E-Z-GO 2009 Annual Report Download - page 44

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Critical Accounting Estimates
To prepare our Consolidated Financial Statements to be in conformity with generally accepted accounting principles, we must make complex and
subjective judgments in the selection and application of accounting policies. The accounting policies that we believe are most critical to the
portrayal of our financial condition and results of operations are listed below. We believe these policies require our most difficult, subjective and
complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated
Financial Statements, which includes other significant accounting policies.
Allowance for Losses on Finance Receivables Held for Investment
We evaluate our allowance for losses on finance receivables held for investment based on a combination of factors. For homogeneous loan pools,
we examine current delinquencies, the characteristics of the existing accounts, historical loss experience, the value of the underlying collateral,
general economic conditions and trends, and the potential impact of the lack of liquidity available to our borrowers and their customers as a result
of our current decision to exit our non-captive finance business. We estimate losses will range from 0.75% to 10.0% of finance receivables held
for investment depending on the specific homogeneous loan pool. For larger balance commercial loans, we also consider borrower-specific
information, industry trends and estimated discounted cash flows.
Provision for losses on finance receivables held for investment is charged to income in amounts sufficient to maintain the allowance for losses on
finance receivables held for investment at a level considered adequate to cover losses inherent in the owned finance receivable held for investment
portfolio based on management’s evaluation and analysis of this portfolio. While management believes that its consideration of the factors and
assumptions referred to above does result in an accurate evaluation of existing losses in the portfolio based on prior trends and experience,
changes in the assumptions or trends within reasonable historical volatility may have a material impact on our allowance for losses on finance
receivables held for investment. The allowance for losses on finance receivables held for investment currently represents 5.49% of total finance
receivables held for investment. During the last five years, net charge-offs as a percentage of finance receivables held for investment have ranged
from 0.38% to 1.82%.
Finance Receivables Held for Sale
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, until maturity or payoff, or there no longer is 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 and the perceived marketability of the receivables. 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. As a result of the significant influence of economic and liquidity conditions on our business plans and strategies, and the rapid
changes in these and other factors we utilize to determine which assets are classified as held for sale, we currently believe the term “foreseeable
future” represents a time period of six to nine months. We also believe that unanticipated changes in both internal and external factors affecting
our financial performance, liquidity position or the value and/or marketability of our finance receivables could result in a modification of this
assessment. If we determine that finance receivables classified as held for sale will not be sold and we have the intent and ability to hold the
finance receivables for the foreseeable future, until maturity or payoff, the finance receivables are 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 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 2, 2010, 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 68 in Note 10 to the
Consolidated Financial Statements for a table where we have included the carrying value and fair value for the assets and liabilities that currently
are 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
Textron Inc.