Ford 2003 Annual Report Download - page 59

2003 ANNUAL REPORT 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
The foregoing indicates that changes in the discount rate and return on assets can have a significant effect on the funded status
of our pension plans and Stockholders’ Equity. As stated above, we base the discount rate assumption on investment yields
available at year-end on corporate long-term bonds rated AA. We cannot predict these bond yields or investment returns and,
therefore, cannot reasonably estimate whether adjustments to our Stockholders’ Equity for minimum pension liability in
subsequent years will be significant.
OTHER POSTRETIREMENT BENEFITS (RETIREE HEALTH CARE AND LIFE INSURANCE)
See Note 19 of the Notes to Financial Statements for more information regarding costs and assumptions for other
postretirement benefits.
Nature of Estimates Required — The measurement of our obligations, costs and liabilities associated with other
postretirement benefits (i.e., retiree health care and life insurance) requires that we make use of estimates of the present
value of the projected future payments to all participants, taking into consideration the likelihood of potential future events
such as health care cost increases, salary increases and demographic experience, which may have an effect on the
amount and timing of future payments.
Assumptions and Approach Used — The assumptions used in developing the required estimates include the following key factors:
• Health care cost trends • Inflation
• Discount rates • Expected return on plan assets
• Salary growth • Mortality rates
• Retirement rates
Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, efficiencies and
other cost-mitigation actions (including further employee cost sharing, administrative improvements and other efficiencies) and
an assessment of likely long-term trends. 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 assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation. The expected return
on plan assets 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 — The December 31, 2003 postretirement obligation is affected by December 31, 2003 assumptions.
Postretirement benefit expense for 2003 is affected by December 31, 2002 assumptions. 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 effect of the indicated
increase/decrease in selected assumptions is shown below (in millions):
Effect on U.S. and Canadian Plans:
Increase/(Decrease)
Percentage December 31, 2003 2003
Assumption Point Change Obligation Expense
Discount rate +/ - 1.0 pt. $ (4,100)/ $ 5,000 $ ( 260)/ $ 280
Health care cost trends — total expense +/ - 1.0 4,600/ (3,800) 560 / (460)
Health care cost trends — service and interest expense +/ - 1.0 4,600/ (3,800) 310 / (260)
ALLOWANCE FOR CREDIT LOSSES
See Note 10 of the Notes to Financial Statements for more information regarding our allowance for credit losses.
The allowance for credit losses is our estimate of the probable credit losses related to impaired finance receivables and operating
leases as of the date of the financial statements. We exercise judgment in estimating this amount because credit losses vary
substantially over time, and estimating probable losses requires a number of assumptions about matters that are uncertain.
Nature of Estimates Required — We estimate the probable credit losses related to impaired finance receivables and operating
leases by evaluating several different factors using econometric models. These factors include historical credit loss trends, the
credit quality of our present portfolio, trends in historical and projected used vehicle values, and general economic measures.
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