E-Z-GO 2011 Annual Report Download - page 63

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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.
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 and fair value. In addition, any
allowance for loan losses previously allocated to these finance receivables is transferred to the valuation allowance account, which
is netted with finance receivables held for sale on the balance sheet. This valuation allowance is adjusted quarterly. 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
transferred to the held for investment classification 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 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 of the underlying collateral, 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 management’s estimate of 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 estimated fair value of the underlying collateral, which may
differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis vary
by product line and include the following:
x Aviation - industry valuation guides, physical condition of the aircraft, payment history, and existence and financial
strength of guarantors.
x Golf Equipment - age and condition of the collateral.
x Timeshare - 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 Aviation and Golf Equipment, 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, such as Timeshare, the allowance is established
as a percentage of watchlist balances, as defined on page 58, which represents a combination of assumed default likelihood and
loss severity based on historical experience, industry trends and collateral values. In estimating our allowance for losses to cover
accounts not specifically identified, critical factors vary by product line and include the following:
x Aviation - the collateral value of the portfolio, historical default experience and delinquency trends.
x Golf Equipment - historical loss experience and delinquency trends.
x Timeshare - 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
when the collateral is repossessed, and are charged off when the remaining balance is deemed to be uncollectable.
52 Textron Inc. Annual Report • 2011