Analysis: Nature of Business, Basis of Reporting, Significant Accounting Policies, Revenues Recognition

Entity Registrant Name FORD MOTOR CO
CIK 0000037996
Accession number 0000037996-14-000010
Link to XBRL instance http://www.sec.gov/Archives/edgar/data/37996/000003799614000010/f-20131231.xml
Fiscal year end --12-31
Fiscal year focus 2013
Fiscal period focus Q4
Current balance sheet date 2013-12-31
Current year-to-date income statement start date 2013-01-01

Commentary All disclosures seem appropriate.

NATURE OF BUSINESS concept us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock
PRESENTATION

For purposes of this report, “Ford,” the “Company,” “we,” “our,” “us” or similar references mean Ford Motor Company and our consolidated subsidiaries and our consolidated VIEs of which we are the primary beneficiary, unless the context requires otherwise.

We prepare our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). We present the financial statements on both a consolidated basis and on a sector basis for our Automotive and Financial Services sectors. The additional information provided in the sector statements enables the reader to better understand the operating performance, financial position, cash flows, and liquidity of our two very different businesses. We eliminate all intercompany items and transactions in the consolidated and sector balance sheets. In certain circumstances, presentation of these intercompany eliminations or consolidated adjustments differ between the consolidated and sector financial statements. These line items are reconciled below under “Reconciliations between Consolidated and Sector Financial Statements” or in related footnotes.

We reclassified certain prior year amounts on our consolidated financial statements to conform to current year presentation.

Adoption of New Accounting Standards

Balance Sheet - Offsetting. On January 1, 2013, we adopted the new accounting standard that requires disclosures about offsetting and related arrangements for derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. See Note 4 and Note 16 for further disclosure regarding balance sheet offsetting.

Intangibles - Goodwill and Other. On January 1, 2013, we adopted the new accounting standard that provides the option to evaluate qualitative factors to determine whether a calculated impairment test for indefinite-lived intangible assets is necessary. The adoption of this accounting standard did not impact our consolidated financial statements.

Comprehensive Income - Reporting of Reclassification Adjustments. During 2012, we early adopted the new accounting standard that requires us to disclose significant amounts reclassified out of each component of Accumulated other comprehensive income/(loss) (“AOCI”) and the affected income statement line item only if the item reclassified is required to be reclassified to net income in its entirety. See Note 18 for further disclosure regarding the significant amounts reclassified out of AOCI.



NOTE 1.  PRESENTATION (Continued)

Reconciliations between Consolidated and Sector Financial Statements

Sector to Consolidated Deferred Tax Assets and Liabilities. The difference between the total assets and total liabilities as presented on our sector balance sheet and consolidated balance sheet is the result of netting deferred income tax assets and liabilities. The reconciliation between the totals for the sector and consolidated balance sheets was as follows (in millions):
 
December 31,
2013
 
December 31,
2012
Sector balance sheet presentation of deferred income tax assets
 
 
 
Automotive sector current deferred income tax assets
$
1,574

 
$
3,488

Automotive sector non-current deferred income tax assets
13,283

 
13,325

Financial Services sector deferred income tax assets (a)
184

 
184

Total
15,041

 
16,997

Reclassification for netting of deferred income taxes
(1,726
)
 
(1,812
)
Consolidated balance sheet presentation of deferred income tax assets
$
13,315

 
$
15,185

 
 
 
 
Sector balance sheet presentation of deferred income tax liabilities
 

 
 

Automotive sector current deferred income tax liabilities
$
267

 
$
81

Automotive sector non-current deferred income tax liabilities
430

 
514

Financial Services sector deferred income tax liabilities
1,627

 
1,687

Total
2,324

 
2,282

Reclassification for netting of deferred income taxes
(1,726
)
 
(1,812
)
Consolidated balance sheet presentation of deferred income tax liabilities
$
598

 
$
470

__________
(a)
Financial Services deferred income tax assets are included in Financial Services other assets on our sector balance sheet.
NOTE 1.  PRESENTATION (Continued)

