Ford 2012 Annual Report Download - page 55

Ford Motor Company | 2012 Annual Report 53
Management's Discussion and Analysis of Financial Condition and Results of Operations
Sensitivity Analysis. The effect on U.S. and Canadian plans of a one percentage point increase/(decrease) in the
assumed discount rate would be a (decrease)/increase in the postretirement health care benefit expense for 2013 of
approximately $(40) million/$50 million, and in the year-end 2012 obligation of approximately $(780) million/$940 million.
Income Taxes
Nature of Estimates Required. We must make estimates and apply judgment in determining the provision for income
taxes for financial reporting purposes. We make these estimates and judgments primarily in the following areas: (i) the
calculation of tax credits, (ii) the calculation of differences in the timing of recognition of revenue and expense for tax and
financial statement purposes that will ultimately be reported in tax returns, as well as (iii) the calculation of interest and
penalties related to uncertain tax positions. Changes in these estimates and judgments may result in a material increase
or decrease to our tax provision, which would be recorded in the period in which the change occurs.
Assumptions and Approach Used. We are subject to the income tax laws and regulations of the many jurisdictions in
which we operate. These tax laws and regulations are complex and involve uncertainties in the application to our facts
and circumstances that may be open to interpretation. We recognize benefits for these uncertain tax positions based
upon a process that requires judgment regarding the technical application of the law, regulations and various related
judicial opinions. If, in our judgment, it is more likely than not that the uncertain tax position will be settled favorably to us,
we estimate an amount that ultimately will be realized. This process is inherently subjective, since it requires our
assessment of the probability of future outcomes. We evaluate these uncertain tax positions on a quarterly basis,
including consideration of changes in facts and circumstances, such as new regulations or recent judicial opinions, as well
as the status of audit activities by taxing authorities. Changes to our estimate of the amount to be realized are recorded in
our provision for income taxes during the period in which the change occurred.
We must also assess the likelihood that we will be able to recover our deferred tax assets against future sources of
taxable income. GAAP requires a reduction of the carrying amount of deferred tax assets by recording a valuation
allowance if, based on all available evidence, it is more likely than not (defined as a likelihood of more than 50%) that all
or a portion of such assets will not be realized. We presently believe that a valuation allowance of $1.9 billion is required,
primarily for deferred tax assets related to our Ford South America operations, as well as various U.S. state and local net
operating losses. We believe that we ultimately will recover the remaining $20.8 billion of deferred tax assets. Within this
amount is $1.4 billion of net deferred tax assets related to our European operations. We have assessed recoverability of
these assets, and concluded that no valuation allowance is required. We will continue to monitor recoverability as we
progress our European transformation plan.
Changes in our judgment regarding our ability to recover our deferred tax assets would be reflected in our tax
provision in the period in which the change occurred. We expect that continued delivery of our One Ford plan could lead
to the reduction in the overall level of valuation allowance related to U.S state and local net operating losses in the
foreseeable future.
For additional information regarding income taxes, see Note 24 of the Notes to the Financial Statements.
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.
Consumer Segment. 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.
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