E-Z-GO 2010 Annual Report Download - page 60

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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 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. In
addition, any allowance for loan losses previously allocated to these finance receivables is reclassified to the valuation allowance
account, which is netted with finance receivables held for sale on the balance sheet. This valuation allowance is adjusted quarterly
through earnings for any changes in the fair value of the finance receivables below the carrying value. 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. 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.
Finance Receivables Held for Investment and Allowance for Losses
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.
We maintain the allowance for losses on finance receivables held for investment at a level considered adequate to cover inherent
losses in the portfolio based on management’s evaluation and analysis by product line. For larger balance accounts specifically
identified as impaired, including large accounts in homogeneous portfolios, a reserve is established based on comparing the carrying
value with either a) the expected future cash flows, discounted at the finance receivable’s effective interest rate; or b) the fair value, if
the finance receivable is collateral dependent. The expected future cash flows consider collateral value; financial performance and
liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs
associated with the repossession/foreclosure and eventual disposal of collateral. When there is a range of potential outcomes, we
perform multiple discounted cash flow analyses and weight the outcomes based on their relative likelihood of occurrence.
The evaluation of our portfolios is inherently subjective, as it requires estimates, including the amount and timing of future cash flows
expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. While our
analysis is specific to each individual account, the most critical factors included in this analysis vary by product line. For the aviation
product line, these factors include industry valuation guides, physical condition of the aircraft, payment history, and existence and
financial strength of guarantors. For the golf equipment line, the critical factors are the age and condition of the collateral, while the
factors for the golf mortgage line include historical golf course, hotel or marina cash flow performance; estimates of golf rounds and
price per round or occupancy and room rates; market discount and capitalization rates; and existence and financial strength of
guarantors. For the timeshare product line, the critical factors are the historical performance of consumer notes receivable collateral,
real estate valuations, operating expenses of the borrower, the impact of bankruptcy court rulings on the value of the collateral, legal
and other professional expenses and borrower’s access to capital.
We also establish an allowance for losses by product line to cover probable but specifically unknown losses existing in the portfolio.
For homogeneous portfolios, including the aviation and golf equipment product lines, the allowance is established as a percentage of
non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a
combination of factors, including historical loss experience, current delinquency and default trends, collateral values, and both general
economic and specific industry trends. For non-homogeneous portfolios, including the golf mortgage and timeshare product lines, the
allowance is established as a percentage of watchlist balances, as defined on page 53, which represents a combination of assumed
default likelihood and loss severity based on historical experience, industry trends and collateral values. In establishing our allowance
for losses to cover accounts not specifically identified, the most critical factors for the aviation product line include the collateral value
of the portfolio, historical default experience and delinquency trends; for golf equipment, factors considered include historical loss
experience and delinquency trends; and for golf mortgage, factors include an evaluation of individual loan credit quality indicators
such as delinquency, loan balance to collateral value, debt service coverage, existence and financial strength of guarantors, historical
progression from watchlist to nonaccrual status and historical loss severity. For the timeshare product line, we evaluate individual
loan credit quality indicators such as borrowing base shortfalls for revolving notes receivable facilities, default rates of our notes
receivable collateral, borrower’s access to capital, historical progression from watchlist to nonaccrual status and estimates of loss
severity based on analysis of impaired loans in the product line.
Finance receivables held for investment 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 unless management deems
the receivable collectable. Finance receivables are charged off when the remaining balance is deemed to be uncollectable.