John Deere 2012 Annual Report Download - page 21

after-tax, respectively. The charges were associated with a
reporting unit included in the agriculture and turf operating
segment. The key factor contributing to the impairments was a
decline in the reporting unit’s forecasted financial performance
(see Note 5).
A 10 percent decrease in the estimated fair value of the
company’s other reporting units would have had no impact on
the carrying value of goodwill at the annual measurement date
in 2012.
Allowance for Credit Losses
The allowance for credit losses represents an estimate of
the losses expected from the company’s receivable portfolio.
The level of the allowance is based on many quantitative
and qualitative factors, including historical loss experience
by product category, portfolio duration, delinquency trends,
economic conditions and credit risk quality. The adequacy
of the allowance is assessed quarterly. Different assumptions or
changes in economic conditions would result in changes to the
allowance for credit losses and the provision for credit losses.
The total allowance for credit losses at October 31, 2012,
2011 and 2010 was $243 million, $269 million and $296 million,
respectively. The decreases in 2012 and 2011 were primarily
due to decreases in loss experience.
The assumptions used in evaluating the company’s
exposure to credit losses involve estimates and significant
judgment. The historical loss experience on the receivable
portfolio represents one of the key assumptions involved in
determining the allowance for credit losses. Over the last five
fiscal years, this percent has varied by an average of approxi-
mately plus or minus .23 percent, compared to the average
loss experience percent during that period. Holding other
assumptions constant, if this estimated loss experience on the
receivable portfolio were to increase or decrease .23 percent,
the allowance for credit losses at October 31, 2012 would
increase or decrease by approximately $70 million.
Operating Lease Residual Values
The carrying value of equipment on operating leases is affected
by the estimated fair values of the equipment at the end of the
lease (residual values). Upon termination of the lease, the
equipment is either purchased by the lessee or sold to a third
party, in which case the company may record a gain or a loss
for the difference between the estimated residual value and the
sales price. The residual values are dependent on current
economic conditions and are reviewed quarterly. Changes in
residual value assumptions would affect the amount of deprecia-
tion expense and the amount of investment in equipment on
operating leases.
The total operating lease residual values at October 31,
2012, 2011 and 2010 were $1,676 million, $1,425 million and
$1,276 million, respectively. The changes in 2012 and 2011
were primarily due to the increasing levels of operating leases.
The pension liabilities, net of pension assets, recognized
on the balance sheet at October 31, 2012, 2011 and 2010 were
$1,817 million, $1,373 million and $693 million, respectively.
The OPEB liabilities, net of OPEB assets, on these same dates
were $5,736 million, $5,193 million and $4,830 million,
respectively. The increases in pension net liabilities in 2012
and 2011 were primarily due to decreases in discount rates and
interest on the liabilities, partially offset by the return on plan
assets. The increases in the OPEB net liabilities in 2012 and
2011 were primarily due to the decreases in discount rates and
interest on the liabilities.
The effect of hypothetical changes to selected assumptions
on the company’s major U.S. retirement benefit plans would be
as follows in millions of dollars:
October 31, 2012 2013
______________ _________
Increase Increase
Percentage (Decrease) (Decrease)
Assumptions Change PBO/APBO* Expense
Pension
Discount rate** ................... +/-.5 $ (598)/635 $ (28)/28
Expected return
on assets ....................... +/-.5 (45)/45
OPEB
Discount rate** ................... +/-.5 (419)/465 (24)/26
Expected return
on assets ....................... +/-.5 (6)/6
Health care cost
trend rate** .................... +/-1.0 938/(709) 124/(95)
* Projected benefit obligation (PBO) for pension plans and accumulated postretirement
benefit obligation (APBO) for OPEB plans.
** Pretax impact on service cost, interest cost and amortization of gains or losses.
Goodwill
Goodwill is not amortized and is tested for impairment annually
and when events or circumstances change such that it is more
likely than not that the fair value of a reporting unit is reduced
below its carrying amount. The end of the third quarter is the
annual measurement date. To test for goodwill impairment,
the carrying value of each reporting unit is compared with its
fair value. If the carrying value of the goodwill is considered
impaired, a loss is recognized based on the amount by which the
carrying value exceeds the implied fair value of the goodwill.
An estimate of the fair value of the reporting unit is
determined through a combination of comparable market values
for similar businesses and discounted cash flows. These estimates
can change significantly based on such factors as the reporting
unit’s financial performance, economic conditions, interest
rates, growth rates, pricing, changes in business strategies and
competition.
Based on this testing, the company identified a reporting
unit in 2012 and 2010 for which the goodwill was impaired.
In the fourth quarters of 2012 and 2010, the company recorded
non-cash charges in cost of sales of $33 million pretax, or
$31 million after-tax, and $27 million pretax, or $25 million
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