Annual Report 2011 - Ford Motor Company

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Notes to the Financial Statements NOTE 2. SUMMARY OF ACCOUNTING POLICIES (Continued) Foreign Currency Translation The assets and liabilities of foreign subsidiaries using the local currency as their functional currency are translated to U.S. dollars using end-of-period exchange rates and any resulting translation adjustments are reported in Accumulated other comprehensive income/(loss). Upon sale or liquidation of an investment in a foreign subsidiary, the accumulated amount of translation adjustments related to that entity is reclassified to net income as part of the recognized gain or loss on the investment. Increases/(Decreases) in Accumulated other comprehensive income/(loss) resulting from translation adjustments for the years ended December 31 were as follows (in millions): Beginning of year: foreign currency translation Adjustments due to translation of net assets of foreign subsidiaries Deferred translation (gains)/losses reclassified to net income (a) Total translation adjustments (net of taxes) End of year: foreign currency translation ______ (a) The adjustment for 2010 primarily relates to the sale of Volvo. 96 Ford Motor Company | 2011 Annual Report 2011 $ (665) (697) (21) (718) $ (1,383) 2010 $ 1,568 (497) (1,736) (2,233) $ (665) 2009 $ (667) 1,951 284 2,235 $ 1,568 Gains or losses arising from transactions denominated in currencies other than the affiliate's functional currency, the effect of remeasuring assets and liabilities of foreign subsidiaries using U.S. dollars as their functional currency, and the results of our foreign currency hedging activities are reported in Automotive cost of sales and Selling, administrative and other expenses. The pre-tax gain/(loss) of this activity for 2011, 2010, and 2009 was $4 million, $56 million, and $(768) million, respectively. Trade Receivables Trade receivables, recorded on our consolidated balance sheet in Other receivables, net, consist primarily of Automotive sector receivables for vehicles, parts, and accessories. Trade receivables are initially recorded at the transaction amount. We record an allowance for doubtful accounts representing our estimate of the probable losses inherent in trade receivables. At every reporting period, we assess the adequacy of our allowance for doubtful accounts taking into consideration recoveries received during that period. Additions to the allowance for doubtful accounts are made by recording charges to bad debt expense reported in Automotive cost of sales on our statement of operations. Receivables are charged to the allowance for doubtful accounts when an account is deemed to be uncollectible. Revenue Recognition — Automotive Sector Automotive revenue is generated primarily by sales of vehicles, parts and accessories. Revenue is recorded when all risks and rewards of ownership are transferred to our customers (generally dealers and distributors). For the majority of our sales, this occurs when products are shipped from our manufacturing facilities. When vehicles are shipped to customers or vehicle modifiers on consignment, revenue is recognized when the vehicle is sold to the ultimate customer. When we give our dealers the right to return eligible parts for credit, we reduce the related revenue for expected returns. We sell vehicles to daily rental car companies subject to guaranteed repurchase options. These vehicles are accounted for as operating leases. At the time of sale, the proceeds are recorded as deferred revenue in Accrued liabilities and deferred revenue. The difference between the proceeds and the guaranteed repurchase amount is recognized in Automotive revenues over an average term of eight months, using a straight-line method. The cost of the vehicles is recorded in Net investment in operating leases and the difference between the cost of the vehicle and the estimated auction value is depreciated in Automotive cost of sales over the term of the lease. Any difference between the estimated auction value and the auction sale proceeds is recognized in Automotive revenues at the time the vehicle is sold at auction. At December 31, 2011 and 2010, we recorded $1.5 billion and $1.4 billion as deferred revenue, respectively. See Note 8 for additional information. Income generated from cash and cash equivalents and investments in marketable securities is reported in Automotive interest income and other non-operating income/(expense), net.
Notes to the Financial Statements NOTE 2. SUMMARY OF ACCOUNTING POLICIES (Continued) Revenue Recognition — Financial Services Sector Financial Services revenue is generated primarily from interest on finance receivables (including direct financing leases) and is recognized using the interest method. Certain origination costs on receivables are deferred and amortized over the term of the related receivable as a reduction to revenue. Revenue from rental payments received on operating leases is recognized on a straight-line basis over the term of the lease. Initial direct costs related to leases are deferred and amortized over the term of the lease as a reduction to revenue. The accrual of interest on finance receivables and revenue on operating leases is discontinued at the earlier of the time a receivable or account is determined to be uncollectible, at bankruptcy status notification, or greater than 120 days past due. Income generated from cash and cash equivalents and investments in marketable securities is reported in Financial Services other income/(loss), net. Retail and Lease Incentives We offer special retail and lease incentives to dealers' customers who choose to finance or lease Ford-brand vehicles from Ford Credit. Generally, the estimated cost for these incentives is recorded as a revenue reduction to Automotive revenues when the vehicle is sold to the dealer. In order to compensate Ford Credit for the lower interest or lease rates offered to the retail customer, we pay the discounted value of the incentive directly to Ford Credit when it originates the retail finance or lease contract with the dealer's customer. The Financial Services sector recognizes income for the special financing and leasing programs consistent with the earnings process of the underlying receivable or operating lease. Sales and Marketing Incentives Sales and marketing incentives generally are recognized by the Automotive sector as revenue reductions in Automotive revenues. The incentives take the form of customer and/or dealer cash payments. The reduction to revenue is accrued at the later of the date the related vehicle is sold or the date the incentive program is both approved and communicated. We generally estimate these accruals using incentive programs that are approved as of the balance sheet date and are expected to be effective at the beginning of the subsequent period. Supplier Price Adjustments We frequently negotiate price adjustments with our suppliers throughout a production cycle, even after receiving production material. These price adjustments relate to changes in design specifications or other commercial terms such as economics, productivity, and competitive pricing. We recognize price adjustments when we reach final agreement with our suppliers. In general, we avoid direct price changes in consideration of future business; however, when these occur, our policy is to defer the financial statement impact of any such price change given explicitly in consideration of future business where guaranteed volumes are specified. Raw Material Arrangements We negotiate prices for and facilitate the purchase of raw materials on behalf of our suppliers. These raw material arrangements, which take place independently of any purchase orders being issued to our suppliers, are negotiated at arms' length and do not involve volume guarantees. When we pass the risks and rewards of ownership to our suppliers, including inventory risk, market price risk, and credit risk for the raw material, we record both the cost of the raw material and the income from the subsequent sale to the supplier in Automotive cost of sales. Government Grants and Loan Incentives We receive incentives from U.S. and non-U.S. governments in the form of tax rebates or credits, loans and grants. Incentives are recorded in the financial statements in accordance with their purpose, either as a reduction of expense or a reduction of the cost of the capital investment. A premium or a discount is calculated on low-interest or interest-free loans if the stated rate differs from the market rate, unless the governmental authority imposes specific restrictions on the use of the loan proceeds. The benefit of these incentives is recorded when performance is complete and all conditions as specified in the agreement are fulfilled. Ford Motor Company | 2011 Annual Report 97
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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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FINANCIAL CONTENT * 26 Management
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GLOBAL OVERVIEW Automotive Brand Cu
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Annual Report 2011 - Ford Motor Company

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