E-Z-GO 2013 Annual Report Download - page 65

52Textron Inc. Annual Report • 2013
We maintain an allowance for losses on finance receivables at a level considered adequate to cover inherent losses in the portfolio
based on management’s evaluation. For larger balance accounts specifically identified as impaired, including large accounts in
homogeneous portfolios, a reserve is established based on comparing the expected future cash flows, discounted at the finance
receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to
its carrying amount. 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 and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple
discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation
of our portfolio 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 include industry
valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors.
We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio. This
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. Finance receivables are charged off at the earlier
of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the
receivable collectible. Repossessed assets are recorded at their fair value, less estimated cost to sell.
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 we no longer have 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, interest rates and perceived marketability of the receivables. These receivables 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 and 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.
Pension and Postretirement Benefit Obligations
We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and
postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these
obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost
projections. We evaluate and update these assumptions annually in consultation with third-party actuaries and investment
advisors. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and
rate of compensation increases. We recognize the overfunded or underfunded status of our pension and postretirement plans in the
Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in
the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are
recognized as a component of other comprehensive income (loss) (OCI) and are amortized into net periodic pension cost in future
periods.
Derivative Financial Instruments
We are exposed to market risk primarily from changes in currency exchange rates and interest rates. We do not hold or issue
derivative financial instruments for trading or speculative purposes. To manage the volatility relating to our exposures, we net
these exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, we enter into various
derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. All derivative
instruments are reported at fair value in the Consolidated Balance Sheets. Designation to support hedge accounting is performed
on a specific exposure basis. For financial instruments qualifying as fair value hedges, we record changes in fair value in earnings,
offset, in part or in whole, by corresponding changes in the fair value of the underlying exposures being hedged. For cash flow
hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes.
Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.
Foreign currency denominated assets and liabilities are translated into U.S. dollars. Adjustments from currency rate changes are
recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or
substantially liquidated. We use foreign currency financing transactions to effectively hedge long-term investments in foreign
operations with the same corresponding currency. Foreign currency gains and losses on the hedge of the long-term investments
are recorded in the cumulative translation adjustment account.