Ford 2006 Annual Report Download - page 40
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Please find page 40 of the 2006 Ford annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
Allowance for Credit Losses — Financial Services Sector
The allowance for credit losses is Ford Credit's estimate of the credit losses related to impaired finance receivables
and operating leases as of the date of the financial statements. Consistent with its normal practices and policies, Ford
Credit assesses the adequacy of its allowance for credit losses quarterly and regularly evaluates the assumptions and
models used in establishing the allowance. Because credit losses can vary substantially over time, estimating credit
losses requires a number of assumptions about matters that are uncertain.
Nature of Estimates Required. Ford Credit estimates the credit losses related to impaired finance receivables and
operating leases based on several factors including historical credit loss trends (including loss history and key physical
trends, such as delinquency and repossessions), the composition and credit quality of its present portfolio (including
vehicle brand, term, risk evaluation and new/used), trends in historical and projected used vehicle values and general
economic measures.
Assumptions Used. Ford Credit makes projections of two key assumptions:
•Frequency. The number of finance receivables and operating lease contracts that Ford Credit expects will default
over a period of time, measured as repossessions; and
•Loss severity. The expected difference between the amounts a customer owes Ford Credit when they charge off
the finance contract and the amount Ford Credit receives, net of expenses, from selling the repossessed vehicle,
including any recoveries from the customer.
Ford Credit uses these assumptions to assist in setting its allowance for credit losses. See Note 6 of the Notes to the
Financial Statements for more information regarding allowance for credit losses.
Sensitivity Analysis. Changes in the assumptions used to derive frequency and severity would affect the allowance for
credit losses. The effect of the indicated increase/decrease in the assumptions is shown below for Ford, Lincoln and
Mercury brand vehicles in the United States (in millions):
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* Reflects the number of finance receivables and operating lease contracts that Ford Credit expects will default over a period of time relative to the
average number of contracts outstanding.
Changes in our assumptions affect the Provision for credit and insurance losses on our statement of income and the
allowance for credit losses contained within Finance receivables, net and Net investment in operating leases on our
balance sheet.
Accumulated Depreciation on Vehicles Subject to Operating Leases
Accumulated depreciation on vehicles subject to operating leases reduces the value of the leased vehicles in our
operating lease portfolio from their original acquisition value to their expected residual value at the end of the lease term.
These vehicles primarily consist of retail lease contracts for Ford Credit and vehicles sold to daily rental car companies
subject to a guaranteed repurchase option ("rental repurchase vehicles") for the Automotive sector.
We monitor residual values each month, and we review the adequacy of our accumulated depreciation on a quarterly
basis. If we believe that the expected residual values for our vehicles have changed, we revise depreciation to ensure
that our net investment in operating leases (equal to our acquisition value of the vehicles less accumulated depreciation)
will be adjusted to reflect our revised estimate of the expected residual value at the end of the lease term. Such
adjustments to depreciation expense would result in a change in the depreciation rates of the vehicles subject to operating
leases, and are recorded on a straight-line basis.