PACCAR 2012 Annual Report Download - page 48

Impaired receivables are considered collateral dependent. Large balance retail and all wholesale impaired receivables
are individually evaluated to determine the appropriate reserve for losses. The determination of reserves for large
balance impaired receivables considers the fair value of the associated collateral. When the underlying collateral fair
value exceeds the Company’s recorded investment, no reserve is recorded. Small balance impaired receivables with
similar risk characteristics are evaluated as a separate pool to determine the appropriate reserve for losses using the
historical loss information discussed below.
For finance receivables that are not individually impaired, the Company collectively evaluates and 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.
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.
The adequacy of the allowance is evaluated quarterly based on the most recent past due account information and
current market conditions. 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 .6%
and 3.0% of loan and lease receivables. Historically, a 100 basis point increase in the 30+ days past-due percentage
has resulted in an increase in credit losses of 10 to 35 basis points of receivables. Past-dues were .6% at
December 31, 2012. If past-dues were 100 basis points higher or 1.6% as of December 31, 2012, the Company’s
estimate of 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 Truck, Parts and
Other net sales and revenues has ranged between 1.1% and 1.2%. If the 2012 warranty expense had been .2%
higher as a percentage of net sales and revenues in 2012, warranty expense would have increased by approximately
$32 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.
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