E-Z-GO 2007 Annual Report Download - page 53

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We assess the adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the amounts as necessary.
Adjustments are made to accruals as claim data and actual experience warrant. Should future warranty experience differ materially from our
historical experience, we may be required to record additional warranty liabilities, which could have a material adverse effect on our results of
operations and cash fl ows in the period in which these additional liabilities are required.
Securitized Transactions
Securitized transactions involve the sale of fi nance receivables to qualifi ed special purpose trusts. We may retain an interest in the assets sold in
the form of interest-only securities, seller certifi cates, cash reserve accounts and servicing rights and obligations. At the time of sale, a gain or
loss is recorded based on the difference between the proceeds received and the allocated carrying value of the fi nance receivables sold. The
allocated carrying value is determined based on the relative fair values of the fi nance receivables sold and the interests retained. As such, the fair
value estimate of the retained interests has a direct impact on the gain or loss recorded. We estimate fair value based on the present value of future
cash fl ows expected under management’s best estimates of key assumptions – credit losses, prepayment speeds and discount rates commensurate
with the risks involved. Retained interests are recorded at fair value as a component of other assets in the Consolidated Balance Sheets.
We review the fair values of the retained interests quarterly using updated assumptions and compare such amounts with the carrying value of the
retained interests. When the carrying value exceeds the fair value of the retained interests, we determine whether the decline in fair value is other
than temporary. When we determine the value of the decline is other than temporary, we write down the retained interests to fair value with a
corresponding charge to income. When a change in fair value of the retained interests is deemed temporary, we record a corresponding credit or
charge to other comprehensive income for any unrealized gains or losses. A hypothetical adverse change of 10% and 20% to the expected credit
losses, residual cash fl ows discount rates or prepayment rate assumptions would not have a material impact on the current value of the residual
cash fl ows associated with the retained interests. Hypothetical sensitivities should be used with caution, as the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, a change in one factor may
magnify or counteract the sensitivities losses. For example, increases in interest rates may result in lower prepayments and increased credit losses.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the fi nancial reporting and tax bases of assets and
liabilities, applying enacted tax rates that we expect to be in effect for the year in which we expect the differences will reverse or settle. Based on
the evaluation of available evidence, we recognize future tax benefi ts, such as net operating loss carryforwards, to the extent that we believe it is
more likely than not that we will realize these benefi ts. We periodically assess the likelihood that we will be able to recover our deferred tax assets
and refl ect any changes in our estimates in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive income
(loss), as appropriate.
In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in
carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes
to tax laws, changes to statutory tax rates and changes to future taxable income estimates.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed
assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We assess our income tax positions and
record tax benefi ts for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the
reporting date. For those tax positions for which it is more likely than not that a tax benefi t will be sustained, we record the amount that has a
greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest
and penalties are accrued, where applicable. If we do not believe that it is more likely than not that a tax benefi t will be sustained, no tax benefi t is
recognized. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income
tax examinations, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fl uctuate signifi cantly
on a quarterly and annual basis.