John Deere 2010 Annual Report Download - page 21

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The assumptions used in evaluating the company’s
exposure to credit losses involve estimates and signifi cant
judgment. The historical loss experience on the receivable
portfolio represents one of the key assumptions involved in
determining the allowance for credit losses. Over the last fi ve
fi scal years, this percent has varied by an average of approxi-
mately plus or minus .15 percent, compared to the average
loss experience percent during that period. Holding other
assumptions constant, if this estimated loss experience on the
receivable portfolio were to increase or decrease .15 percent,
the allowance for credit losses at October 31, 2010 would
increase or decrease by approximately $35 million.
Operating Lease Residual Values
The carrying value of equipment on operating leases is affected
by the estimated fair values of the equipment at the end of the
lease (residual values). Upon termination of the lease, the
equipment is either purchased by the lessee or sold to a third
party, in which case the company may record a gain or a loss for
the difference between the estimated residual value and the sales
price. The residual values are dependent on current economic
conditions and are reviewed quarterly. Changes in residual
value assumptions would affect the amount of depreciation
expense and the amount of investment in equipment on
operating leases.
The total operating lease residual values at October 31,
2010, 2009 and 2008 were $1,276 million, $1,128 million and
$1,055 million, respectively. The changes in 2010 and 2009
were primarily due to the levels of operating leases.
Estimates used in determining end of lease market values
for equipment on operating leases signifi cantly impact the
amount and timing of depreciation expense. If future market
values for this equipment were to decrease 10 percent from
the company’s present estimates, the total impact would be
to increase the company’s annual depreciation for equipment
on operating leases by approximately $45 million.
Goodwill
Goodwill is not amortized and is tested for impairment annually
and when events or circumstances change such that it is more
likely than not that the fair value of a reporting unit is reduced
below its carrying amount. The end of the third quarter is the
annual measurement date. To test for goodwill impairment,
the carrying value of each reporting unit is compared with its
fair value. If the carrying value of the goodwill is considered
impaired, a loss is recognized based on the amount by which the
carrying value exceeds the implied fair value of the goodwill.
An estimate of the fair value of the reporting unit is
determined through a combination of comparable market values
for similar businesses and discounted cash fl ows. These estimates
can change signifi cantly based on such factors as the reporting
unit’s fi nancial performance, economic conditions, interest
rates, growth rates, pricing, changes in business strategies and
competition.
Based on this testing, the company identifi ed one reporting
unit in 2010 and one reporting unit in 2009 for which the
goodwill was impaired. In the fourth quarter of 2010 and 2009,
the company recorded a non-cash pretax charge in cost of
sales of $27 million ($25 million after-tax) and $289 million
($274 million after-tax), respectively. The charges were related
to write-downs of the goodwill associated with reporting units
included in the agriculture and turf operating segment. The key
factor contributing to the impairments was a decline in the
reporting units’ forecasted fi nancial performance (see Note 5).
A 10 percent decrease in the estimated fair value of the
company’s other reporting units would have had no impact on
the carrying value of goodwill at the annual measurement date
in 2010.
Allowance for Credit Losses
The allowance for credit losses represents an estimate of
the losses expected from the company’s receivable portfolio.
The level of the allowance is based on many quantitative
and qualitative factors, including historical loss experience
by product category, portfolio duration, delinquency trends,
economic conditions and credit risk quality. The adequacy
of the allowance is assessed quarterly. Different assumptions or
changes in economic conditions would result in changes to the
allowance for credit losses and the provision for credit losses.
The total allowance for credit losses at October 31, 2010,
2009 and 2008 was $296 million, $316 million and $226 million,
respectively. The decrease in 2010 was primarily due to a
decrease in loss experience. The increase in 2009 was primarily
due to an increase in loss experience and delinquencies in the
construction and forestry retail notes, revolving charge fi nancing
receivables and operating loans.