General Motors 2011 Annual Report Download - page 61

GENERAL MOTORS COMPANY AND SUBSIDIARIES
statutory tax rate in periods after valuation allowances are reversed. In the quarter in which valuation allowances are released, we will
record a material tax benefit reflecting the release, which could result in a negative effective tax rate. Valuation allowance releases
could result in goodwill impairment. Refer to Note 12 to our consolidated financial statements for additional information related to
goodwill impairment charges.
Valuation of Vehicle Operating Leases and Valuation of Residual Support and Risk Sharing Reserve
Valuation of Vehicle Operating Leases
In accounting for vehicle operating leases, a determination is made at the inception of a lease of the estimated realizable value (i.e.,
residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end
of the lease term, which typically ranges from six months to five years. A retail lease customer is obligated to make payments during
the term of a lease to the contract residual. A retail lease customer is not obligated to purchase a vehicle at the end of a lease. Sales to
daily rental car companies with guaranteed repurchase obligations are accounted for as operating leases. Generally, the terms under
these arrangements are up to 24 months, however, the daily rental car companies can and do return the vehicles earlier, averaging nine
months. We are and Old GM was exposed to a risk of loss to the extent the value of a vehicle is below the residual value estimated at
contract inception.
Realization of residual values is dependent on the future ability to market vehicles under prevailing market conditions. Over the life
of a lease, the adequacy of the estimated residual value is evaluated and adjustments are made to the extent the expected value of a
vehicle at lease termination declines. Adjustments may be in the form of revisions to depreciation rates or recognition of impairment
charges. Impairment is determined to exist if the undiscounted expected future cash flows are lower than the carrying amount of the
leased vehicle.
The critical assumptions underlying the estimated carrying amount of leased vehicles included within Equipment on operating
leases, net include: (1) estimated market value information obtained and used in estimating residual values; (2) proper identification
and estimation of business conditions; (3) remarketing abilities; and (4) vehicle and marketing programs. Changes in these
assumptions could have a significant effect on the estimate of residual values.
We continue to use forecasted auction proceeds to estimate residual values for impairment purposes. Significant differences
between the estimate of residual values and actual experience may materially affect impairment charges recorded, if any, and the rate
at which vehicles in Equipment on operating leases, net are depreciated.
The following table summarizes recorded impairment charges related to leases to daily rental car companies and automotive retail
leases (dollars in millions):
Successor Predecessor
Year Ended
December 31, 2011
Year Ended
December 31, 2010
July 10, 2009
Through
December 31, 2009
January 1, 2009
Through
July 9, 2009
Automotive retail leases to daily rental car companies ...... $151 $49 $18 $47
Automotive retail leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $— $— $16
Valuation of Residual Support and Risk Sharing Reserve
Significant differences between estimated and actual residual values will also affect the residual support and risk sharing reserves
established as a result of certain agreements with Ally Financial, whereby Ally Financial is reimbursed up to an agreed-upon
percentage of certain residual value losses they experience on their operating lease portfolio.
During the year ended December 31, 2011 we recorded favorable adjustments to our residual support and risk sharing liabilities of
$0.5 billion in the U.S. due to increases in estimated and actual residual values at contract termination.
General Motors Company 2011 Annual Report 59