Ford 2009 Annual Report Download - page 66

Management’s Discussion and Analysis of Financial Condition and Results of Operations
64 Ford Motor Company | 2009 Annual Report
This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence,
including the following:
• Nature, frequency, and severity of current and cumulative financial reporting losses. A pattern of objectively
measured recent financial reporting losses is heavily weighted as a source of negative evidence. In certain
circumstances, historical information may not be as relevant due to changed circumstances;
• Sources of future taxable income. Future reversals of existing temporary differences are heavily-weighted sources
of objectively verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary
differences are a source of positive evidence only when the projections are combined with a history of recent profits
and can be reasonably estimated. Otherwise, these projections are considered inherently subjective and generally
will not be sufficient to overcome negative evidence that includes relevant cumulative losses in recent years,
particularly if the projected future taxable income is dependent on an anticipated turnaround to profitability that has
not yet been achieved. In such cases, we generally give these projections of future taxable income no weight for the
purposes of our valuation allowance assessment pursuant to U.S. GAAP; and
• Tax planning strategies. If necessary and available, tax planning strategies would be implemented to accelerate
taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence
and, depending on their nature, could be heavily weighted.
See Note 23 of the Notes to the Financial Statements for more information regarding deferred tax assets.
Sensitivity Analysis. In 2006, our net deferred tax position in the United States changed from a net deferred tax liability
position to a net deferred tax asset position. In our assessment of the need for a valuation allowance, we heavily weighted
the negative evidence of cumulative financial reporting losses in recent periods and the positive evidence of future
reversals of existing temporary differences. Although a sizable portion of our North American losses in recent years were
the result of charges incurred for restructuring actions, impairments, and other special items, even without these charges
we still would have incurred significant operating losses. Accordingly, we considered our pattern of recent losses to be
relevant to our analysis. Considering this pattern of recent relevant losses and the uncertainties associated with projected
future taxable income exclusive of reversing temporary differences, we gave no weight to projections showing future U.S.
taxable income for purposes of assessing the need for a valuation allowance. As a result of our assessment, we
concluded that the net deferred tax assets of our U.S. entities required a full valuation allowance. We also recorded a full
valuation allowance on the net deferred tax assets of certain foreign entities, such as Germany, Canada, and Spain, as the
realization of these foreign deferred tax assets are reliant upon U.S.-source taxable income.
At December 31, 2006, we reported a $7.3 billion valuation allowance against our deferred tax assets (including
$2.7 billion resulting from the adoption of the revised standard on accounting for defined benefit pension and other
postretirement benefit plans). During 2007, we recorded an additional valuation allowance of $700 million. Losses
during 2008, primarily in the United States, increased the valuation allowance by $9.3 billion to a balance of $17.3 billion at
December 31, 2008. The valuation allowance increased by $200 million in 2009, which reflects a $1.1 billion increase
related to charges to other comprehensive income, partially offset by a $900 million decrease as a result of operating
profits.
A sustained period of profitability in our North America operations is required before we would change our judgment
regarding the need for a full valuation allowance against our net deferred tax assets. Accordingly, although we were
profitable in 2009, we continue to record a full valuation allowance against the net deferred tax assets in the United States
and foreign entities discussed above. Although the weight of negative evidence related to cumulative losses is decreasing
as we deliver on our One Ford plan (discussed in "Overview" and "Outlook" above), we believe that this objectively-
measured negative evidence outweighs the subjectively-determined positive evidence and, as such, we currently do not
anticipate a change in judgment regarding the need for a full valuation allowance in 2010. The consumption of tax
attributes to offset expected operating profits during 2010, however, would reduce the overall level of deferred tax assets
subject to valuation allowance.