Ford 2011 Annual Report Download - page 78

Management’s Discussion and Analysis of Financial Condition and Results of Operations
76 Ford Motor Company | 2011 Annual Report
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 Credit's
U.S. Ford and Lincoln retail and lease portfolio (in millions):
Assumption
Repossession rates (a)
Loss severity
Percentage
Point Change
+/- 0.1 pt.
+/- 1.0
Increase/(Decrease)
December 31, 2011
Allowance for
Credit Losses
$20/$(20)
5/(5)
2011
Expense
$20/$(20)
5/(5)
__________
(a) 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.
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):
Vehicle return volume
Return rate
2011
144
59%
2010
281
69%
2009
314
81%
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 regarding:
• 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.