E-Z-GO 2008 Annual Report Download - page 83

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Notes to the Consolidated Financial Statements
70
The Finance group’s derivative contracts are not exchange-traded. Derivative financial instruments are measured at fair value utilizing widely
accepted, third-party developed valuation models. The actual terms of each individual contract are entered into a valuation model, along with
interest rate and foreign exchange rate data, which is based on readily observable market data published by third-party leading financial news and
data providers. Credit risk is factored into the fair value of derivative assets and liabilities based on the differential between both our credit default
swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared to a standard AA-rated counterparty; however,
this had no significant impact on the valuation as of January 3, 2009 as most of our counterparties are AA-rated and the vast majority of our
derivative instruments are in an asset position.
Changes in Fair Value for Unobservable Inputs
The table below presents the change in fair value measurements for our interest-only strips for which we used significant unobservable inputs
(Level 3) during 2008:
(In millions)
Balance, beginning of year $ 43
Net gains for the year:
Increase in securitization gains on sale of finance receivables 66
Change in value recognized in finance revenues 2
Reclassification to finance receivables held for investment (19)
Impairment charges (21)
Collections (59)
Balance, end of year $ 12
Assets Recorded at Fair Value on a Nonrecurring Basis
The table below presents the assets measured at fair value on a nonrecurring basis for the Finance group at January 3, 2009 categorized by the
level of inputs used in the valuation of each asset:
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(In millions) Total (Level 1) (Level 2) (Level 3)
Finance receivables held for sale $ 1,658 $ — $ — $ 1,658
Impaired loans 191 — — 191
Total assets $ 1,849 $ — $ — $ 1,849
Finance receivables held for sale are recorded at the lower of cost or fair value. Due to our current plan to exit the non-captive commercial finance
business through a combination of orderly liquidation of receivables as they mature and selected sales, we classified $1.7 billion of finance
receivables as held for sale. The finance receivables held for sale as of January 3, 2009 include asset-based revolving lines of credit, dealer
inventory financing and golf and resort mortgages. The majority of the finance receivables held for sale were identified at the individual loan level.
Golf and resort mortgages classified as held for sale were identified as a portion of a larger portfolio with common characteristics based on the
intention to balance the sale of certain loans with the collection of others to maximize economic value. Finance receivables held for sale are
recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value. Upon initial reclassification of
these receivables to held for sale we estimated the fair value to be $293 million less than the carrying value, net of the $44 million allowance for
loan losses attributable to these portfolios. This net adjustment was recorded within special charges in the fourth quarter of 2008.
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 current market participants 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 current market
participants were compared to observable market inputs, including bids from prospective purchasers, and certain bond market indices for loans