Ford 2007 Annual Report Download - page 45

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2007 Annual Report 43
• Tax planning strategies – If necessary and available, tax planning strategies would be implemented to accelerate
taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence
and, depending on their nature, could be heavily weighted.
See Note 19 of the Notes to the Financial Statements for more information regarding deferred tax assets.
Sensitivity Analysis. In 2006, our net deferred tax position at our U.S., Jaguar, and Land Rover entities changed from a
net deferred tax liability position to a net deferred tax asset position. In our assessment of the need for a valuation
allowance, and as required by SFAS No. 109, we heavily weighted the negative evidence of cumulative financial reporting
losses in recent periods and the positive evidence of future reversals of existing temporary differences. Although a sizable
portion of our North American losses in recent years were the result of charges incurred for restructuring actions,
impairments, and other special items, even without these charges we still would have incurred significant operating losses.
Accordingly, we considered our pattern of recent losses to be relevant to our analysis. Considering this pattern of recent
relevant losses and the uncertainties associated with projected future taxable income exclusive of reversing temporary
differences, we gave no weight to projections showing future U.S. taxable income for purposes of assessing the need for a
valuation allowance. As a result of our assessment, we concluded that the net deferred tax assets at our U.S., Jaguar, and
Land Rover entities required a full valuation allowance.
At December 31, 2006, we reported a $7.2 billion valuation allowance against our deferred tax assets (including
$2.7 billion resulting from the adoption of SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R) ("SFAS No. 158")). During 2007,
we recorded an additional valuation allowance for our U.S., Jaguar, and Land Rover entities of $1.4 billion (including about
$700 million resulting from the adoption of FIN 48).
A return to profitability in our North America operations would result in a reversal of a portion of the valuation allowance
relating to realized deferred tax assets, but we may not change our judgment of the need for a full valuation allowance on
our remaining deferred tax assets. A sustained period of North America profitability could cause a change in our judgment
about the realizability of the remaining deferred tax assets. In that case, it is likely that we would reverse some or all of the
remaining deferred tax asset valuation allowance. However, as discussed above, since we have heavily weighted
objectively measured recent financial reporting losses and given no weight to subjectively determined projections of future
taxable income exclusive of reversing temporary differences, we have concluded as of December 31, 2007 and 2006 that it
is more likely than not such deferred tax assets will not be realized (in whole or in part), and accordingly, we have recorded
a full valuation allowance against the net deferred tax assets.
At December 31, 2007 and 2006, our deferred tax assets, net of the valuation allowances of $8.6 billion and $7.2 billion
respectively, were $466 million and $2.2 billion, respectively. These net deferred tax assets related to operations outside
North America where we believed it was more likely than not that these net deferred tax assets would be realized through
future taxable earnings. Accordingly, no valuation allowance has been established on our remaining net deferred tax
assets. Most notably, at December 31, 2007 and 2006, we continued to recognize a net deferred tax asset of $1.5 billion
and $1.7 billion, respectively, in our U.K. Automotive operations, primarily based upon the tax return consolidation of our
Automotive operations with our U.K. FCE operation. Our U.K. FCE operation has a long history of profitability and we
believe it will provide a source of future taxable income that can be reasonably estimated. If, in the future, we are not able
to consolidate FCE profits in the U.K., additional valuation allowances may be required. We will continue to assess the
need for a valuation allowance in the future.
Accumulated Depreciation on Vehicles Subject to Operating Leases
Accumulated depreciation on vehicles subject to operating leases reduces the value of the leased vehicles in our
operating lease portfolio from their original acquisition value to their expected residual value at the end of the lease term.
These vehicles primarily consist of retail lease contracts for Ford Credit and vehicles sold to daily rental car companies
subject to a guaranteed repurchase option ("rental repurchase vehicles") for the Automotive sector.
We monitor residual values each month, and we review the adequacy of our accumulated depreciation on a quarterly
basis. If we believe that the expected residual values for our vehicles have changed, we revise depreciation to ensure that
our net investment in operating leases (equal to our acquisition value of the vehicles less accumulated depreciation) will be
adjusted to reflect our revised estimate of the expected residual value at the end of the lease term. Such adjustments to