Ford 2003 Annual Report Download - page 58

56 FORD MOTOR COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
WARRANTY AND ADDITIONAL SERVICE ACTIONS
See Notes 1 and 23 of the Notes to Financial Statements for more information regarding costs and assumptions for warranties
and additional service actions.
Nature of Estimates Required — The estimated warranty and additional service action costs are accrued for each vehicle
at the time of sale. Estimates are principally based on assumptions regarding the lifetime warranty costs of each vehicle line
and each model year of that vehicle line, where little or no claims experience may exist. In addition, the number and magnitude
of additional service actions expected to be approved, and policies related to additional service actions, are taken into
consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our assumptions
could materially affect net income.
Assumptions and Approach Used — Our estimate of warranty and additional service action obligations is reevaluated on a
quarterly basis. Experience has shown that initial data for any given model year can be volatile; therefore, our process relies upon
long-term historical averages until sufficient data are available. As actual experience becomes available, it is used to modify the
historical averages to ensure that the forecast is within the range of likely outcomes. Resulting balances are then compared with
present spending rates to ensure that the accruals are adequate to meet expected future obligations.
PENSIONS
See Note 19 of the Notes to Financial Statements for more information regarding costs and assumptions for employee
retirement benefits.
Nature of Estimates Required — The measurement of our pension obligations, costs and liabilities is dependent on a variety
of assumptions used by our actuaries. These assumptions include estimates of the present value of projected future pension
payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and
demographic experience. These assumptions may have an effect on the amount and timing of future contributions. The plan
trustee conducts an independent valuation of the fair value of pension plan assets.
Assumptions and Approach Used — The assumptions used in developing the required estimates include the following key factors:
• Discount rates • Inflation
• Salary growth • Expected return on plan asset
• Retirement rates • Mortality rates
We base the discount rate assumption on investment yields available at year-end on corporate long-term bonds rated AA. Our
inflation assumption is based on an evaluation of external market indicators. The salary growth assumption reflects our long-term
actual experience, the near-term outlook and assumed inflation. The expected return on plan assets assumption reflects asset
allocation, investment strategy and the views of investment managers and of other large pension plan sponsors regarding the
market. Retirement and mortality rates are based primarily on actual plan experience. The effects of actual results differing from
our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in
such future periods.
Sensitivity Analysis — Sensitivity of our worldwide pension funded status and stockholders’ equity to the indicated
increase/decrease in the discount rate assumption is shown below. Although not an estimate, we've also included sensitivity
around the actual return on pension assets. Note that these sensitivities may be asymmetric, and are specific to the base
conditions at year-end 2003. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be
calculated by combining the individual sensitivities shown. The December 31, 2003 funded status is affected by December 31,
2003 assumptions. Pension expense for 2003 is affected by December 31, 2002 assumptions. The impact on our funded status,
equity and U.S. pension expense from a one percentage point change in these assumptions is shown below (in millions):
Increase/(Decrease) in:
Percentage December 31, 2003 2003
Point U.S. Plans Non-U.S. Plans U.S.
Assumption Change Funded Status Funded Status Equity Expense
Discount rate +/- 1.0 pt. $ 4,110/ $ (4,580) $3,300/ $(3,850) $2,870/$(4,910) $(20) /$20
Full year 2003, actual
return on assets +/- 1.0 290/ (290) 130/(130) 180/(180) –
Full year 2003, expected
return on assets +/- 1.0 – – – (350)/350
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