Ford 2002 Annual Report Download - page 52

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of
our Board of Directors and the Audit Committee has reviewed the foregoing disclosure. 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 ADDITIONAL SERVICE ACTIONS
See Notes 1 and 24 of the Notes to our Financial Statements for more information regarding costs and assumptions for
warranties and additional service actions.
Nature of Estimates Required: The estimated warranty and additional service action costs for each vehicle sold by us are
accrued at the time the vehicle is sold to a dealer. Included in the accruals are the costs for both basic warranty and additional
service action on vehicles we sell. Estimates are principally based on assumptions regarding the lifetime warranty costs of each
vehicle line and each model year of that vehicle line, where little or no claims experience may exist. In addition, the number and
magnitude of additional service actions expected to be approved, and policies related to additional service actions, are taken
into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our assumptions could
materially affect net income.
Assumptions and Approach Used: Our estimate of warranty and additional service action obligations is reevaluated on a
quarterly basis. Experience has shown that initial data for any given model year can be volatile; therefore, our process relies
upon long-term historical averages until sufficient data are available. As actual experience becomes available, it is used to
modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting balances are then
compared with present spending rates to ensure that the accruals are adequate to meet expected future obligations.
PENSION
See Note 20 of the Notes to our Financial Statements for more information regarding costs and assumptions for employee
retirement benefits.
Nature of Estimates Required: The measurement of our pension obligations, costs and liabilities is dependent on a variety of
assumptions used by our actuaries. These assumptions include estimates of the present value of projected future pension
payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases
and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.
The plan trustee conducts an independent valuation of the fair value of pension plan assets.
Assumptions and Approach Used: The assumptions used in developing the required estimates include the following key factors:
• Discount rates • Inflation
• Salary growth • Expected return on plan assets
• Retirement rates • Mortality rates
We base the discount rate assumption on investment yields available at year-end on corporate long-term bonds rated AA.
Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our
long-term actual experience, the near-term outlook and assumed inflation. The expected return on plan assets reflects asset
allocations, investment strategy and the views of investment managers and other large pension plan sponsors. Retirement and
mortality rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are
accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods.
Sensitivity Analysis: The effect of the indicated decrease in the selected assumptions is shown below, assuming no changes
in benefit levels and no amortization of gains or losses for our major plans in 2003 (in millions):
Effect on U.S. Plans:
December 31, 2002
Percentage Decline in Reduction in Higher 2003
Assumption Point Change Funded Status Equity Expense
Discount rate -0.5 pts. $ 1,800 $ 1,100 $ 10
Expected return on assets -0.5 pts. - - 175