Ford 2005 Annual Report Download - page 44

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 Additional Service Actions
Nature of Estimates Required. The estimated warranty and additional service action costs are accrued for each vehicle at the time
of sale. Estimates are principally based on assumptions regarding the lifetime warranty costs of each vehicle line and each model year
of that vehicle line, where little or no claims experience may exist. 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 our assumptions could materially affect net income.
Assumptions and Approach Used. Our estimate of warranty and additional service action obligations is re-evaluated on a quarterly
basis. 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 are 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 balances are then compared with present
spending rates to ensure that the accruals are adequate to meet expected future obligations.
See Note 27 of the Notes to the Financial Statements for more information regarding costs and assumptions for warranties and
additional service actions.
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 salary increases and 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
•Salary growth
•Retirement rates
•Expected contributions
•Inflation
•Expected return on plan assets
•Mortality 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. Our inflation
assumption is based on an evaluation of external market indicators. The salary growth assumption reflects our long-term actual
experience, the near-term outlook, and assumed inflation. The expected return on plan assets assumption reflects historical plan
returns and long-run inputs from a range of internal and external advisors for capital market returns, inflation, bond yields, and other
variables, adjusted for specific aspects of our investment strategy. We also consider peer data in setting the expected return on asset
assumption. 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 Pension Benefit Guaranty Corporation
("PBGC") penalty premiums, U.K. Pension Protection Fund levies, and tax efficiency). Retirement and mortality rates are developed
to reflect actual and projected plan experience. Plan obligations and costs are based on existing retirement plan provisions. No
assumption is made regarding any potential future changes to benefit provisions beyond those to which we are presently committed
(e.g., in existing labor contracts). The effects of actual results differing from our assumptions and the effects of changing assumptions
Ford Motor Company Annual Report 2005 42 Ford Motor Company Annual Report 2005 43