E-Z-GO 2011 Annual Report Download - page 48

Finance Receivables
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. 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, interest
rates and perceived marketability of the receivables. On an ongoing basis, these factors, combined with our overall liquidation
strategy, determine which finance receivables we have the intent to hold for the foreseeable future and which finance 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 marketability of our finance receivables. A change in this strategy could result in a
change in the classification of our finance receivables.
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 transferred 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 subsequently 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 December 31, 2011, 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 9 to the Consolidated
Financial Statements for a table where we have included the carrying value and fair value for the finance receivables held for
investment, excluding leases that currently are not recorded at fair value in our Consolidated Balance Sheet.
Finance receivables held for sale are carried at the lower of cost or fair value. 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 both the sale
of 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 expectations of borrowers’ ability to make scheduled balloon payments on a timely basis.
Where available, assumptions related to the expectations of current market participants are compared with observable market
inputs, including bids from prospective purchasers of similar loans and certain bond market indices for loans perceived to be of
similar credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these
inputs are not typically 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.
See page 67 in Note 9 to the Consolidated Financial Statements for the impact of changes in fair value and the classification of
finance receivables for the past two years.
Long-Term Contracts
We make a substantial portion of our sales to government customers pursuant to long-term contracts. These contracts require
development and delivery of products over multiple years and may contain fixed-price purchase options for additional products.
We account for these long-term contracts under the percentage-of-completion method of accounting. Under this method, we
estimate profit as the difference between total estimated revenues and cost of a contract. The percentage-of-completion method of
accounting involves the use of various estimating techniques to project costs at completion and, in some cases, includes estimates
of recoveries asserted against the customer for changes in specifications. Due to the size, length of time and nature of many of our
contracts, the estimation of total contract costs and revenues through completion is complicated and subject to many variables
relative to the outcome of future events over a period of several years. We are required to make numerous assumptions and
estimates relating to items such as expected engineering requirements, complexity of design and related development costs,
performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs,
manufacturing efficiencies and the achievement of contract milestones, including product deliveries.
Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with
finance professionals. We update our projections of costs at least semiannually or when circumstances significantly change.
Adjustments to projected costs are recognized in earnings when determinable. Anticipated losses on contracts are recognized in
full in the period in which the losses become probable and estimable. Due to the significance of judgment in the estimation
process described above, it is likely that materially different revenues and/or cost of sales amounts could be recorded if we used
different assumptions or if the underlying circumstances were to change. Our earnings could be reduced by a material amount
resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in
customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously
estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the
contract or (d) we are unable to meet contract milestones.
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