Honda 2011 Annual Report Download - page 53

The changes in provisions for those product warranties and net sales and other operating revenue for each of the years in the three-year
period ended March 31, 2011 are as follows:
Yen (millions)
Fiscal years ended March 31 2009 2010 2011
Provisions for product warranties
Balance at beginning of year ¥ 293,760 ¥ 233,979 ¥ 226,038
Warranty claims paid during the period (123,509) (86,886) (82,080)
Liabilities accrued for warranties issued during the period 79,576 79,520 84,920
Changes in liabilities for pre-existing warranties during the period 2,233 (3,571) (3,550)
Foreign currency translation (18,081) 2,996 (11,385)
Balance at end of year 233,979 226,038 213,943
Net sales and other operating revenue ¥10,011,241 ¥8,579,174 ¥8,936,867
(Credit Losses)
Our finance subsidiaries provide retail lending and leasing to
customers and wholesale financing to dealers primarily to support
sales of our products. Honda classifies retail and direct financing
lease receivables derived from those services as finance
subsidiaries– receivables. Operating leases are classified as property
on operating leases. Certain finance receivables related to sales of
inventory are included in trade accounts and notes receivable and
other assets in the consolidated balance sheets. Receivables on
past due operating lease rental payments are included in other
current assets in the consolidated balance sheets.
The majority of the credit risk is with consumer financing and to a
lesser extent with dealer financing. Credit risk is affected by general
economic conditions such as a rise in unemployment rates or
declines in used vehicle prices. Our finance subsidiaries estimate
losses incurred on retail and direct financing lease receivables
(consumer finance receivables) and recognize them in the allowance
for credit losses. Estimated losses on past due operating lease
rental payments are also recognized in the allowance for credit
losses. In the case of property on operating leases, estimated losses
due to customer defaults are not recognized in the allowance for
credit losses because a loss is realized on the disposition of the
property. Therefore, we present these losses as impairment losses
on property on operating leases. Consumer finance receivables
consist of a large number of smaller-balance homogenous loans
and leases. Our finance subsidiaries segment these receivables into
groups with common characteristics, and estimate collectively the
allowance for credit losses on consumer finance receivables by the
group. Our finance subsidiaries take into consideration various
methodologies when estimating the allowance including vintage loss
rate analysis and delinquency roll rate analysis. When performing the
vintage loss rate analysis, consumer finance receivables are
segregated between retail and direct financing leases, and further
segmented into groups with common risk characteristics including
collateral type, credit grades and original terms. Loss rates are
projected for these pools based on historical rates and adjusted for
considerations of emerging trends and changing economic
conditions. The roll rate analysis is used primarily by our finance
subsidiaries in North America. This analysis tracks the migration of
finance receivables through various stages of delinquency and
ultimately to charge-offs. Roll rates are projected based on historical
results while also taking into consideration trends and changing
economic conditions. Similar to our portfolio of consumer finance
receivables, our portfolio of receivables on past due operating lease
rental payments is collectively evaluated for the allowance for credit
losses. Property on operating leases are also collectively evaluated
for impairment losses to be realized upon early disposition.
Wholesale receivables are considered to be impaired and
recognized in the allowance for credit losses when it is probable that
it will be unable to collect all amounts due according to the original
terms of the contract. Our finance subsidiaries recognize estimated
losses on them in allowance for credit losses. Credit risk on wholesale
receivables is affected primarily by the financial strength of the
dealers within the portfolio. Wholesale receivables are evaluated for
impairment on an individual dealer basis. Ongoing evaluations of
dealerships are performed to determine whether there is evidence of
impairment. Factors can include payment performance, overall
dealership financial performance or known difficulties experienced
by the dealership.
We believe our allowance for credit losses and impairment losses
on operating leases is a “critical accounting estimate” because it
requires significant judgment about inherently uncertain items. We
regularly review the adequacy of the allowance for credit losses and
impairment losses on operating leases. The estimates are based on
information available as of the closing date of each fiscal year.
However, actual losses may differ from the original estimates as a
result of actual results varying from those assumed in our
estimates.
As an example of the sensitivity of the allowance calculation, the
following scenario demonstrates the impact that a deviation in one
of the primary factors estimated as a part of our allowance calculation
would have on the provision and allowance for credit losses. If we
had experienced a 10% increase in net credit losses during fiscal
2011, the provision for fiscal 2011 and the allowance balance at the
end of fiscal 2011 would have increased by approximately ¥4.6
billion and ¥2.8 billion, respectively. Note that this sensitivity analysis
may be asymmetric, and is specific to the base conditions in fiscal
2011.
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