PACCAR 2011 Annual Report Download - page 55

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011, 2010 and 2009 (currencies in millions)
shorter in duration than retail receivables, and the Company requires monthly reporting of the wholesale dealer’s
financial condition, conducts periodic audits of the trucks being financed and in many cases, obtains personal guarantees
or other security such as dealership assets. The allowance for credit losses consists of both specific and general reserves.
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, certain large retail accounts with past-due
balances or that otherwise are determined to be at a higher risk of credit loss, and loans which have been modified as
TDRs. A receivable is considered impaired if it is probable the Company will be unable to collect all contractual interest
and principal payments as scheduled. Large balance impaired receivables are individually evaluated to determine the
appropriate reserve for losses. Small balance impaired receivables with similar risk characteristics are evaluated as a
separate pool. Impaired receivables are considered collateral dependent. Accordingly, the evaluation of individual reserves
is based on the fair value of the associated collateral (estimated sales proceeds less the costs to sell). When the underlying
collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company uses a pricing
model to assist in valuing the underlying collateral and categorizes the fair value as Level 2 in the hierarchy of fair value
measurement. The pricing model is reviewed quarterly and updated as appropriate. The pricing model considers the
make, model and year of the equipment as well as recent sales prices of comparable equipment. The fair value of the
collateral is determined based on management’s evaluation of numerous factors such as the pricing model value, overall
condition of the equipment, whether the Company will dispose of the equipment through wholesale or retail channels, as
well as economic trends affecting used equipment values.
For finance receivables that are evaluated collectively, the Company determines the general 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, 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 amount is then compared to the allowance for credit loss balance (after charge-
offs for the current period) and an appropriate adjustment is made. In determining the general allowance for credit
losses, loans and finance leases are evaluated together since they relate to a similar customer base, their contractual terms
require regular payment of principal and interest generally over 36 to 60 months and they are secured by the same type
of collateral.
After determining the appropriate level of the allowance for credit losses, the provision for losses on finance receivables is
charged to income as necessary to reflect management’s estimate of incurred credit losses, net of recoveries, inherent in
the portfolio. Accounts are charged-off against the allowance for credit losses when, in the judgment of management, they
are considered uncollectable (generally upon repossession of the collateral). Typically the timing between the repossession
and charge-off is not significant. In cases where repossession is delayed (e.g., for legal proceedings), the Company records
partial charge-offs. The charge-off is determined by comparing the fair value of the collateral, less cost to sell, to the
recorded investment.
Inventories: Inventories are stated at the lower of cost or market. Cost of inventories in the U.S. is determined
principally by the last-in, first-out (LIFO) method. Cost of all other inventories is determined principally by the
first-in, first-out (FIFO) method.
Equipment on Operating Leases: The Company leases equipment under operating leases to customers in the
Financial Services segment. In addition, in the Truck segment, equipment sold to customers in Europe subject to a
residual value guarantee (RVG) by the Company is accounted for as an operating lease. Equipment is recorded at
cost and is depreciated on the straight-line basis to the lower of the estimated residual value or guarantee value.