Ford 2010 Annual Report Download - page 66

Management’s Discussion and Analysis of Financial Condition and Results of Operations
64 Ford Motor Company | 2010 Annual Report
Accumulated Depreciation on Vehicles Subject to Operating Leases
Accumulated depreciation on vehicles subject to operating leases reduces the value of the leased vehicles in our
operating lease portfolio from their original acquisition value to their expected residual value at the end of the lease term.
These vehicles primarily consist of retail lease contracts for Ford Credit and vehicles sold to daily rental car companies
subject to a guaranteed repurchase option ("rental repurchase vehicles") for the Automotive sector.
We monitor residual values each month, and we review the adequacy of our accumulated depreciation on a quarterly
basis. If we believe that the expected residual values for our vehicles have changed, we revise depreciation to ensure
that our net investment in operating leases (equal to our acquisition value of the vehicles less accumulated depreciation)
will be adjusted to reflect our revised estimate of the expected residual value at the end of the lease term. Such
adjustments to depreciation expense would result in a change in the depreciation rates of the vehicles subject to
operating leases, and are recorded prospectively on a straight-line basis.
For retail leases, each lease customer has the option to buy the leased vehicle at the end of the lease or to return the
vehicle to the dealer. Ford Credit's North America operating lease activity was as follows for each of the last three years
(in thousands, except percentages):
2010
20102010
2010
2009
20092009
2009
2008 20082008
2008
Vehicle return volume ................................................................................................
................................
281 314 327
Return rate................................................................................................
................................
69% 81% 86%
For rental repurchase vehicles, practically all vehicles have been returned to us.
Nature of Estimates Required. Each operating lease in our portfolio represents a vehicle we own that has been
leased to a customer. At the time we purchase a lease, we establish an expected residual value for the vehicle. We
estimate the expected residual value by evaluating recent auction values, historical return volumes for our leased
vehicles, industry-wide used vehicle prices, our marketing incentive plans and vehicle quality data.
Assumptions Used. For retail leases, our accumulated depreciation on vehicles subject to operating leases is based
on our assumptions of:
• Auction value. Ford Credit's projection of the market value of the vehicles when we sell them at the end of the
lease; and
• Return volume. Ford Credit's projection of the number of vehicles that will be returned to us at lease-end.
See Note 8 of the Notes to the Financial Statements for more information regarding accumulated depreciation on
vehicles subject to operating leases.
Sensitivity Analysis. For returned vehicles, we face a risk that the amount we obtain from the vehicle sold at auction
will be less than our estimate of the expected residual value for the vehicle. At December 31, 2010, if future auction
values for Ford Credit's existing portfolio of operating leases on Ford, Lincoln and Mercury brand vehicles in the United
States were to decrease by one percent from its present estimates, the effect would be to increase the depreciation on
these vehicles by about $25 million. Similarly, if return volumes for Ford Credit's existing portfolio of operating leases on
Ford, Lincoln and Mercury brand vehicles in the United States were to increase by one percent from its present
estimates, the effect would be to increase the depreciation on these vehicles by about $2 million. These increases in
depreciation would be charged to depreciation expense during the 2011 through 2014 period so that the net investment
in operating leases at the end of the lease term for these vehicles is equal to the revised expected residual value.
Adjustments to the amount of accumulated depreciation on operating leases will be reflected on our balance sheet as
Net investment in operating leases and on the statement of operations in Depreciation, in each case under the Financial
Services sector.
Allowance for Credit Losses
The allowance for credit losses is Ford Credit's estimate of the probable credit losses inherent in finance receivables
and operating leases at the date of the balance sheet. Consistent with its normal practices and policies, Ford Credit
assesses the adequacy of its allowance for credit losses quarterly and regularly evaluates the assumptions and models
used in establishing the allowance. Because credit losses can vary substantially over time, estimating credit losses
requires a number of assumptions about matters that are uncertain.