Ford 2010 Annual Report Download - page 64

Management’s Discussion and Analysis of Financial Condition and Results of Operations
62 Ford Motor Company | 2010 Annual Report
The effects of actual results differing from our assumptions and the effects of changing assumptions are included in
unamortized net gains and losses. Unamortized gains and losses are amortized over future periods and, therefore,
generally affect our recognized expense in future periods. The weighted average discount rate used to determine the
benefit obligation for U.S. plans at December 31, 2010 was 5.20%, compared with 5.74% at December 31, 2009,
resulting in an unamortized loss of about $250 million. This amount is expected to be recognized as a component of net
expense over the expected future years of service (approximately 13 years).
See Note 18 of the Notes to the Financial Statements for more information regarding costs and assumptions for other
postretirement employee benefits.
Sensitivity Analysis. The effect on U.S. and Canadian plans of a one percentage point increase/(decrease) in the
assumed discount rate would be a (decrease)/increase in the postretirement health care benefit expense for 2011 of
approximately $(40) million/$40 million, and in the year-end 2010 obligation of approximately $(660) million/$790 million.
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.
This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of
evidence, including the following:
• Nature, frequency, and severity of current and cumulative financial reporting losses. A pattern of objectively-measured
recent financial reporting losses is heavily weighted as a source of negative evidence. We generally consider
cumulative pre-tax losses in the three-year period ending with the current quarter to be significant negative evidence
regarding future profitability. We also consider the strength and trend of earnings, as well as other relevant factors. In
certain circumstances, historical information may not be as relevant due to changes in our business operations;
• Sources of future taxable income. Future reversals of existing temporary differences are heavily-weighted sources of
objectively verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary
differences are a source of positive evidence only when the projections are combined with a history of recent profits
and can be reasonably estimated. Otherwise, these projections are considered inherently subjective and generally
will not be sufficient to overcome negative evidence that includes relevant cumulative losses in recent years,
particularly if the projected future taxable income is dependent on an anticipated turnaround to profitability that has not
yet been achieved. In such cases, we generally give these projections of future taxable income no weight for the
purposes of our valuation allowance assessment pursuant to U.S. GAAP; and
• Tax planning strategies. If necessary and available, tax planning strategies would be implemented to accelerate
taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence
and, depending on their nature, could be heavily weighted.
See Note 23 of the Notes to the Financial Statements for more information regarding deferred tax assets.