Ford 2007 Annual Report Download - page 68

Notes to the Financial Statements
66 Ford Motor Company | 2007 Annual Report
NOTE 2. SUMMARY OF ACCOUNTING POLICIES (Continued)
with the tools are expected to materially decline over the life of the tool, an accelerated method reflecting the rate of
decline. For 2006, this change in method decreased Automotive cost of sales by $135 million.
Goodwill
Beginning with 2006, our policy is to perform annual testing of goodwill and certain other net intangible assets during
the fourth quarter to determine whether any impairment has occurred. Goodwill impairment testing is also performed
following an allocation of goodwill to a business to be disposed, or following a triggering event for the long-lived asset
impairment test. Testing is conducted at the reporting unit level, which is generally the same level as our operating
segments. To test for goodwill impairment, the carrying value of each reporting unit is compared with its fair value. Fair
value is estimated using the present value of free cash flows method. Prior to 2006, our policy was to test in the second
quarter; in 2005, we tested in both the second and fourth quarters. Fourth quarter testing is considered preferable
because it allows us to use more current financial information and matches our business plan timing. This change in
accounting principle does not delay, accelerate or avoid an impairment charge or affect our financial statements.
Asset Impairments
Held-for-Sale and Discontinued Operations. We perform an impairment test on an asset group to be discontinued,
held for sale, or otherwise disposed of when management has committed to the action and the action is expected to be
completed within one year. We estimate fair value to approximate the expected proceeds to be received, less transaction
costs, and compare it to the carrying value of the asset group. An impairment charge is recognized when the carrying
value exceeds the estimated fair value.
Held-and-Used Long-Lived Assets. We monitor the carrying value of long-lived asset groups held and used for
potential impairment when certain triggering events have occurred. These events include current period losses combined
with a history of losses or a projection of continuing losses. When a triggering event occurs, a test for recoverability is
performed, comparing projected undiscounted future cash flows (utilizing current cash flow information and expected
growth rates) to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the
asset group's fair value is measured relying primarily on the discounted cash flow methodology. Additionally, we consider
various market multiples (e.g., revenue and earnings before interest, taxes, and depreciation and amortization
("EBITDA")) and consult with external valuation experts. An impairment charge is recognized for the amount by which the
carrying value of the asset group exceeds its estimated fair value.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and
assumptions that affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities at
the date of the financial statements, and our revenue and expenses during the periods reported. Estimates are used
when accounting for certain items such as marketing accruals, warranty costs, employee benefit programs, etc.
Estimates are based on historical experience, where applicable, and assumptions that we believe are reasonable under
the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.