Ford 2006 Annual Report Download - page 70
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Notes to the Financial Statements
68
NOTE 10. NET PROPERTY AND RELATED EXPENSES (Continued)
Automotive sector property-related expenses for the years ended December 31 were as follows (in millions):
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Beginning January 1, 2006, we changed our method of amortization for special tools from an activity-based method
(units-of-production) to a time-based method. The time-based method amortizes the cost of special tools over their
expected useful lives using a straight-line method or, if the production volumes for major product programs associated
with the tool are expected to materially decline over the life of the tool, an accelerated method reflecting the rate of
decline. For 2006, this change in method decreased Automotive cost of sales by $135 million.
NOTE 11. IMPAIRMENT OF LONG-LIVED ASSETS
Based on the assumptions underlying the acceleration of our Way Forward plan, we project a decline in net cash flows
for the Ford North America segment, primarily reflecting lower market share assumptions, capacity reductions, and other
aspects of our accelerated plan. As a result, in the third quarter of 2006 we tested the long-lived assets of this segment
for recoverability and recorded a pre-tax impairment charge of $2.2 billion in Automotive cost of sales, representing the
amount by which the carrying value of these assets exceeded the fair value.
During the third quarter of 2006, we also reviewed our business plan for the Jaguar and Land Rover operating unit
within our Premier Automotive Group ("PAG") segment and, consistent with 2006 operating results, projected lower sales,
a decline in net cash flows for this operating unit based on cost performance shortfalls and currency exchange
deterioration. As a result, we tested the long-lived assets of this operating unit for recoverability and recorded a pre-tax
impairment charge of $1.6 billion in Automotive cost of sales, representing the amount by which the carrying value of
these assets exceeded the fair value.
During 2005, we updated our PAG Improvement Plan for the Jaguar and Land Rover operating unit. We projected a
decline in net cash flows for the Jaguar and Land Rover operating unit based on updated market projections primarily
reflecting recent market performance for Jaguar. As a result, we tested the long-lived assets of this operating unit for
recoverability and recorded a pre-tax impairment charge of $1.3 billion in Automotive cost of sales, representing the
amount by which the carrying value of these assets exceeded the fair value.
NOTE 12. GOODWILL AND OTHER INTANGIBLES
Beginning with 2006, our policy has been to perform annual testing of goodwill and certain other intangible assets
during the fourth quarter to determine whether any impairment has occurred. Testing is conducted at the reporting unit
level. Testing is also performed following a triggering event for the long-lived asset impairment test. As a result of the
impairment of the Ford North America segment and Jaguar and Land Rover operating unit in the third quarter of 2006, we
tested goodwill at our Ford North America and PAG reporting units. No goodwill impairment was necessary.
To test for impairment, the carrying value of each reporting unit is compared with its fair value. Fair value is estimated
using the present value of free cash flows method. Prior to 2006, our policy was to test in the second quarter; in 2005, we
tested in both the second and fourth quarters. Fourth quarter testing is considered preferable because it allows us to use
more current financial information and matches our business plan timing. This change in accounting principle does not
delay, accelerate or avoid an impairment charge or affect our financial statements.