PACCAR 2011 Annual Report Download - page 45

Allowance for Credit Losses
The accounting for allowance for credit losses related to the Company’s loans and finance leases is disclosed in
Note D of the consolidated financial statements. The Company determines the allowance for credit losses on
financial services retail and wholesale receivables based on historical loss information, using past-due account
data, current market conditions and expectations about the future. The allowance for credit losses consists of
both a specific reserve and a general reserve based on estimates, including 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 specifically evaluates large
retail and wholesale accounts with past-due balances or that otherwise are deemed to be at a higher risk of credit
loss. All other past-due customers and current accounts are evaluated as a group.
The Company has developed a range of specific loss estimates for each of its portfolios by country 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 and expectations
about the future. 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 ranges between 20%
and 80%. Over the past three years, the Company’s year-end 30+ days past-due accounts have ranged between
1.5% 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 1.5% at December 31, 2011. If past-dues were 100 basis points higher or 2.5% as
of December 31, 2011, 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.
Product Warranty
Product warranty is disclosed in Note H of the consolidated financial statements. The expenses related to product
warranty are estimated and recorded at the time products are sold based on historical and current data and
reasonable expectations for the future regarding the frequency and cost of warranty claims, net of recoveries.
Management takes actions to minimize warranty costs through quality-improvement programs; however, actual
claim costs incurred could materially differ from the estimated amounts and require adjustments to the reserve.
Historically those adjustments have not been material. Over the past three years, warranty expense as a
percentage of net sales and revenues has ranged between 1.1% and 1.2%. For 2011, warranty expense was 1.1% of
net sales and revenues. If warranty expense were .2% higher as a percentage of truck net sales and revenues in
2011, warranty expense would have increased by approximately $24 million.
Pension Benefits
Employee benefits are disclosed in Note L of the consolidated financial statements. The Company’s accounting for
employee pension benefit costs and obligations is based on management assumptions about the future used by
actuaries to estimate net costs and liabilities. These assumptions include discount rates, long-term rates of return
on plan assets, inflation rates, retirement rates, mortality rates and other factors. Management bases these
assumptions on historical results, the current environment and reasonable estimates of future events.
