Ford 2013 Annual Report Download - page 58

56 Ford Motor Company | 2013 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Discount rates and the expected long-term rate of return on assets have the largest impact on pension expense.
These assumptions are generally set at each year end for expense recorded throughout the following year. The
estimated effect on 2014 pension expense of an increase/decrease in assumption for these factors is shown below (in
millions):
Basis Increase/(Decrease) in
Point 2014 Expense
Factor Change U.S. Plans Non-U.S. Plans
Discount rate +/- 10 bps. $(30)/35 $(35)/35
Expected long-term rate of return on assets +/- 10 (40)/40 (20)/20
The sensitivities shown may not be additive. The impact of changing multiple factors simultaneously cannot be
calculated by combining the individual sensitivities. The sensitivity of pension expense to an increase in discount rates
assumptions may not be linear.
Other Postretirement Employee Benefits
Effect of Actual Results. The weighted average discount rate used to determine the benefit obligation for U.S. OPEB
plans at December 31, 2013 was 4.65%, compared with 3.80% at December 31, 2012, resulting in an unamortized gain of
$430 million. This amount is expected to be recognized as a component of net expense over the expected future years of
service (approximately 12 years).
Sensitivity Analysis. The effect on U.S. and Canadian plans of a 100 basis point increase/(decrease) in the assumed
discount rate would be a (decrease)/increase in the postretirement health care benefit expense for 2014 of approximately
$(30) million/$40 million, and in the year-end 2013 obligation of approximately $(620) million/$740 million.
Income Taxes
Nature of Estimates Required. We must make estimates and apply judgment in determining the provision for income
taxes for financial reporting purposes. We make these estimates and judgments primarily in the following areas: (i) the
calculation of tax credits, (ii) the calculation of differences in the timing of recognition of revenue and expense for tax and
financial statement purposes that will ultimately be reported in tax returns, as well as (iii) the calculation of interest and
penalties related to uncertain tax positions. Changes in these estimates and judgments may result in a material increase
or decrease to our tax provision, which would be recorded in the period in which the change occurs.
Assumptions and Approach Used. We are subject to the income tax laws and regulations of the many jurisdictions in
which we operate. These tax laws and regulations are complex and involve uncertainties in the application to our facts
and circumstances that may be open to interpretation. We recognize benefits for these uncertain tax positions based
upon a process that requires judgment regarding the technical application of the laws, regulations, and various related
judicial opinions. If, in our judgment, it is more likely than not that the uncertain tax position will be settled favorably to us,
we estimate an amount that ultimately will be realized. This process is inherently subjective, since it requires our
assessment of the probability of future outcomes. We evaluate these uncertain tax positions on a quarterly basis,
including consideration of changes in facts and circumstances, such as new regulations or recent judicial opinions, as well
as the status of audit activities by taxing authorities. Changes to our estimate of the amount to be realized are recorded in
our provision for income taxes during the period in which the change occurred.
We must also assess the likelihood that we will be able to recover our deferred tax assets against future sources of
taxable income. GAAP requires a reduction of the carrying amount of deferred tax assets by recording a valuation
allowance if, based on all available evidence, it is more likely than not (defined as a likelihood of more than 50%) that all
or a portion of such assets will not be realized.
Changes in our judgment regarding the ability to recover our deferred tax assets are reflected in our tax provision in
the periods in which the changes occur. With the continued implementation of our One Ford plan and the strength of our
U.S. operations, we released valuation allowances related to certain U.S. state and local net operating losses at year-end
2013, resulting in a $418 million benefit in our provision for income taxes.
We presently believe that a valuation allowance of $1.6 billion is required, primarily for deferred tax assets related to
our South America operations. We believe that we ultimately will recover the remaining $20.1 billion of deferred tax
assets. We have assessed recoverability of these assets, and concluded that no valuation allowance is required.
For additional information regarding income taxes, see Note 22 of the Notes to the Financial Statements.