Sector to Consolidated Cash Flow. We present certain cash flows from wholesale and other receivables, interest supplements and residual support, and the acquisition of intersector debt differently on our sector and consolidated statements of cash flows. The reconciliation between totals for the sector and consolidated cash flows for the years ended December 31 was as follows (in millions):
 
2013
 
2012
 
2011
Automotive net cash provided by/(used in) operating activities
$
7,738

 
$
6,266

 
$
9,368

Financial Services net cash provided by/(used in) operating activities
3,352

 
2,043

 
418

Total sector net cash provided by/(used in) operating activities (Note 25)
11,090

 
8,309

 
9,786

Reclassifications from investing to operating cash flows
 

 
 

 
 
Purchases/Collections of wholesale receivables (a)
(2,971
)
 
(1,235
)
 
(2,010
)
Purchases/Collections of other receivables (b)
(73
)
 
57

 
21

Payments of interest supplements and residual support (c)
2,398

 
1,914

 
1,987

Consolidated net cash provided by/(used in) operating activities
$
10,444

 
$
9,045

 
$
9,784

 
 
 
 
 
 
Automotive net cash provided by/(used in) investing activities
$
(8,111
)
 
$
(8,024
)
 
$
(1,541
)
Financial Services net cash provided by/(used in) investing activities
(11,821
)
 
(4,404
)
 
1,401

Total sector net cash provided by/(used in) investing activities
(19,932
)
 
(12,428
)
 
(140
)
Reclassifications from investing to operating cash flows
 

 
 

 
 
Purchases/Collections of wholesale receivables (a)
2,971

 
1,235

 
2,010

Purchases/Collections of other receivables (b)
73

 
(57
)
 
(21
)
Payments of interest supplements and residual support (c)
(2,398
)
 
(1,914
)
 
(1,987
)
Reclassifications from investing to financing cash flows
 
 
 
 
 
Maturity of Financial Services sector debt held by Automotive sector (d)

 
(201
)
 

Elimination of investing activity to/(from) Financial Services in consolidation
(445
)
 
(925
)
 
(2,903
)
Consolidated net cash provided by/(used in) investing activities
$
(19,731
)
 
$
(14,290
)
 
$
(3,041
)
 
 
 
 
 
 
Automotive net cash provided by/(used in) financing activities
$
(822
)
 
$
40

 
$
(5,932
)
Financial Services net cash provided by/(used in) financing activities
8,510

 
2,539

 
(1,212
)
Total sector net cash provided by/(used in) financing activities
7,688

 
2,579

 
(7,144
)
Reclassifications from investing to financing cash flows
 

 
 

 
 
Maturity of Financial Services sector debt held by Automotive sector (d)

 
201

 

Elimination of investing activity to/(from) Financial Services in consolidation
445

 
925

 
2,903

Consolidated net cash provided by/(used in) financing activities
$
8,133

 
$
3,705

 
$
(4,241
)
 __________
(a)
In addition to the cash flow from vehicles sold by us, the cash flow from wholesale finance receivables (being reclassified from investing to operating) includes dealer financing by Ford Credit of used and non-Ford vehicles. One hundred percent of cash flows from these wholesale finance receivables have been reclassified for consolidated presentation as the portion of these cash flows from used and non-Ford vehicles is impracticable to separate.
(b)
Includes cash flows of other receivables purchased/collected by the Financial Services sector from certain divisions and subsidiaries of the Automotive sector.
(c)
Payments from Automotive sector to Ford Credit on behalf of the retail customer that represent interest supplements and residual support.
(d)
Cash inflows related to these transactions are reported as financing activities on the consolidated statement of cash flows and investing activities on the sector statement of cash flows.



