E-Z-GO 2008 Annual Report Download - page 50

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Finance receivables are classified as held for sale based on the determination that we no longer intend to hold the receivables for the foreseeable
future or until maturity or there is no longer the ability to hold to maturity. Our decision to classify certain finance receivables as held for sale is
based on a number of factors, including, but not limited to, contractual duration, type of collateral, credit strength of the borrowers, the existence
of continued contractual commitments, the perceived marketability of the receivables and our ability to hold the receivables to maturity. On an
ongoing basis, these factors, combined with our overall liquidation strategy, determine which finance receivables we have the positive intent to
hold for the foreseeable future and which receivables we will hold for sale.
Our current strategy is based on an evaluation of both our performance and liquidity position and changes in external factors affecting the value
and/or the marketability of our finance receivables. A change in this strategy could result in a change in the classification of our finance
receivables. If we subsequently determine that finance receivables classified as held for sale will not be sold, the finance receivables will be
reclassified to held for investment at the lower of cost or fair value at that time. Conversely, if we determine that there are other finance receivables
that we subsequently determine we no longer intend or have the ability to hold to maturity, these receivables would be designated as held for sale
and a valuation allowance would be established at that time, if necessary. At January 3, 2009, if we had classified additional finance receivables as
held for sale, a valuation allowance would likely have been required at that time based on the fair value estimates we completed for our footnote
disclosure requirements. See page 71 in Note 10, Fair Values of Assets and Liabilities, to the Consolidated Financial Statements for a table where
we have included the carrying value and fair value for the assets and liabilities that are currently not recorded at fair value on our balance sheet.
Finance receivables held for sale are carried at the lower of cost or fair value. At the time of transfer to the held for sale classification, we establish
a valuation allowance for any shortfall between the carrying value, net of all deferred fees and costs, and fair value. Upon the initial classification
to held for sale, any shortfall is recorded as a charge within special charges. In addition, any allowance for loan losses previously allocated to
these receivables is reclassified to the valuation allowance account which is netted with finance receivables held for sale on the balance sheet.
After the valuation allowance is initially established, it is adjusted quarterly for any changes in the fair value of the receivables below the original
carrying value, with subsequent adjustments included in earnings within segment profit. Fair value changes can occur based on market interest
rates, market liquidity and changes in the credit quality of the borrower and value of underlying loan collateral.
There are no active, quoted market prices for our finance receivables. The estimate of fair value was determined based on the use of discounted
cash flow models to estimate the exit price we expect to receive in the principal market for each type of loan in an orderly transaction, which
includes the sale of both pools of similar assets, and the sale of individual loans. The models we used incorporate estimates of the rate of return,
financing cost, capital structure and/or discount rate expectations of prospective purchasers combined with estimated loan cash flows based on
credit losses, payment rates and credit line utilization rates. Where available, the assumptions related to the expectations of prospective
purchasers were compared to observable market inputs, including bids from prospective purchasers, and certain bond market indices for loans of
similar perceived credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these
inputs are rarely derived from markets with directly comparable loan structures, industries and collateral types. Therefore, all valuations of finance
receivables held for sale involve significant management judgment, which can result in differences between our fair value estimates and those of
other market participants.
Long-Term Contracts
We make a substantial portion of our sales to government customers pursuant to long-term contracts. These contracts require development and
delivery of products over multiple years and may contain fixed-price purchase options for additional products. We account for these long-term
contracts under the percentage-of-completion method of accounting.
Under the percentage-of-completion method, we estimate profit as the difference between total estimated revenue and cost of a contract. We then
recognize that estimated profit over the contract term based on either the costs incurred (under the cost-to-cost method, which typically is used
for development effort) or the units delivered (under the units-of-delivery method, which is used for production effort), as appropriate under the
circumstances. The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at
completion and, in some cases, includes estimates of recoveries asserted against the customer for changes in specifications. Due to the size,
length of time and nature of many of our contracts, the estimation of total contract costs and revenue through completion is complicated and
subject to many variables relative to the outcome of future events over a period of several years. We are required to make numerous assumptions
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