Ford 2013 Annual Report Download - page 59

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Ford Motor Company | 2013 Annual Report 57
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
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. See Note 8 of the Notes to the Financial Statements
for more information regarding allowance for credit losses.
Nature of Estimates Required. Ford Credit estimates the probable credit losses inherent in finance receivables and
operating leases based on several factors.
Consumer Portfolio. The retail financing and operating 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 of money a customer owes Ford Credit when it
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.
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 for Ford Credit’s U.S. Ford and Lincoln
retail financing and operating lease portfolio is as follows (in millions, except for percentages):
Increase/(Decrease)
Assumption
Percentage
Point Change
December 31, 2013
Allowance for
Credit Losses
2014
Expense
Repossession ratios (a) +/- 0.1 pt. $27/$(27) $27/$(27)
Loss severity +/- 1.0 3/(3) 3/(3)
__________
(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 Portfolio. Ford Credit estimates an allowance using a loss-to-receivables 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 a specific
allowance is estimated for the expected loss of the impaired loans.
Changes in Ford Credit’s assumptions affect the Provision for credit losses 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 Ford
Credit’s operating lease portfolio from their original acquisition value to their expected residual value at the end of the
lease term.
For more information visit www.annualreport.ford.com