Ford 2011 Annual Report Download - page 120

Notes to the Financial Statements
118 Ford Motor Company | 2011 Annual Report
NOTE 9. ALLOWANCE FOR CREDIT LOSSES (Continued)
Collective Allowance for Credit Losses. The consumer receivables portfolio allowance is evaluated primarily using a
collective loss-to-receivables ("LTR") model that, based on historical experience, indicates credit losses have been
incurred in the portfolio even though the particular receivables that are uncollectible cannot be specifically identified. The
LTR model is based on the most recent years of history. Each LTR is calculated by dividing credit losses by average end-
of-period receivables excluding unearned interest supplements and allowance for credit losses. A weighted-average LTR
is calculated for each class of consumer receivables and multiplied by the end-of-period receivable balances for that given
class.
The loss emergence period ("LEP") is a key assumption within Ford Credit's models and represents the average
amount of time between when a loss event first occurs and when it is charged off. This time period starts when the
consumer begins to experience financial difficulty. It is evidenced later, typically through delinquency, before eventually
resulting in a charge-off. The LEP is a multiplier in the calculation of the collective consumer allowance for credit losses.
For consumer receivables greater than 120 days past due, the uncollectible portion of the receivable is charged-off,
such that the remaining recorded investment in the loan is equal to the estimated fair value of the collateral less costs to
sell.
Specific Allowance for Impaired Receivables. Consumer receivables involved in TDRs are specifically assessed for
impairment. A specific allowance is estimated based on the present value of the expected future cash flows of the
receivable discounted at the loan's original effective interest rate or the fair value of any collateral adjusted for estimated
costs to sell.
After establishing the collective and specific allowance for credit losses, if management believes the allowance does
not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant
factors, an adjustment is made based on management judgment.
Non-Consumer Receivables
Ford Credit estimates the allowance for credit losses for non-consumer receivables based on historical LTR ratios,
expected future cash flows, and the fair value of collateral.
Collective Allowance for Credit Losses. Ford Credit estimates an allowance for non-consumer receivables that are
not specifically identified as impaired using a LTR model for each financing product based on historical experience. This
LTR is a weighted average of the most recent historical experience and is calculated consistent with the consumer
receivables LTR approach. All accounts that are specifically identified as impaired are excluded from the calculation of
the non-specific or collective allowance.
Specific Allowance for Impaired Receivables. The wholesale and dealer loan portfolio is evaluated by grouping
individual loans into risk pools determined by the risk characteristics of the loan (such as the amount of the loan, the
nature of the collateral, and the financial status of the debtor). The risk pools are analyzed to determine whether
individual loans are impaired, and a specific allowance is estimated based on the present value of the expected future
cash flows of the receivable discounted at the loan's original effective interest rate or the fair value of the collateral
adjusted for estimated costs to sell.
After establishment of the collective and the specific allowance for credit losses, if management believes the
allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions or
other relevant factors, an adjustment is made based on management judgment.