Ford 2012 Annual Report Download - page 57

Ford Motor Company | 2012 Annual Report 55
Management's Discussion and Analysis of Financial Condition and Results of Operations
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 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.
Sensitivity Analysis. For returned vehicles, we face a risk that the amount we obtain from the vehicle sold at auction
will be less than our estimate of the expected residual value for the vehicle. The effect of the indicated increase/decrease
in the assumptions for our U.S. Ford and Lincoln retail and lease portfolio is as follows:
Increase/(Decrease)
Assumption
Percentage
Change
December 31, 2012
Accumulated
Depreciation on
Vehicles Subject to
Operating Leases
2013
Expense
Future auction values +/- 1.0 $47/$(47) $12/$(12)
Return volumes +/- 1.0 3/(3) 1/(1)
The impact of the increased accumulated supplemental depreciation in 2012 would be charged to expense in the
2013 - 2016 periods. Adjustments to the amount of accumulated depreciation on operating leases are reflected on our
balance sheet as Net investment in operating leases and on the income statement in Depreciation, in each case under the
Financial Services sector.
Automotive Sector Long-Lived Asset Impairment Testing
Nature of Estimates Required - Long-Lived Assets. Long-lived asset groups are tested for recoverability when
changes in circumstances indicate the carrying value may not be recoverable. Events that trigger a test for recoverability
include material adverse changes in projected revenues and expenses, significant underperformance relative to historical
and projected future operating results, and significant negative industry or economic trends. When a triggering event
occurs, a test for recoverability is performed, comparing projected undiscounted future cash flows to the carrying value of
the asset group. If the test for recoverability identifies a possible impairment, the asset group's fair value is measured
relying primarily on a discounted cash flow methodology. An impairment charge is recognized for the amount by which
the carrying value of the asset group exceeds its estimated fair value. A test for recoverability also is performed when
management has committed to a plan to sell or otherwise dispose of an asset group and the plan is expected to be
completed within a year. When an impairment loss is recognized for assets to be held and used, the adjusted carrying
amount of those assets is depreciated over its remaining useful life. Restoration of a previously recognized long-lived
asset impairment loss is not allowed.
Assumptions and Approach Used. We measure the fair value of a reporting unit or asset group based on market
prices (i.e., the amount for which the asset could be sold to a third party), when available. When market prices are not
available, we estimate the fair value of the reporting unit or asset group using the income approach and/or the market
approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are
assumptions and estimates derived from a review of our operating results, business plan forecasts, expected growth
rates, and cost of capital, similar to those a market participant would use to assess fair value. We also make certain
assumptions about future economic conditions and other data. Many of the factors used in assessing fair value are
outside the control of management, and these assumptions and estimates may change in future periods.
Changes in assumptions or estimates can materially affect the fair value measurement of a reporting unit or asset
group, and therefore can affect the test results. The following are key assumptions we use in making cash flow
projections:
• Business projections. We make assumptions about the demand for our products in the marketplace. These
assumptions drive our planning assumptions for volume, mix, and pricing. We also make assumptions about our
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