PACCAR 2011 Annual Report Download - page 56

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011, 2010 and 2009 (currencies in millions)
Lease and guarantee periods generally range from three to seven years. Estimated useful lives of the equipment
range from four to nine years. The Company reviews residual values of equipment on operating leases periodically
to determine that recorded amounts are appropriate.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed
principally by the straight-line method based on the estimated useful lives of the various classes of assets. Certain
production tooling is amortized on a unit of production basis.
Long-lived Assets, Goodwill and Other Intangible Assets: The Company evaluates the carrying value of property,
plant, equipment and other intangible assets when events and circumstances warrant a review. Goodwill is tested
for impairment at least on an annual basis. Impairment charges were insignificant during the three years ended
December 31, 2011.
Product Support Liabilities: Product support liabilities are estimated future payments related to product
warranties, optional extended warranties and repair and maintenance (R&M) contracts. The Company generally
offers one-year warranties covering most of its vehicles and related aftermarket parts. Specific terms and conditions
vary depending on the product and the country of sale. Optional extended warranty and R&M contracts can be
purchased for periods which generally range up to five years. Warranty expenses and reserves are estimated and
recorded at the time products or contracts are sold based on historical data regarding the source, frequency and
cost of claims, net of any recoveries. PACCAR periodically assesses the adequacy of its recorded liabilities and
adjusts them as appropriate to reflect actual experience.
Derivative Financial Instruments: Derivative financial instruments are used to hedge exposures to fluctuations in
interest rates and foreign currency exchange rates. Certain derivative instruments designated as either cash flow
hedges or fair value hedges are subject to hedge accounting. Derivative instruments that are not subject to hedge
accounting are held as economic hedges. The Company’s policies prohibit the use of derivatives for speculation or
trading. At inception of each hedge relationship, the Company documents its risk management objectives,
procedures and accounting treatment.
The Company has elected not to offset derivative positions in the balance sheet with the same counterparty under
the same master netting agreements. The Company is not required to post or receive collateral under these
agreements. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default.
The Company had no material exposures to default at December 31, 2011.
The Company uses regression analysis to assess effectiveness of interest-rate contracts on a quarterly basis. For
foreign-exchange contracts, the Company performs quarterly assessments to ensure that critical terms continue to
match. All components of the derivative instrument’s gain or loss are included in the assessment of hedge
effectiveness. Gains or losses on the ineffective portion of cash flow hedges are recognized currently in earnings.
Hedge accounting is discontinued prospectively when the Company determines that a derivative financial
instrument has ceased to be a highly effective hedge.
Foreign Currency Translation: For most of PACCAR’s foreign subsidiaries, the local currency is the functional currency.
All assets and liabilities are translated at year-end exchange rates and all income statement amounts are translated at the
weighted average rates for the period. Translation adjustments are recorded in accumulated other comprehensive income
(loss). PACCAR uses the U.S. dollar as the functional currency for all but one of its Mexican subsidiaries, which uses the
local currency. For the U.S. functional currency entities in Mexico, inventories, cost of sales, property, plant and
equipment and depreciation are remeasured at historical rates and resulting adjustments are included in net income.