E-Z-GO 2004 Annual Report Download - page 63

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Loan Impairment
Textron Finance periodically evaluates finance receivables, excluding homogeneous loan portfolios and finance leases, for impair-
ment. 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. In addition, Textron Finance identifies loans that are considered impaired due to the
significant modification of the original loan terms to reflect deferred principal payments generally at market interest rates but which
continue to accrue finance charges since full collection of principal and interest is not doubtful. Impairment is measured by com-
paring the fair value of a loan with its carrying amount. Fair value is based on the present value of expected future cash flows dis-
counted 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, less selling costs. 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 subordinated interests, including
interest-only securities, subordinated certificates and cash reserves, all of which are retained interests in the securitized receiv-
ables. 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 transfer. Retained interests are
recorded at fair value as a component of other assets.
Textron Finance estimates 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 com-
pares 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 share-
holders’ equity as a component of accumulated other comprehensive loss.
Investments
Investments in marketable equity 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 com-
ponent of accumulated other comprehensive loss. Investments in non-marketable equity securities are accounted for under either
the cost or equity method of accounting. Textron periodically reviews investment securities for impairment based on criteria that
include the duration of the market value decline, Textron’s ability to hold to recovery, information regarding the market and industry
trends for the investee’s business, the financial strength and specific prospects of the investee, and investment analyst reports, if
available. If a decline in the fair value of an investment security is judged to be other than temporary, the cost basis is written down
to fair value with a charge to earnings.
In the normal course of business, Textron has entered into various joint venture agreements that are not controlled by Textron, but
where Textron has the ability to exercise significant influence over the operating and financial policies. Textron’s investments in
these ventures are accounted for under the equity method of accounting. At January 1, 2005 and January 3, 2004, the investment
in these unconsolidated joint ventures totaled $14 million and $26 million, respectively, and is included in other assets. Under the
equity method, only Textron’s share of the ventures’ net earnings and losses is included in the consolidated statement of opera-
tions. The net loss totaled $11 million in 2004, $12 million in 2003 and $13 million in 2002. Since these losses are not considered
material for separate presentation, they are included within cost of sales.
Textron’s joint venture agreement with Boeing creates contractual, rather than ownership, rights related to the V-22. Accordingly,
Textron does not account for this joint venture under the equity method of accounting. Textron accounts for all of Bell Helicopter’s
rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell Helicopter under the joint venture
agreement. Revenues and cost of sales reflect Bell Helicopter’s performance under the V-22 Contracts. All assets used in perfor-
mance of the V-22 Contracts owned by Bell Helicopter, including inventory and unpaid receivables, and all liabilities arising from
Bell Helicopter’s obligations under the V-22 Contracts, are included in the consolidated balance sheet.
Notes to Consolidated Financial Statements