Ford 2006 Annual Report Download - page 37

Download and view the complete annual report

Please find page 37 of the 2006 Ford annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
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 accruals are then compared with present spending rates to ensure that the balances 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:
xDiscount 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.
xExpected return on plan assets. The expected return on plan assets assumption reflects historical plan 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.
xSalary growth. The salary growth assumption reflects our long-term actual experience, outlook and assumed
inflation.