Ford 2012 Annual Report Download - page 144

142 Ford Motor Company | 2012 Annual Report
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 25. DISPOSITIONS AND OTHER CHANGES IN INVESTMENTS IN AFFILIATES (Continued)
We measured the fair value of our equity interest using the income approach. We used cash flows that were
developed jointly by Ford and Sollers. The significant assumptions used in this approach included:
• Projected growth in the Russian automobile market;
• Reduced import duties on certain auto parts; and
• A discount rate of 16% based on an appropriate weighted average cost of capital, adjusted for perceived business
risks related to regulatory concerns, foreign exchange volatility, execution risk, and risk associated with the
Russian automotive industry.
We, along with Sollers, pledged 100% of the shares in the joint venture to the State Corporation Bank for Development
and Foreign Economic Operations - Vnesheconombank ("VEB") as collateral securing the joint venture's debt.
Other Changes in Investments in Affiliates
AAI. AAI is a 50/50 joint venture between Ford and Mazda that operates an automobile assembly plant in Flat Rock,
Michigan. In September 2011, we signed a Memorandum of Understanding ("MOU") with Mazda to change our future
business relationship with respect to AAI. Pursuant to the terms of the MOU, in the third quarter of 2012 the assembly
plant ceased production of Mazda vehicles and on September 1, 2012 we acquired full management control of AAI.
In exchange, beginning on September 1, 2015, for a three year period, we have granted to Mazda a put option to sell,
and received a call option to purchase from Mazda, the 50% equity interest in AAI that is held by Mazda ("the Option").
The Option is exercisable at a price of $338 million as determined by a formula based on AAI's final December 31, 2012
closing balance sheet.
The change in management control resulted in a business combination on September 1, 2012 and we consolidated
AAI under the acquisition method of accounting. We measured the fair value of AAI using the income approach and used
cash flows that reflect our approved business plan for AAI. We assumed a discount rate of 10% based on an appropriate
weighted average cost of capital adjusted for perceived business risks. The fair value of 100% of AAI's identifiable net
assets was $868 million, as shown below (in millions):
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September 1,
2012
Assets
Cash and cash equivalents $ 191
Marketable securities 321
Receivables 202
Inventories 99
Property, plant and equipment 487
Deferred tax assets 119
Total assets of AAI (a) $ 1,419
Liabilities
Trade payables $ 150
Other payables 185
Accrued liabilities 41
Debt payable to Ford 51
Deferred tax liabilities 124
Total liabilities of AAI (a) $ 551
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(a) As of September 1, 2012, intercompany assets of $121 million and intercompany liabilities of $306 million have been eliminated in both
consolidated and sector balance sheets.
As part of the business combination, the Option was recorded as a redeemable noncontrolling interest in the
mezzanine section of our balance sheet at the then fair value of $319 million (see Note 19). This represents the
discounted cash flow of the option price using Ford's incremental borrowing rate of 2.75%.
As a result, the fair value attributable to our investment in AAI at September 1, 2012 was $549 million. The excess of
this fair value over the carrying value of our previously recorded 50% unconsolidated equity interest resulted in a third
quarter 2012 pre-tax gain of $155 million in Automotive interest income and other income/(loss), net.