E-Z-GO 2002 Annual Report Download - page 45

Loan Impairment
Textron Finance periodically evaluates finance receivables, excluding homogeneous loan portfolios and
finance leases, for impairment. A loan is considered impaired when it is probable that Textron Finance
will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Impairment is measured by comparing the fair value of a loan to its carrying amount. Fair value is based
on the present value of expected future cash flows discounted at the loan’s effective interest rate, the
loan’s observable market price or, if the loan is collateral dependent, at the fair value of the collateral. If
the fair value of the loan is less than its carrying amount, Textron Finance establishes a reserve based on
this difference. This evaluation is inherently subjective, as it requires estimates, including the amount
and timing of future cash flows expected to be received on impaired loans, that may differ from actual
results.
Securitized Transactions
Textron Finance sells or securitizes loans and leases and retains servicing responsibilities and subordi-
nated interests, including interest-only securities, subordinated certificates and cash reserves, all of
which are retained interests in the securitized receivables. These retained interests are subordinate to
other investors’ interests in the securitizations. A gain or loss on the sale of finance receivables depends
in part on the previous carrying amount of the finance receivables involved in the transfer, allocated
between the assets sold and the retained interests based on their relative fair values at the date of trans-
fer. Retained interests are recorded at fair value as a component of other assets. Textron Finance esti-
mates fair value based on the present value of future expected cash flows using management’s best
estimates of key assumptions - credit losses, prepayment speeds, forward interest rate yield curves and
discount rates commensurate with the risks involved. Textron Finance reviews the fair values of the
retained interests quarterly using updated assumptions and compares such amounts with the carrying
value of the retained interests. When the carrying value exceeds the fair value of the retained interests
and the decline in fair value is determined to be other than temporary, the retained interest is written
down to fair value. When a change in the fair value of the retained interest is deemed temporary, any
unrealized gains or losses are included in shareholders’ equity as a component of accumulated other
comprehensive loss (OCL).
Investment Securities
Investments in marketable securities are classified as available for sale and are recorded at fair value as
a component of other assets. Unrealized gains and losses on these securities, net of income taxes, are
included in shareholders’ equity as a component of accumulated OCL. If a decline in the fair value of a
marketable security is judged to be other than temporary, the cost basis is written down to fair value with
a charge to earnings. Non-marketable equity securities are accounted for under either the cost or equity
method of accounting.
Inventories
Inventories are carried at the lower of cost or market. The cost of approximately 71% of inventories is
determined using the last-in, first-out method. The cost of remaining inventories, other than those related
to certain long-term contracts, are generally valued by the first-in, first-out method. Costs for commercial
helicopters are determined on an average cost basis by model considering the expended and estimat-
ed costs for the current production release.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line
method. Land improvements and buildings are depreciated primarily over estimated lives ranging from
5 to 40 years, while machinery and equipment are depreciated primarily over 3 to 15 years. Expendi-
tures for improvements that increase asset values and extend useful lives are capitalized. Expenditures
for maintenance and repairs are expensed as incurred.
Goodwill and Other Intangible Assets
Management evaluates the recoverability of goodwill and other intangible assets annually, or more fre-
quently if events or changes in circumstances, such as decline in sales, earnings or cash flows or mate-
rial adverse changes in the business climate, indicate that the carrying value of an asset might be
impaired. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its
estimated fair value. Fair values are primarily established using a discounted cash flow methodology.
The determination of discounted cash flows is based on the businesses’ strategic plans and long-range
planning forecasts.
43