Ford 2010 Annual Report Download - page 24

Management’s Discussion and Analysis of Financial Condition and Results of Operations
22 Ford Motor Company | 2010 Annual Report
OVERVIEW
Revenue
Our Automotive sector's revenue is generated primarily by sales of vehicles, parts and accessories to our dealers
and distributors (i.e., our customers). Vehicles we produce generally are subject to firm orders from our customers.
The vehicles generally are deemed sold, and revenue recognized, when produced and shipped or delivered to our
customers. This is not the case, however, with respect to vehicles produced for sale to daily rental car companies that
are subject to a guaranteed repurchase option, or vehicles produced for use in our own fleet (including management
evaluation vehicles). Vehicles sold to daily rental car companies subject to a guaranteed repurchase option are
accounted for as operating leases, with lease revenue and profits recognized over the term of the lease. When we sell
the returned vehicle at auction, we recognize a gain or loss on the difference, if any, between actual auction value and
the projected auction value. In addition, revenue for finished vehicles we sell to customers or vehicle modifiers on
consignment is not recognized until the vehicle is sold to the ultimate customer.
Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Credit. Upon Ford
Credit originating the wholesale receivable related to a dealer's purchase of a vehicle, Ford Credit pays cash to the
relevant legal entity in our Automotive sector in payment of the dealer's obligation for the purchase price of the vehicle.
The dealer then pays the wholesale finance receivable to Ford Credit when it sells the vehicle to a retail customer.
Our Financial Services sector's revenue is generated primarily from interest on finance receivables, net of certain
deferred origination costs that are included as a reduction of financing revenue, and such revenue is recognized over
the term of the receivable using the interest method. Also, revenue from operating leases, net of certain deferred
origination costs, is recognized on a straight-line basis over the term of the lease. Income is generated to the extent
revenues exceed expenses, most of which are interest, depreciation, and operating expenses.
Transactions between our Automotive and Financial Services sectors occur in the ordinary course of business. For
example, we offer special retail and lease incentives to dealers' customers who choose to finance or lease our vehicles
from Ford Credit. The estimated cost for these incentives is recorded as revenue reduction to Automotive sales at the
later of the date the related vehicle sales to our dealers are recorded or the date the incentive program is both approved
and communicated. In order to compensate Ford Credit for the lower interest or lease rates offered to the retail
customer, we pay the discounted value of the incentive directly to Ford Credit when it originates the retail finance or
lease contract with the dealer's customer. Ford Credit recognizes the amount over the life of the related contracts as an
element of financing revenue. See Note 1 of the Notes to the Financial Statements for a more detailed discussion of
transactions and payments between our Automotive and Financial Services sectors.
Costs and Expenses
Our statement of operations classifies our Automotive total costs and expenses into two categories: (i) cost of sales,
and (ii) selling, administrative and other expenses. We include within cost of sales those costs related to the
development, manufacture, and distribution of our vehicles, parts and accessories. Specifically, we include in cost of
sales each of the following: material costs (including commodity costs); freight costs; warranty, product recall and
customer satisfaction program costs; labor and other costs related to the development and manufacture of our products;
depreciation and amortization; and other associated costs. We include within selling, administrative and other expenses
labor and other costs not directly related to the development and manufacture of our products, including such expenses
as advertising and sales promotion costs.
Certain of our costs, such as material costs, generally vary directly with changes in volume and mix of production.
In our industry, production volume often varies significantly from quarter to quarter and year to year. Quarterly
production volumes experience seasonal shifts throughout the year (including peak retail sales seasons, and the impact
on production of model changeover and new product launches). As we have seen in recent years, annual production
volumes are heavily impacted by external economic factors, including the pace of economic growth and factors such as
the availability of consumer credit and cost of fuel.