E-Z-GO 2008 Annual Report Download - page 53

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We review the fair values of the retained interests quarterly using updated assumptions and compare such amounts with the carrying value. When
the carrying value exceeds the fair value, 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 securities to fair value with a corresponding charge to income. When a change in fair value
of the interest-only securities is deemed temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized
gains or losses. Refer to Note 5 to the Consolidated Financial Statements for a summary of key assumptions used to record initial gains related to
the sale of finance receivables through securitizations and to measure the current fair value of the interest-only securities.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates expected 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 benefits, such as net operating loss carryforwards, to the extent that we believe it is more
likely than not that we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and
reflect 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 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 benefits 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 benefit will be sustained, we record the largest amount of tax
benefit with 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. We recognize net tax-related interest and penalties in income tax expense. If we
do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit 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 fluctuate significantly on a quarterly and annual basis.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risks
Our financial results are affected by changes in U.S. and foreign interest rates. As part of managing this risk, we enter into interest rate exchange
agreements to convert certain floating-rate debt to fixed-rate debt and vice versa. The overall objective of our interest rate risk management is to
achieve a prudent balance between floating- and fixed-rate debt. We continually monitor our mix of floating- and fixed-rate debt and adjust the
mix, as necessary, based on our evaluation of internal and external factors. The difference between the rates our Manufacturing group received
and the rates it paid on interest rate exchange agreements did not significantly impact interest expense in 2008, 2007 or 2006.
Our Finance group limits its risk to changes in interest rates with its strategy of matching floating-rate assets with floating-rate liabilities. This
strategy includes the use of interest rate exchange agreements. At January 3, 2009, floating-rate liabilities in excess of floating-rate assets were
$3.0 billion, net of $2.1 billion of interest rate exchange agreements, which effectively converted fixed-rate debt to a floating-rate equivalent.
Classified within fixed-rate assets are $3.0 billion of floating rate loans with index rate floors that are, on average, 224 basis points above the
applicable index rate (predominately the Prime rate). These assets will remain classified as fixed-rate until the Prime rate increases above the floor
rates. We have benefited from the interest rate floor arrangements in the recent low rate environment; however, in a rising rate environment, this
benefit will dissipate until the Prime rate exceeds the floor rates embedded in these agreements. The net effect of interest rate exchange
agreements designated as hedges of debt decreased interest expense for our Finance group by $25 million in 2008 and increased interest
expense by $25 million and $27 million in 2007 and 2006, respectively.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations