors, an adjustment is made based on management judgment.