Ford 2010 Annual Report Download - page 65

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2010 Annual Report 63
Sensitivity Analysis. In 2006, our net deferred tax position in the United States changed from a net deferred tax
liability position to a net deferred tax asset position. In our assessment of the need for a valuation allowance, we heavily
weighted the negative evidence of cumulative financial reporting losses in then-recent periods and the positive evidence
of future reversals of existing temporary differences. Although a sizable portion of our North American losses in then-
recent years were the result of charges incurred for restructuring actions, impairments, and other special items, even
without these charges we still would have incurred significant operating losses. Accordingly, we considered our pattern
of then-recent losses to be relevant to our analysis. Considering this pattern of then-recent relevant losses and the
uncertainties associated with projected future taxable income exclusive of reversing temporary differences, we gave no
weight to projections showing future U.S. taxable income for purposes of assessing the need for a valuation allowance.
As a result of our assessment, we concluded that the net deferred tax assets of our U.S. entities required a full valuation
allowance. We also recorded a full valuation allowance on the net deferred tax assets of certain foreign entities, such as
Germany, Canada, and Spain, as the realization of these foreign deferred tax assets are reliant upon U.S.-source
taxable income.
At December 31, 2010, our valuation allowance was $15.7 billion, leaving net deferred tax assets of about
$900 million on our balance sheet.
A sustained period of profitability in our operations is required before we would change our judgment regarding the
need for a full valuation allowance against our net deferred tax assets. Accordingly, although we were profitable in 2009
and 2010, we continue to record a full valuation allowance against the net deferred tax assets in the United States and
foreign entities discussed above. Although the weight of negative evidence related to cumulative losses is decreasing as
we deliver on our One Ford plan, we believe that this objectively-measured negative evidence outweighs the
subjectively-determined positive evidence and, as such, we have not changed our judgment regarding the need for a full
valuation allowance in 2010.
Continued improvement in our operating results, however, could lead to reversal of almost all of our valuation
allowance as early as the second half of 2011. Until such time, consumption of tax attributes to offset profits will reduce
the overall level of deferred tax assets subject to valuation allowance.
For each reporting period until the valuation allowance is released, we expect to have low effective tax rates as we
continue to record tax expense only for those locations in which we do not have a valuation allowance in place. We will
experience more normal effective tax rates, approaching the U.S. statutory tax rate of 35%, in periods after the valuation
allowance reverses.
In the quarter in which the valuation allowance is released, we would record an abnormally large tax benefit reflecting
the release, which would result in a large negative effective tax rate and very high earnings per share from net income
attributable to Ford. Rather than allow this abnormal effective tax rate to impact our earnings per share from operating
profit excluding special items ("operating earnings per share"), we intend to classify the release of the valuation allowance
as a special item for the quarter in which it reverses and use a more normalized effective tax rate (approaching the U.S.
statutory tax rate of 35%).
We will take a similar approach for calculation of our full-year operating earnings per share. Once the valuation
allowance is released, for purposes of calculating our full-year operating earnings per share we will retrospectively revise
our quarterly operating earnings per share for each quarter leading up to the reversal using a comparable tax rate
approaching 35%. This presentation would have no impact on net income calculation.
Unlike our U.S. operations where, considering the pattern of relevant losses and the uncertainties associated with
projected future taxable income exclusive of reversing temporary differences, we gave no weight to projections showing
future taxable income, our net deferred tax assets relate to certain operations outside North America where we generally
have had a long history of profitability and believe it is more likely than not that the net deferred tax assets will be realized
through future taxable earnings. Accordingly, we have not established a valuation allowance on our remaining net deferred
tax assets. Most notably, at December 31, 2010, we recognized a net deferred tax asset of $1.1 billion in our U.K.
Automotive operations, primarily based upon the tax return consolidation of our Automotive operations with our U.K. FCE
operation. Our U.K. FCE operation has a long history of profitability, and we believe it will provide a source of future
taxable income that can be reasonably estimated. If in the future FCE U.K. profits decline, additional valuation allowances
may be required. We will continue to assess the need for a valuation allowance in the future.