Ford 2002 Annual Report Download - page 54

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The effect of the indicated increase/decrease in the assumptions is shown below for retail and lease receivables that finance
Ford, Lincoln, and Mercury vehicles in the United States (in millions):
Effect on:
December 31, 2002 2002 Provision
Allowance for for Credit
Percentage Credit Losses Losses
Assumption Point Change Higher/(Lower) Higher/(Lower)
Repossession rates +/- 0.1 pts. $80/$(80) $80/$(80)
Loss severity +/- 1.0 pts. 25/(25) 25/(25)
Changes in our assumptions affect the provision for credit losses on our income statement and the allowance for credit
and insurance losses on our balance sheet.
ACCUMULATED DEPRECIATION ON OPERATING LEASES
Accumulated depreciation on operating leases reflects the cumulative amount of depreciation that has been recorded to date,
reducing the value of the vehicles in our operating lease portfolio from their original acquisition value to their projected residual
value at the end of the lease term.
Nature of Estimates Required: Each operating lease in our portfolio represents a vehicle we own that has been leased to a
customer. At the origination of the lease, we establish an estimated residual value for the vehicle at lease end. Significant
judgment is required in estimating the expected lease-end residual value because future market values of used vehicles are
difficult to predict. We depreciate leased vehicles on a straight-line basis to estimated residual value.
We monitor residual value performance by vehicle line monthly. We review the adequacy of our accumulated depreciation on a
quarterly basis. If we believe that the residual values for our vehicles have decreased, we revise depreciation for the affected
vehicles to ensure that the book value (our net investment in the operating lease, equal to our acquisition value of the vehicles
less accumulated depreciation) will be reduced to our revised estimate of residual value at the end of the lease term. Such
adjustments to depreciation expense are recorded over the remaining term of the contracts of affected vehicles in our portfolio
on a straight-line basis.
Each lease retail customer has the option to buy the leased vehicle at the end of the lease or to return the vehicle to the dealer.
In the latter case, the dealer then has the option to purchase the vehicle at the contractual lease-end value or return it to us. For
returned vehicles, we face a potential risk that the book value of the vehicle will exceed the auction value. Over the last five
years, about 60% to 70% of retail leased vehicles have been returned to us.
Assumptions and Approach Used: Our accumulated depreciation on operating leases is based on the following assumptions:
• Auction value: the expected market • Return rates: the expected percentage of vehicles
value of the vehicle at the end of the lease. that will be returned at the end of the lease.
We estimate expected auction values and return rates with econometric models. These models use historical auction values,
historical return rates for our leased vehicles, industry-wide used vehicle prices, our marketing plans and vehicle quality data.
Sensitivity Analysis: The largest impact of changes in assumptions is on Ford Credit’s U.S. retail operating leases of Ford, Lincoln
and Mercury brand vehicles. If future auction values for all of the Ford, Lincoln, and Mercury vehicles in our U.S. operating lease
portfolio at year-end 2002 were to decrease by $100 per unit from our present estimates, we would increase our depreciation on
these vehicles by a cumulative amount of about $70 million in the 2003 through 2005 period to cause the book value at the end
of the lease term for these vehicles to be equal to the revised residual value. Similarly, if future return rates for our existing
portfolio of Ford, Lincoln and Mercury vehicles in the U.S. were to increase by one percentage point from our present estimates,
we would increase our depreciation on these vehicles by about $15 million in the 2003 through 2005 period. Changes in the
amount of accumulated depreciation on operating leases will be reflected on our balance sheet in “Net investment in operating
leases” and on the income statement in the “Depreciation” line of the Financial Services sector.
NEW ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation–Transition and Disclosure–an
amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,”
to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compen-
sation and the effect of the method used on reported results. Effective January 1, 2003, we adopted the fair value recognition
provisions of SFAS No. 123 prospectively to all unvested employee awards as of January 1, 2003, and all new awards granted to
employees after January 1, 2003 using the modified prospective method of adoption under the provisions of SFAS No. 148.