Ford 2014 Annual Report Download - page 87

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
CRITICAL ACCOUNTING ESTIMATES
We consider an accounting estimate to be critical if: 1) the accounting estimate requires us to make assumptions
about matters that were highly uncertain at the time the accounting estimate was made, and 2) changes in the estimate
that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used
in the current period, would have a material impact on our financial condition or results of operations.
Management has discussed the development and selection of these critical accounting estimates with the Audit
Committee of our Board of Directors. In addition, there are other items within our financial statements that require
estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have
a material impact on our financial statements.
Warranty and Field Service Actions
Nature of Estimates Required. We provide warranties on the products we sell. Separately, we also periodically
perform field service actions related to safety recalls, emission recalls, and other product campaigns. Pursuant to these
warranties and field service actions, we will repair, replace or adjust all parts on a vehicle that are defective in factory-
supplied materials or workmanship. We accrue the estimated cost of both basic warranty coverages and field service
actions at the time of sale.
Assumptions and Approach Used. We establish estimates for warranty and field service action obligations using a
patterned estimation model. We use historical information regarding the nature, frequency, and average cost of claims for
each vehicle line by model year. We reevaluate our estimate of warranty and field service obligations on a regular basis.
Experience has shown that initial data for any given model year may be volatile; therefore, our process relies on long-term
historical averages until sufficient data are available. As actual experience becomes available, we use the data to modify
the historical averages in order to ensure that the estimate is within the range of likely outcomes. We then compare the
resulting accruals with present spending rates to ensure that the balances are adequate to meet expected future
obligations. Based on these data, we revise our estimates as necessary. Warranty coverages vary; therefore, our
warranty accruals vary depending upon the type of product and the geographic location of its sale for specific periods of
time and/or mileage. Field service actions are distinguishable from warranties in that they may occur in periods beyond
the basic warranty coverage period. Our best estimate of the obligation related to field service actions includes expected
future payments related to vehicles produced in the most recent eight model years and announced field service actions for
vehicles produced before this period.
Due to the uncertainty and potential volatility of these factors, changes in our assumptions could materially affect our
financial condition and results of operations. See Note 27 of the Notes to the Financial Statements for information
regarding warranty and product recall related costs.
Pensions and Other Postretirement Employee Benefits
Nature of Estimates Required. The estimation of our defined benefit pension and OPEB plan obligations and expenses
requires that we make use of estimates of the present value of the projected future payments to all participants, taking into
consideration the likelihood of potential future events such as demographic experience and health care cost increases. Plan
obligations and expenses are based on existing retirement plan provisions. No assumption is made regarding any potential
future changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor contracts).
Assumptions and Approach Used. The assumptions used in developing the required estimates include the following
key factors:
• Discount rates. Our discount rate assumption is based primarily on the results of a cash flow matching analysis,
which matches the future cash outflows for each major plan to a yield curve based on high-quality bonds specific
to the country of the plan. Benefit payments are discounted at the rates on the curve and a single discount rate
specific to the plan is determined.
• Expected long-term rate of return on plan assets. Our expected long-term rate of return assumption reflects
historical returns and long-run inputs from a range of advisors for capital market returns, inflation, bond yields,
and other variables, adjusted for specific aspects of our investment strategy such as asset mix. The assumption
is based on consideration of all inputs, with a focus on long-term trends to avoid short-term market influences.
• Salary growth. Our salary growth assumption reflects our actual experience, long-term outlook, and assumed
inflation.
• Inflation. Our inflation assumption is based on an evaluation of external market indicators, including real gross
domestic product growth and central bank inflation targets.
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