Ford 2011 Annual Report Download - page 77

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2011 Annual Report 75
As a result of our assessment, we concluded that the net deferred tax assets of our U.S. entities required a full valuation
allowance. We also recorded a full valuation allowance on the net deferred tax assets of certain foreign entities, such as
Canada and Spain, where realization of these assets also was uncertain.
At December 31, 2010, our valuation allowance was $15.7 billion, leaving net deferred tax assets of about
$900 million on our balance sheet. Prior to year-end 2011, the pattern of objectively-measured negative evidence of
recent financial reporting losses outweighed the positive evidence of our growing profitability, despite the tangible
progress we were making in implementing our One Ford plan.
By the end of 2011, our U.S. operations had returned to a position of cumulative profits for the most recent three-year
period. We concluded that this record of cumulative profitability in recent years, our ten consecutive quarters of pre-tax
operating profits, our successful completion of labor negotiations with the UAW, and our business plan showing continued
profitability, provided assurance that our future tax benefits more likely than not will be realized. Accordingly, at year-end
2011, we released almost all of our valuation allowance against net deferred tax assets for entities in the United States,
Canada, and Spain, resulting in a $12.4 billion benefit in our provision for income taxes.
At December 31, 2011, we have retained a valuation allowance against approximately $500 million of deferred tax
assets in North America related to various state and local operating loss carryforwards that are subject to restrictive rules
for future utilization, and a valuation allowance totaling about $1 billion primarily against deferred tax assets for our South
America operations.
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.
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 it 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.