Ford 2007 Annual Report Download - page 43

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2007 Annual Report 41
Impairment of Goodwill and Long-Lived Assets
Nature of Estimates Required – Goodwill. Goodwill is not amortized, but is subject to periodic assessments of
impairment. We test goodwill for impairment annually during the fourth quarter, or when changes in circumstances indicate
that the carrying value may not be recoverable. Recoverability of goodwill is evaluated using a two-step process. The first
step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting
unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value of goodwill
(based on a purchase price allocation methodology) with its carrying value. If the carrying value of the reporting unit's
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
Restoration of a previously-recognized goodwill impairment loss is not allowed.
Nature of Estimates Required – Long-Lived Assets. Long-lived asset groups are tested for recoverability when changes
in circumstances indicate the carrying value may not be recoverable. Events that trigger a test for recoverability include
material adverse changes in the projected revenues and expenses, significant underperformance relative to historical or
projected future operating results, and significant negative industry or economic trends. A test for recoverability also is
performed when management has committed to a plan to sell or otherwise dispose of an asset group and the plan is
expected to be completed within a year. Recoverability of an asset group is evaluated by comparing its carrying value to the
future net undiscounted cash flows expected to be generated by the asset group. If the comparison indicates that the
carrying value of an asset group is not recoverable, an impairment loss is recognized. The impairment loss is measured by
the amount by which the carrying amount of the asset group exceeds the estimated fair value. When an impairment loss is
recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining
useful life. Restoration of a previously-recognized long-lived asset impairment loss is not allowed.
Assumptions and Approach Used. We estimate the fair value of a reporting unit or asset group based on market prices
(i.e., the amount for which the asset could be bought by or sold to a third party), when available. When market prices are
not available, we estimate the fair value of the reporting unit or asset group using the income approach and/or the market
approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are
assumptions and estimates derived from a review of our operating results, approved business plans, expected growth
rates, cost of capital, and tax rates. We also make certain assumptions about future economic conditions, interest rates,
and other market data. Many of the factors used in assessing fair value are outside the control of management, and these
assumptions and estimates can change in future periods.
Changes in assumptions or estimates could materially affect the determination of fair value of an asset group, and
therefore could affect the amount of potential impairment of the asset. The following assumptions are key to our income
approach:
• Business Projections – We make assumptions about the level of product acceptance in the marketplace. These
assumptions drive our planning assumptions for volumes, mix, and pricing. We also make assumptions about our
cost levels (e.g., capacity utilization, cost performance, etc.). These assumptions are key inputs for developing our
cash flow projections. These projections are derived using our internal business plans that are updated quarterly
and reviewed by the Board of Directors;
• Growth Rate – A growth rate is used to calculate the terminal value of the business, and is added to the present
value of the debt-free interim cash flows. The growth rate is the expected rate at which a business unit's earnings
stream is projected to grow beyond the planning period;
• Economic Projections – Assumptions regarding general economic conditions are included in and affect our
assumptions regarding industry sales and pricing estimates for our vehicles. These macro-economic assumptions
include, but are not limited to, industry volumes, inflation, interest rates, prices of raw materials (commodities), and
foreign currency exchange rates; and
• Discount Rates – When measuring a possible impairment, future cash flows are discounted at a rate that is
consistent with a weighted average cost of capital for a potential market participant. The weighted average cost of
capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business
enterprise, which is developed with the assistance of external financial advisors.
The market approach is one of the other primary methods used for estimating fair value of a reporting unit, asset, or
asset group. This assumption relies on the market value (market capitalization) of companies that are engaged in the
same or similar line of business.