Ford 2009 Annual Report Download - page 68

Management’s Discussion and Analysis of Financial Condition and Results of Operations
66 Ford Motor Company | 2009 Annual Report
Sensitivity Analysis. For returned vehicles, we face a risk that the amount we obtain from the vehicle sold at auction
will be less than our estimate of the expected residual value for the vehicle. At December 31, 2009, if future auction values
for Ford Credit's existing portfolio of operating leases on Ford, Lincoln and Mercury brand vehicles in the United States
were to decrease by one percent from its present estimates, the effect would be to increase the depreciation on these
vehicles by about $50 million. Similarly, if return volumes for Ford Credit's existing portfolio of operating leases on Ford,
Lincoln and Mercury brand vehicles in the United States were to increase by one percent from its present estimates, the
effect would be to increase the depreciation on these vehicles by about $7 million. These increases in depreciation would
be charged to depreciation expense during the 2010 through 2013 period so that the net investment in operating leases at
the end of the lease term for these vehicles is equal to the revised expected residual value. Adjustments to the amount of
accumulated depreciation on operating leases will be reflected on our balance sheet as Net investment in operating leases
and on the statement of operations in Depreciation, in each case under the Financial Services sector.
Allowance for Credit Losses
The allowance for credit losses is Ford Credit's estimate of the probable credit losses inherent in finance receivables
and operating leases at the date of the balance sheet. Consistent with its normal practices and policies, Ford Credit
assesses the adequacy of its allowance for credit losses quarterly and regularly evaluates the assumptions and models
used in establishing the allowance. Because credit losses can vary substantially over time, estimating credit losses
requires a number of assumptions about matters that are uncertain.
Nature of Estimates Required. Ford Credit estimates the probable credit losses inherent in finance receivables and
operating leases based on several factors.
Retail Installment and Lease Portfolio. The retail installment and lease portfolio is evaluated using a combination of
models and management judgment, and is based on factors such as historical trends in credit losses and recoveries
(including key metrics such as delinquencies, repossessions, and bankruptcies), the composition of Ford Credit's present
portfolio (including vehicle brand, term, risk evaluation, and new/used vehicles), trends in historical and projected used
vehicle values, and economic conditions. Estimates from models may not fully reflect losses inherent in the present
portfolio, and an element of the allowance for credit losses is established for the imprecision inherent in loan loss models.
Reasons for imprecision include changes in economic trends and conditions, portfolio composition and other relevant
factors.
Assumptions Used. Ford Credit makes projections of two key assumptions:
• Frequency. The number of finance receivables and operating lease contracts that Ford Credit expects will default
over a period of time, measured as repossessions; and
• Loss severity. The expected difference between the amount a customer owes Ford Credit when Ford Credit charges
off the finance contract and the amount Ford Credit receives, net of expenses, from selling the repossessed vehicle,
including any recoveries from the customer.
Ford Credit uses these assumptions to assist in estimating its allowance for credit losses. See Note 9 of the Notes to
the Financial Statements for more information regarding allowance for credit losses.
Sensitivity Analysis. Changes in the assumptions used to derive frequency and severity would affect the allowance for
credit losses. The effect of the indicated increase/decrease in the assumptions is shown below for Ford, Lincoln, and
Mercury brand vehicles in the U.S. retail and lease portfolio (in millions):
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* Reflects the number of finance receivables and operating lease contracts that Ford Credit expects will default over a period of time relative to the
average number of contracts outstanding.