Chrysler 2015 Annual Report Download - page 161

2015 | ANNUAL REPORT 161
Sales incentives
The Group records the estimated cost of sales incentive programs offered to dealers and consumers as a reduction to
revenue at the time of sale of the vehicle to the dealer. This estimated cost represents the incentive programs offered
to dealers and consumers, as well as the expected modifications to these programs in order to facilitate sales of the
dealer inventory. Subsequent adjustments to sales incentive programs related to vehicles previously sold to dealers
are recognized as an adjustment to Net revenues in the period the adjustment is determinable.
The Group uses price discounts to adjust vehicle pricing in response to a number of market and product factors,
including pricing actions and incentives offered by competitors, economic conditions, the amount of excess industry
production capacity, the intensity of market competition, consumer demand for the product and the desire to support
promotional campaigns. The Group may offer a variety of sales incentive programs at any given point in time, including
cash offers to dealers and consumers and subvention programs offered to customers, or lease subsidies, which
reduce the retail customer’s monthly lease payment or cash due at the inception of the financing arrangement, or
both. Sales incentive programs are generally brand, model and region specific for a defined period of time.
Multiple factors are used in estimating the future incentive expense by vehicle line including the current incentive
programs in the market, planned promotional programs and the normal incentive escalation incurred as the
model year ages. The estimated incentive rates are reviewed monthly and changes to planned rates are adjusted
accordingly, thus impacting revenues. As there are a multitude of inputs affecting the calculation of the estimate for
sales incentives, an increase or decrease of any of these variables could have a significant effect on Net revenues.
Product warranties, recall campaigns and product liabilities
The Group establishes reserves for product warranties at the time the sale is recognized. The Group issues various
types of product warranties under which the performance of products delivered is generally guaranteed for a certain
period or term. The accrual for product warranties includes the expected costs of warranty obligations imposed by
law or contract, as well as the expected costs for policy coverage, recall actions and buyback commitments. The
estimated future costs of these actions are principally based on assumptions regarding the lifetime warranty costs
of each vehicle line and each model year of that vehicle line, as well as historical claims experience for the Group’s
vehicles. 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 the assumptions used could materially affect the results of operations.
The Group periodically initiates voluntary service and recall actions to address various customer satisfaction as well
as safety and emissions issues related to vehicles sold. Included in the reserve is the estimated cost of these service
and recall actions. The estimated future costs of these actions are based primarily on historical claims experience for
our vehicles. Given recent increases in both the cost and frequency of recall campaigns, and increased regulatory
activity across the industry in the U.S. and Canada, an additional actuarial analysis that gives greater weight to the
more recent calendar year trends in recall campaign activity was added to our adequacy assessment during the three
months ended September 30, 2015. Refer to Note 2 for additional information.
Estimates of the future costs of these actions are inevitably imprecise due to numerous uncertainties, including the
enactment of new laws and regulations, the number of vehicles affected by a service or recall action and the nature
of the corrective action. It is reasonably possible that the ultimate cost of these service and recall actions may require
the Group to make expenditures in excess of (or less than) established reserves over an extended period of time and
in a range of amounts that cannot be reasonably estimated. The estimate of warranty and additional service and recall
action obligations is periodically reviewed during the year. 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 is 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 accruals are then compared with current spending rates to ensure that the
balances are adequate to meet expected future obligations.