Ford 2005 Annual Report Download - page 63

Ford Motor Company Annual Report 2005 60 Ford Motor Company Annual Report 2005 61
Notes to the Financial Statements
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and all highly liquid investments with a maturity of three months or less at the date of purchase, including short-term time
deposits and government agency and corporate obligations, are classified as Cash and cash equivalents.
Revenue Recognition — Automotive Sector
Sales are generally recorded when products are shipped, and the risks and rewards of ownership are transferred to our
customers (generally dealers).
We also sell vehicles to daily rental car companies that are subject to guaranteed repurchase options. These vehicles are
accounted for as operating leases. At the time of sale, the proceeds are recorded as deferred revenue in Accrued liabilities and
deferred revenue. The difference between the proceeds and the guaranteed repurchase amount is recognized in Sales over the term
of the lease. Also at the time of sale, the costs of the vehicles are recorded as operating leases in Other current assets. The
difference between the cost of the vehicle and the estimated auction value is depreciated as Cost of sales over the term of the lease.
At December 31, 2005 and 2004, included in Accrued liabilities and deferred revenue was $4.6 billion and $3.5 billion,
respectively and included in Other current assets was $4.1 billion and $2.9 billion, respectively for these vehicles.
Automotive marketing incentives, including customer and dealer cash payments and costs for special financing and leasing
programs paid to the Financial Services sector, are recognized as revenue reductions and are accrued at the later of the date the
related vehicle sales are recorded or the date the incentive program is both approved and communicated. Costs for marketing
incentives are based on assumptions regarding the number of vehicles that will have a specific incentive applied against them.
Income generated from cash and cash equivalents, investments in marketable securities, loaned securities and other
miscellaneous receivables is reported as Interest income and other non-operating income/(expense), net.
Revenue Recognition — Financial Services Sector
Revenue from finance receivables is recognized using the interest method. Certain origination costs on receivables are
deferred and amortized, using the interest method, over the term of the related receivable as a reduction in financing revenue.
Rental revenue on operating leases is recognized on a straight-line basis over the term of the lease. Initial direct costs related to
leases are deferred and amortized over the term of the lease. The accrual of interest on receivables is discontinued at the time a
receivable is determined to be uncollectible. Interest supplements paid by the Automotive sector are recognized over the term of
the receivable or operating lease.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the periods reported.
Estimates are used when accounting for certain items such as marketing accruals, warranty costs, employee benefit programs, etc.
Estimates are based on historical experience, where applicable, and assumptions that management believes are reasonable under
the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ from those estimates.
Selected Other Costs
Freight, engineering and research and development costs are included in cost of sales; advertising costs are included in selling,
administrative and other expenses. Advertising, engineering and research and development costs are expensed as incurred and
were as follows (in billions):
2005 2004 2003
Advertising.................................................................................................................................................................................................. $ 5.0 $ 4.6 $ 4.1
Engineering, research and development ..................................................................................................................................................... 8.0 7.4 7.3