PACCAR 2010 Annual Report Download - page 44

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Future market conditions, changes in government regulations and other factors outside the Company’s control could
impact the ultimate sales price of trucks returned under these contracts. Residual values are reviewed regularly and
adjusted if market conditions warrant. A decrease in the estimated equipment residual values would increase annual
depreciation expense over the remaining lease term.
During 2008, market values on vehicles returning upon operating lease maturity were generally higher than the
residual values on these vehicles resulting in a decrease of depreciation expense of $3.2 million. During 2009 and
2010 lower market values on trucks returning upon lease maturity, as well as impairments on existing operating
leases resulted in additional depreciation expense of $59.2 million and $13.1 million, respectively.
At December 31, 2010, the aggregate residual value of equipment on operating leases in the Financial Services segment
and residual value guarantee on trucks accounted for as operating leases in the Truck segment was $1.15 billion. A
10% decrease in used truck values worldwide, expected to persist over the remaining maturities of the Company’s
operating leases, would reduce residual values estimates and result in the Company recording approximately $30
million of additional depreciation per year.
Allowance for Credit Losses
The accounting for allowance for credit losses related to the Company’s loans and finance leases is discussed in
Note A of the consolidated financial statements. The Company collectively and individually evaluates its finance
receivables and the allowance for credit losses consists of both a general and specific reserve. The Company
individually evaluates certain finance receivables for impairment. Finance receivables which are evaluated individually
consist of customers on non-accrual status, all wholesale accounts and certain large retail accounts with past-due
balances or that otherwise are deemed to be at a higher risk of credit loss and loans which have been modified as
troubled debt restructurings. A receivable is considered impaired if it is probable the Company will be unable to
collect all contractual interest and principal payments as scheduled. Impaired receivables are individually evaluated to
determine the amount of impairment and these receivables are considered collateral dependent. Accordingly, the
evaluation of individual reserves is based on the fair value less costs to sell the associated collateral. When the
underlying collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company
uses a pricing model to value the underlying collateral on a quarterly basis. The fair value of the collateral is
determined based on management’s evaluation of numerous factors such as the make, model and year of the
equipment, overall condition of the equipment, primary method of distribution for the equipment, recent sales
prices of comparable equipment and economic trends effecting used equipment values.
For finance receivables that are evaluated collectively, the Company determines the allowance for credit losses for
both retail and wholesale receivables based on historical loss information, using past due account data and current
market conditions. Information used includes assumptions regarding the likelihood of collecting current and past-
due accounts, repossession rates and the recovery rate on the underlying collateral based on used truck values and
other pledged collateral or recourse. The Company has developed a range of loss estimates for each of its country
portfolios based on historical experience, taking into account loss frequency and severity in both strong and weak
truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from
which an amount is determined as probable based on current market conditions and other factors impacting the
creditworthiness of the Company’s borrowers and their ability to repay. The projected amount is then compared to
the allowance for credit loss balance and an appropriate adjustment is made.
The adequacy of the allowance is evaluated quarterly based on the most recent information. As accounts become
past-due, the likelihood increases they will not be fully collected. The Company’s experience indicates the
probability of not fully collecting past-due accounts range between 20% and 80%. Over the past three years, the
Company’s year-end 30+ days past-due accounts have ranged between 3.0% and 3.8% of average loan and lease
receivables. Historically, a 100 basis point increase in the 30+ days past-due percentage has resulted in an increase
in future credit losses of 10 to 35 basis points of average receivables. Past-dues were 3.0% at December 31, 2010.
If past-dues were 100 basis points higher or 4.0% as of December 31, 2010, the Company’s estimate of future credit
losses would likely have increased by approximately $5 to $20 million depending on the extent of the past-dues, the
estimated value of the collateral as compared to amounts owed and general economic factors.