E-Z-GO 2008 Annual Report Download - page 66

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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 in 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.
Finance Receivables Held for Investment
Finance receivables are classified as held for investment when we have the intent and the ability to hold the receivable for the foreseeable future or
until maturity or payoff. Finance receivables held for investment are generally recorded at the amount of outstanding principal less allowance for
loan losses.
Losses on Finance Receivables — Provisions for losses on finance receivables held for investment are charged to income in amounts sufficient
to maintain the allowance at a level considered adequate to cover losses in the portfolio. We evaluate the allowance by examining current
delinquencies, characteristics of the existing accounts, historical loss experience, underlying collateral value, and general economic conditions
and trends. In addition, for larger balance commercial loans, we consider borrower specific information, industry trends and estimated discounted
cash flows. Finance receivables held for investment generally are written down to the fair value (less estimated costs to sell) of the related
collateral at the earlier of the date when the collateral is repossessed or when no payment has been received for six months. Finance receivables
are charged off when they are deemed to be uncollectible.
Loan Impairment — We periodically evaluate our non-homogeneous loan portfolios for impairment. A loan is considered impaired when it is
probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We also identify loans that are
considered impaired due to the significant modification of the original loan terms. These modified loans reflect deferred principal payments,
generally at market interest rates, and continue to accrue finance charges since collection of principal and interest is not doubtful. We measure
impairment by comparing the fair value of a loan with 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, less selling costs. If the fair value of the loan is less than its carrying amount, we establish a reserve based on this difference.
Securitized Transactions
Securitized transactions involve the sale of finance receivables to qualified special purpose trusts. Through our Finance group, we sell or
securitize loans and leases and may retain an interest in the assets sold in the form of interest-only securities, seller certificates, cash reserve
accounts, and servicing rights and obligations. These retained interests are subordinate to other investors’ interests in the securitizations. We do
not provide legal recourse to third-party investors that purchase interests in our securitizations beyond the credit enhancement inherent in the
retained interest-only securities, seller certificates and cash reserve accounts. Gain or loss on the sale of the loans or leases depends, in part, on
the previous carrying amount of the financial assets involved in the transfer, which is allocated between the assets sold and the retained interests
based on their relative fair values at the date of transfer.
The interest-only securities within our retained interests are recorded at fair value in other assets. We estimate fair values based on the present
value of expected future cash flows using management’s best estimates of key assumptions — credit losses, prepayment speeds, discount rates
and forward interest rate yield curves commensurate with the risks involved. 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 that the value of the decline is other than temporary, we write down the
carrying value 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.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. We value our inventories generally using the first-in, first-out method
or the last-in, first-out (LIFO) method for certain qualifying inventories in the U.S. We determine costs for our commercial helicopters on an
average cost basis by model considering the expended and estimated costs for the current production release. Costs on long-term contracts
represent costs incurred for production, allocable operating overhead, advances to suppliers, and, in the case of contracts with the U.S.
Government, allocable research and development and general and administrative expenses. Since our inventoried costs include amounts related
to contracts with long production cycles, a portion of these costs is not expected to be realized within one year. Pursuant to contract provisions,
53
Textron Inc.