Ford 2011 Annual Report Download - page 76

Management’s Discussion and Analysis of Financial Condition and Results of Operations
74 Ford Motor Company | 2011 Annual Report
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 2012 of
approximately $(40) million/$40 million, and in the year-end 2011 obligation of approximately $(730) million/$880 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.
GAAP for income taxes requires 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. 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 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 22 of the Notes to the Financial Statements for more information regarding deferred tax assets.
Sensitivity Analysis. In 2006, our net deferred tax position in the United States changed from a net deferred tax
liability position to a net deferred tax asset position. In our assessment of the need for a valuation allowance, we heavily
weighted the negative evidence of cumulative financial reporting losses in then-recent periods and the positive evidence
of future reversals of existing temporary differences. Although a sizable portion of our North American losses in then-
recent years were the result of charges incurred for restructuring actions, impairments, and other special items, even
without these charges we still would have incurred significant operating losses. Accordingly, we considered our pattern of
then-recent losses to be relevant to our analysis. Considering this pattern of then-recent relevant losses and the
uncertainties associated with projected future taxable income exclusive of reversing temporary differences, we gave no
weight to projections showing future U.S. taxable income for purposes of assessing the need for a valuation allowance.