E-Z-GO 2008 Annual Report Download - page 84

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Textron Inc.
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.
Loan impairment is measured by comparing the expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the
collateral if the loan is collateral dependent, to its carrying amount. If the carrying amount is higher, we establish a reserve based on this
difference. This evaluation is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be
received on impaired loans and the underlying collateral, which may differ from actual results. Impaired nonaccrual loans are also included in the
table above since the measurement of required reserves on these loans is significantly dependent on the fair value of the underlying collateral.
Fair values of collateral are determined utilizing either appraisals, industry pricing guides, input from market participants, our recent experience
selling similar assets or internally developed discounted cash flow models.
Assets and Liabilities Not Recorded at Fair Value
The carrying amounts and estimated fair values of our financial instruments that are not reflected in the financial statements at fair value are
as follows:
January 3, 2009 December 29, 2007
Carrying Estimated Carrying Estimated
(In millions) Value Fair Value Value Fair Value
Manufacturing group:
Debt $ (2,438) $ (2,074) $ (1,998) $ (2,021)
Finance group:
Finance receivables held for investment 5,665 4,828 7,363 7,378
Retained interest in securitizations, excluding interest only strips 188 178 160 160
Investment in other marketable securities 95 78 20 20
Debt (7,549) (6,663) (7,336) (7,309)
In accordance with disclosure requirements, debt and finance receivables held for investment in the table above exclude leases. Fair value for the
Manufacturing group debt is determined using market observable data for similar transactions. We utilize the same valuation methodologies to
determine the fair value estimates for finance receivables held for investment as described above for finance receivables held for sale.
Retained interests represent our subordinated interest in finance receivables sold to qualified special purpose trusts. These interests are classified
as held-to-maturity and recorded at the allocated carrying value, which is determined based on the relative fair values of the finance receivables
sold and the interests retained. We estimate fair value upon the initial recognition of the retained interest based on the present value of expected
future cash flows using our best estimates of key assumptions – credit losses, prepayment speeds, forward interest rate yield curves and discount
rates commensurate with the risks involved. These inputs reflect our own judgment regarding the assumptions market participants would use in
pricing these assets based on the best information available in the circumstances as there is no active market for these assets.
Investments in other marketable securities represent notes receivable issued by securitization trusts that purchase timeshare notes receivable
from timeshare developers. These notes are classified as held-to-maturity and are held at cost. The estimate of fair value was based on observable
market inputs for similar securitization interests in markets that are currently inactive.
In 2008, approximately 80% of the fair value of term debt for the Finance group was determined based on observable market transactions.
The remaining Finance group debt was determined based on discounted cash flow analyses using observable market inputs from debt with
similar duration, subordination and credit default expectations. The fair values of short-term borrowings are assumed to approximate their
carrying values.
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