Ford 2012 Annual Report Download - page 53

Ford Motor Company | 2012 Annual Report 51
Management's Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING ESTIMATES
We consider an accounting estimate to be critical if: 1) the accounting estimate requires us to make assumptions
about matters that were highly uncertain at the time the accounting estimate was made, and 2) changes in the estimate
that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used
in the current period, would have a material impact on our financial condition or results of operations.
Management has discussed the development and selection of these critical accounting estimates with the Audit
Committee of our Board of Directors. 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 Product Recalls
Nature of Estimates Required. We accrue the estimated cost of basic warranty coverages for each vehicle at the time
of sale. We establish estimates using historical information regarding the nature, frequency, and average cost of claims
for each vehicle line by model year. Where little or no claims experience exists, we rely on historical averages. See
Note 31 of the Notes to the Financial Statements for information regarding costs for warranty actions. Separately, we also
accrue at the time of sale for potential product recalls based on historical experience. Product recalls are distinguishable
from warranty coverages in that the actions may extend beyond basic warranty coverage periods.
Assumptions and Approach Used. We reevaluate our estimate of warranty obligations on a regular basis. Experience
has shown that initial data for any given model year may be volatile; therefore, our process relies on long-term historical
averages until sufficient data are available. As actual experience becomes available, we use the data to modify the
historical averages in order to ensure that the estimate is within the range of likely outcomes. We then compare the
resulting accruals with present spending rates to ensure that the balances are adequate to meet expected future
obligations. Based on these data, we revise our estimates as necessary. Due to the uncertainty and potential volatility of
these factors, changes in our assumptions could materially affect our financial condition and results of operations.
Pensions
Nature of Estimates Required. The estimation of our pension obligations, costs, and liabilities requires that we make
use of estimates of the present value of the projected future payments to all participants, taking into consideration the
likelihood of potential future events such as demographic experience. These assumptions may have an effect on the
amount and timing of future contributions.
Assumptions and Approach Used. The assumptions used in developing the required estimates include the following
key factors:
• Discount rates. We base the discount rate assumption primarily on the results of a cash flow matching analysis,
which matches the future cash outflows for each major plan to a yield curve comprised of high-quality bonds
specific to the country of the plan. Benefit payments are discounted at the rates on the curve and a single
discount rate specific to the plan is determined.
• Expected long-term rate of return on assets. The expected long-term rate of return on assets assumption reflects
historical returns and long-run inputs from a range of advisors for capital market returns, inflation, bond yields,
and other variables, adjusted for specific aspects of our investment strategy. The assumption is based on
consideration of all inputs, with a focus on long-term trends to avoid short-term market influences. Assumptions
are not changed unless structural trends in the underlying economy are identified, our asset strategy changes, or
there are significant changes in other inputs.
• Salary growth. The salary growth assumption reflects our long-term actual experience, outlook, and assumed
inflation.
• Inflation. Our inflation assumption is based on an evaluation of external market indicators, including real gross
domestic product growth and central bank inflation targets.
• Expected contributions. The expected amount and timing of contributions is based on an assessment of
minimum requirements, and additional amounts based on cash availability and other considerations (e.g., funded
status, avoidance of regulatory premiums and levies, and tax efficiency).
• Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.
• Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.
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