Ford 2009 Annual Report Download - page 63

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2009 Annual Report 61
Our valuation was based on an in-use premise which considered a discount rate, after-tax return on sales rate, growth
rate, and terminal value consistent with assumptions we believed principal market participants (i.e., other global automotive
manufacturers) would use. This methodology produced appropriate valuations for entities we disposed of in recent years;
in light of worsening economic conditions, however, we also considered other valuations, including a discounted cash flow
analysis using more conservative assumptions than we initially used. This alternative analysis incorporated a significantly
higher discount rate, offset partially by a higher growth rate; a much lower after-tax return on sales rate; and a lower
terminal value. This alternative analysis reduced the valuation of our Volvo reporting unit by about 50%. Even this more
conservative analysis, however, did not support an impairment of Volvo goodwill at year-end 2008. For information
regarding 2009 testing, see "Automotive Sector – Held-for-Sale Operations" shown below.
Automotive Sector – Held-and-Used Long-Lived Assets
In 2008, we examined each of our asset groups for triggering events and recorded a pre-tax impairment charge for
Ford North America. All other asset groups were found to either have no triggering events or have a carrying value of
assets that was recoverable.
Ford North America. Due to rapidly-changing U.S. market conditions in the second quarter of 2008 (discussed in
Note 15 of the Notes to the Financial Statements), we tested the long-lived assets of our Ford North America segment and
recorded a pre-tax impairment charge of $5.3 billion. The impairment was driven almost entirely by deterioration in
projected cash flows for our near-term business plan period, attributable to changes in our business and economic
projections as discussed above. Following this impairment, Ford North America had $11 billion of net property recorded in
our financial statements as of June 30, 2008.
Sensitivity Analysis. The impairment reflected changes in the assumptions used to measure the fair value of the asset
group based on the rapidly-changing market conditions (including changes to our business projections). The most notable
changes in our business and economic projections included: (1) a more pronounced and accelerated shift in consumer
preferences away from full-size trucks and SUVs to smaller and more fuel-efficient vehicles as a result of higher fuel
prices, with a return over time to a level between today's mix and recent levels; (2) lowered U.S. industry demand in the
near term, with a return to trend levels as the U.S. economy recovers subsequent to 2010; and (3) higher commodity costs
over the business plan period compared with prior projections. For additional discussion of the planning assumptions
used, see the "Outlook" discussion in our Quarterly Report on Form 10-Q for the period ended June 30, 2008.
Beyond the business and economic projections discussed above, we also updated our assumptions with regard to
long-term growth and discount rates. The long-term growth rate assumption used in our second quarter 2008 testing is
similar to that used in our 2006 North America impairment testing, when we last had an impairment of North America fixed
assets. This growth rate, however, when applied to lowered business plan period projections, resulted in a less favorable
undiscounted long-term outlook. This outlook is consistent with our present projection of lower margins, resulting primarily
from the recent shift in consumer preferences discussed above. We estimate that a 0.5 percentage point decrease in the
long-term growth rate assumed in our second quarter impairment testing would have decreased the fair value estimate by
about $800 million.
The discount rate that we used in our second quarter of 2008 impairment testing was consistent with a weighted-
average cost of capital that we estimate a potential market participant would use. This discount rate was lower than that
used in our 2006 impairment testing, primarily reflecting the change in long-term outlook discussed above. A
0.5 percentage point increase in the discount rate assumption used in the impairment testing would have decreased the
fair value estimate by about $1.4 billion.
During the third quarter of 2008, we experienced a severe deterioration in U.S. credit markets, which adversely affected
economic conditions and depressed automotive sales. As a result of this significant adverse change in the U.S. business
climate, we again tested the long-lived assets of our Ford North America segment. Using updated business and economic
projections, we assessed that the carrying value of our long-lived assets at September 30, 2008 did not exceed their fair
value. We used the same long-term growth rate as used in our second quarter testing as we believe that long-term
economic conditions have not deteriorated as a result of the present credit crisis. We estimate that a 0.5 percentage point
decrease in the long-term growth rate assumed in our third quarter impairment testing would have decreased the fair value
estimate by about $800 million. Additionally, we used the same discount rate as used in our second quarter testing. This
is based on the assumption that the present credit crisis does not have a material impact on the weighted cost of capital in
the medium- to long-term (consistent with our planning horizon). A 0.5 percentage point increase in the discount rate
assumption used in the impairment testing would have decreased the fair value estimate by about $1.3 billion.