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58 Ford Motor Company | 2013 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Credit monitors residual values each month, and it reviews the adequacy of accumulated depreciation on a
quarterly basis. If Ford Credit believes that the expected residual values for its vehicles have changed, it revises
depreciation to ensure that net investment in operating leases (equal to the acquisition value of the vehicles less
accumulated depreciation) will be adjusted to reflect Ford Credit’s 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.
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. For additional information on residual risk on operating leases, refer to the “Residual Risk” section above.
Nature of Estimates Required. Each operating lease in Ford Credit’s portfolio represents a vehicle it owns that has
been leased to a customer. At the time Ford Credit purchases a lease, it establishes an expected residual value for the
vehicle. Ford Credit estimates the expected residual value by evaluating recent auction values, return volumes for its
leased vehicles, industry-wide used vehicle prices, marketing incentive plans, and vehicle quality data.
Assumptions Used. Ford Credit’s accumulated depreciation on vehicles subject to operating leases is based on
assumptions regarding:
• Auction value. Ford Credit’s projection of the market value of the vehicles when sold 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 7 of the Notes to the Financial Statements for more information regarding accumulated depreciation on
vehicles subject to operating leases.
Sensitivity Analysis. For returned vehicles, Ford Credit faces a risk that the amount it obtains from the vehicle sold at
auction will be less than its estimate of the expected residual value for the vehicle. The effect of the indicated increase/
decrease in the assumptions for Ford Credit’s U.S. Ford and Lincoln operating lease portfolio is as follows (in millions,
except for percentages):
Increase/(Decrease)
Assumption
Percentage
Change
December 31, 2013
Accumulated
Depreciation on
Vehicles Subject to
Operating Leases
2014
Expense
Future auction values +/- 1.0 $(71)/$71 $(31)/$31
Return volumes +/- 1.0 6/(6) 4/(4)
The impact of the increased accumulated supplemental depreciation in 2013 would be charged to expense in the
2014–2017 periods. Adjustments to the amount of accumulated depreciation on operating leases would be reflected on
our balance sheet as Net investment in operating leases and on the income statement in Depreciation on vehicles subject
to operating leases, in each case under the Financial Services sector.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
For information on accounting standards issued but not yet adopted, see Note 3 of the Notes to the Financial
Statements.