Hertz 2012 Annual Report Download - page 83

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
depreciation expense is adjusted for any difference between the net proceeds received and the
remaining net book value and a corresponding gain or loss is recorded.
Within our Donlen subsidiary, revenue earning equipment is under longer term lease agreements with
our customers. These leases contain provisions whereby we have a contracted residual value
guaranteed to us by the lessee, such that we do not experience any gains or losses on the disposal of
these vehicles. Therefore depreciation rates on these vehicles are not adjusted at any point in time per
the associated lease contract.
See Note 8 to the Notes to our consolidated financial statements included in this Annual Report under
the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Public Liability and Property Damage
The obligation for public liability and property damage on self-insured U.S. and international vehicles
and equipment represents an estimate for both reported accident claims not yet paid, and claims
incurred but not yet reported. The related liabilities are recorded on a non-discounted basis. Reserve
requirements are based on rental volume and actuarial evaluations of historical accident claim
experience and trends, as well as future projections of ultimate losses, expenses, premiums and
administrative costs. The adequacy of the liability is regularly monitored based on evolving accident
claim history and insurance related state legislation changes. If our estimates change or if actual results
differ from these assumptions, the amount of the recorded liability is adjusted to reflect these results. Our
actual results as compared to our estimates have historically resulted in relatively minor adjustments to
our recorded liability.
Pension Benefit Obligations
Our employee pension costs and obligations are dependent on our assumptions used by actuaries in
calculating such amounts. These assumptions include discount rates, salary growth, long-term return
on plan assets, retirement rates, mortality rates and other factors. Actual results that differ from our
assumptions are accumulated and amortized over future periods and, therefore, generally affect our
recognized expense in such future periods. While we believe that the assumptions used are appropriate,
significant differences in actual experience or significant changes in assumptions would affect our
pension costs and obligations. The various employee related actuarial assumptions (e.g., retirement
rates, mortality rates, salary growth) used in determining pension costs and plan liabilities are reviewed
periodically by management, assisted by the enrolled actuary, and updated as warranted. The discount
rate used to value the pension liabilities and related expenses and the expected rate of return on plan
assets are the two most significant assumptions impacting pension expense. The discount rate used is a
market based spot rate as of the valuation date. For the expected return on assets assumption, we use a
forward looking rate that is based on the expected return for each asset class (including the value added
by active investment management), weighted by the target asset allocation. The past annualized
long-term performance of the Plans’ assets has generally been in line with the long-term rate of return
assumption. See Note 6 to the Notes to our consolidated financial statements included in this Annual
Report under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’ For a discussion of
the risks associated with our pension plans, see ‘‘Item 1A—Risk Factors’’ in this Annual Report.
Goodwill
We review goodwill for impairment whenever events or changes in circumstances indicate that the
carrying amount of the goodwill may not be recoverable, and also review goodwill annually. Goodwill
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