Ford 2010 Annual Report Download - page 67

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2010 Annual Report 65
Nature of Estimates Required. Ford Credit estimates the probable credit losses inherent in finance receivables and
operating leases based on several factors.
Consumer Segment. The retail installment and lease portfolio is evaluated using a combination of models and
management judgment, and is based on factors such as historical trends in credit losses and recoveries (including key
metrics such as delinquencies, repossessions, and bankruptcies), the composition of Ford Credit's present portfolio
(including vehicle brand, term, risk evaluation, and new/used vehicles), trends in historical and projected used vehicle
values, and economic conditions. Estimates from models may not fully reflect losses inherent in the present portfolio,
and an element of the allowance for credit losses is established for the imprecision inherent in loan loss models.
Reasons for imprecision include changes in economic trends and conditions, portfolio composition and other relevant
factors.
Assumptions Used. Ford Credit makes projections of two key assumptions:
• Frequency. The number of finance receivables and operating lease contracts that Ford Credit expects will default
over a period of time, measured as repossessions; and
• Loss severity. The expected difference between the amount a customer owes Ford Credit when Ford Credit
charges off the finance contract and the amount Ford Credit receives, net of expenses, from selling the
repossessed vehicle, including any recoveries from the customer.
Ford Credit uses these assumptions to assist in estimating its allowance for credit losses. See Note 9 of the Notes to
the Financial Statements for more information regarding allowance for credit losses.
Sensitivity Analysis. Changes in the assumptions used to derive frequency and severity would affect the allowance
for credit losses. The effect of the indicated increase/decrease in the assumptions is shown below for Ford, Lincoln, and
Mercury brand vehicles in the U.S. retail and lease portfolio (in millions):
Increase/(Decrease)
Increase/(Decrease)Increase/(Decrease)
Increase/(Decrease)
Assumption
AssumptionAssumption
Assumption
Percentage
PercentagePercentage
Percentage
Point
Point Point
Point
Change
ChangeChange
Change
December 31, 2010
December 31, 2010December 31, 2010
December 31, 2010
Allowance for
Allowance forAllowance for
Allowance for
Credit Losses
Credit LossesCredit Losses
Credit Losses
2010
20102010
2010
Expense
ExpenseExpense
Expense
Repossession rates* ................................................................
................................
+/- 0.1 pt. $20/$(20) $20/$(20)
Loss severity................................................................................................
.........................
+/- 1.0 10/(10) 10/(10)
__________
* Reflects the number of finance receivables and operating lease contracts that Ford Credit expects will default over a period of time relative to the
average number of contracts outstanding.
Non-Consumer Segment. The wholesale and dealer loan portfolio is evaluated by segmenting individual loans into
risk pools, which are determined by the risk characteristics of the loan (such as the amount of the loan, the nature of
collateral, and the financial status of the dealer). The risk pools are analyzed to determine if individual loans are
impaired, and an allowance is estimated for the expected loss of these loans.
Changes in Ford Credit's assumptions affect the Provision for credit and insurance losses on our statement of
operations and the allowance for credit losses contained within Finance receivables, net and Net investment in operating
leases on our balance sheet, in each case under the Financial Services sector.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
For information on accounting standards issued but not yet adopted, see Note 3 of the Notes to the Financial
Statements.