Annual Report 2011 - Ford Motor Company

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Management’s Discussion and Analysis of Financial Condition and Results of Operations Sensitivity Analysis. Changes in the assumptions used to derive frequency and severity would affect the allowance for credit losses. The effect of the indicated increase/decrease in the assumptions is shown below for Ford Credit's U.S. Ford and Lincoln retail and lease portfolio (in millions): 76 Ford Motor Company | 2011 Annual Report Percentage Point Change +/- 0.1 pt. +/- 1.0 Increase/(Decrease) December 31, 2011 Allowance for Credit Losses $20/$(20) 5/(5) 2011 Expense $20/$(20) 5/(5) Assumption Repossession rates (a) Loss severity __________ (a) Reflects the number of finance receivables and operating lease contracts that Ford Credit expects will default over a period of time relative to the average number of contracts outstanding. Non-Consumer Segment. The wholesale and dealer loan portfolio is evaluated by segmenting individual loans into risk pools, which are determined by the risk characteristics of the loan (such as the amount of the loan, the nature of collateral, and the financial status of the dealer). The risk pools are analyzed to determine if individual loans are impaired, and an allowance is estimated for the expected loss of these loans. Changes in Ford Credit's assumptions affect the Provision for credit and insurance losses on our statement of operations and the allowance for credit losses contained within Finance receivables, net and Net investment in operating leases on our balance sheet, in each case under the Financial Services sector. Accumulated Depreciation on Vehicles Subject to Operating Leases Accumulated depreciation on vehicles subject to operating leases reduces the value of the leased vehicles in our operating lease portfolio from their original acquisition value to their expected residual value at the end of the lease term. These vehicles primarily consist of retail lease contracts for Ford Credit and vehicles sold to daily rental car companies subject to a guaranteed repurchase option ("rental repurchase vehicles") for the Automotive sector. We monitor residual values each month, and we review the adequacy of our accumulated depreciation on a quarterly basis. If we believe that the expected residual values for our vehicles have changed, we revise depreciation to ensure that our net investment in operating leases (equal to our acquisition value of the vehicles less accumulated depreciation) will be adjusted to reflect our revised estimate of the expected residual value at the end of the lease term. Such adjustments to depreciation expense would result in a change in the depreciation rates of the vehicles subject to operating leases, and are recorded prospectively on a straight-line basis. For retail leases, each lease customer has the option to buy the leased vehicle at the end of the lease or to return the vehicle to the dealer. Ford Credit's North America operating lease activity was as follows for each of the last three years (in thousands, except percentages): Vehicle return volume Return rate For rental repurchase vehicles, practically all vehicles have been returned to us. Nature of Estimates Required. Each operating lease in our portfolio represents a vehicle we own that has been leased to a customer. At the time we purchase a lease, we establish an expected residual value for the vehicle. We estimate the expected residual value by evaluating recent auction values, historical return volumes for our leased vehicles, industry-wide used vehicle prices, our marketing incentive plans, and vehicle quality data. Assumptions Used. For retail leases, our accumulated depreciation on vehicles subject to operating leases is based on our assumptions regarding: • Auction value. Ford Credit's projection of the market value of the vehicles when we sell them at the end of the lease; and • Return volume. Ford Credit's projection of the number of vehicles that will be returned to us at lease-end. See Note 8 of the Notes to the Financial Statements for more information regarding accumulated depreciation on vehicles subject to operating leases. 2011 144 59% 2010 281 69% 2009 314 81%
Management’s Discussion and Analysis of Financial Condition and Results of Operations Sensitivity Analysis. For returned vehicles, we face a risk that the amount we obtain from the vehicle sold at auction will be less than our estimate of the expected residual value for the vehicle. The effect of the indicated increase/decrease in the assumptions for our U.S. Ford and Lincoln retail and lease portfolio is as follows: Assumption Future auction values Return volumes Percentage Change +/- 1.0 +/- 1.0 Increase/(Decrease) December 31, 2011 Accumulated Depreciation on Vehicles Subject to Operating Leases $32/$(32) 3/(3) 2012 Expense $12/$(12) 1/(1) The impact of the increased accumulated supplemental depreciation in 2011 would be charged to expense in the 2012 - 2015 periods. Adjustments to the amount of accumulated depreciation on operating leases are reflected on our balance sheet as Net investment in operating leases and on the statement of operations in Depreciation, in each case under the Financial Services sector. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED For information on accounting standards issued but not yet adopted, see Note 3 of the Notes to the Financial Statements. Ford Motor Company | 2011 Annual Report 77
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PROFITABLE GROWTH FOR ALL Ford Moto
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ON THE COVER The all-new Ford Fusio
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A MESSAGE FROM THE PRESIDENT AND CE
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Environmental and social goals are
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1 1) Joe Hinrichs, Group Vice Presi
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To meet regional needs in Asia Paci
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UTILITIES The latest One Ford globa
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LINCOLN CUTTING-EDGE PRODUCTS, PERS
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GREEN 2 Ford continues to work to f
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SMART As technology becomes ever mo
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1) Ford team at the ringing of the
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THE POWER OF CHOICE With record sal
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PEOPLE HELPING PEOPLE Ford voluntee
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GLOBAL OVERVIEW Automotive Brand Cu
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Annual Report 2011 - Ford Motor Company

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