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54 Ford Motor Company | 2012 Annual Report
Management's Discussion and Analysis of Financial Condition and Results of Operations
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 of money 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.
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):
Increase/(Decrease)
Assumption
Percentage
Point Change
December 31, 2012
Allowance for
Credit Losses
2012
Expense
Repossession ratios (a) +/- 0.1 pt. $20/$(20) $20/$(20)
Loss severity +/- 1.0 5/(5) 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. We estimate an allowance using an LTR model for non-consumer receivables that are not
specifically identified as impaired. All accounts that are specifically identified as impaired are excluded from the
calculation of the non-specific or collective allowance. The non-consumer portfolio is evaluated by segmenting individual
loans 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 loans 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 income statement
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):
2012 2011 2010
Vehicle return volume 76 144 281
Return rate 60% 59% 69%
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