NOTE 1.  PRESENTATION (Continued)

Certain Transactions Between Automotive and Financial Services Sectors

Intersector transactions occur in the ordinary course of business. Additional detail regarding certain transactions and the effect on each sector’s balance sheet was as follows (in billions):
 
December 31, 2013
 
December 31, 2012
 
Automotive
 
Financial
Services
 
Automotive
 
Financial
Services
Finance receivables, net (a)
 
 
$
3.3

 
 
 
$
4.8

Unearned interest supplements and residual support (b)
 
 
(3.1
)
 
 
 
(2.6
)
Wholesale receivables/Other (c)
 
 
0.8

 
 
 
0.8

Net investment in operating leases (d)
 
 
0.6

 
 
 
0.5

Intersector receivables/(payables) (e)
$
(0.2
)
 
0.2

 
$
(0.3
)
 
0.3

__________
(a)
Automotive sector receivables (generated primarily from vehicle and parts sales to third parties) sold to Ford Credit.  These receivables are classified as Other receivables, net on our consolidated balance sheet and Finance receivables, net on our sector balance sheet.
(b)
We pay amounts to Ford Credit at the point of retail financing or lease origination that represent interest supplements and residual support.
(c)
Primarily wholesale receivables with entities that are consolidated subsidiaries of Ford.  
(d)
Sale-leaseback agreement between Automotive and Financial Services sectors relating to vehicles that we lease to our employees.
(e)
Amounts owed to the Financial Services sector by Automotive sector, or vice versa.

Venezuelan Operations

On February 13, 2013, the Venezuelan government effected a devaluation of the bolivar, from an exchange rate of 4.3 bolivars to the U.S. dollar to an exchange rate of 6.3 bolivars to the U.S. dollar. This resulted in a remeasurement loss of $186 million in the first quarter. For periods subsequent to the date of the devaluation, assets, liabilities, and results of operations from our Venezuelan subsidiary are remeasured at this new exchange rate.

At December 31, 2013, we had a bolivar denominated net monetary position of $749 million, including $765 million of bolivar denominated cash and cash equivalents. Based on our net monetary position at December 31, 2013, a further devaluation from an exchange rate of 6.3 bolivars to the U.S. dollar to an exchange rate of 12 bolivars to the U.S. dollar would have resulted in a balance sheet remeasurement loss of approximately $360 million.

At December 31, 2013, our investment in our Venezuelan subsidiary (which includes undistributed earnings) was $881 million. Also, at December 31, 2013, it had $300 million of U.S. dollar currency exchange requests pending with and in transit to the governmental controlled currency exchange, including $295 million payable to other Ford consolidated affiliates.

The operating environment in Venezuela continues to be challenging.  Foreign exchange control regulations have affected our Venezuelan operation’s ability to pay dividends and obligations denominated in U.S. dollars, and are constraining parts availability and our ability to maintain normal production. Recent developments in Venezuela, including price controls and a very limited and uneven supply of foreign currency to support production, have affected adversely our business and results of operations.  These and other restrictions could limit our ability to benefit from our investment and maintain a controlling interest in our Venezuelan subsidiary.

BASIS OF REPORTING concept us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock
PRESENTATION

For purposes of this report, “Ford,” the “Company,” “we,” “our,” “us” or similar references mean Ford Motor Company and our consolidated subsidiaries and our consolidated VIEs of which we are the primary beneficiary, unless the context requires otherwise.

We prepare our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). We present the financial statements on both a consolidated basis and on a sector basis for our Automotive and Financial Services sectors. The additional information provided in the sector statements enables the reader to better understand the operating performance, financial position, cash flows, and liquidity of our two very different businesses. We eliminate all intercompany items and transactions in the consolidated and sector balance sheets. In certain circumstances, presentation of these intercompany eliminations or consolidated adjustments differ between the consolidated and sector financial statements. These line items are reconciled below under “Reconciliations between Consolidated and Sector Financial Statements” or in related footnotes.

We reclassified certain prior year amounts on our consolidated financial statements to conform to current year presentation.

Adoption of New Accounting Standards

Balance Sheet - Offsetting. On January 1, 2013, we adopted the new accounting standard that requires disclosures about offsetting and related arrangements for derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. See Note 4 and Note 16 for further disclosure regarding balance sheet offsetting.

Intangibles - Goodwill and Other. On January 1, 2013, we adopted the new accounting standard that provides the option to evaluate qualitative factors to determine whether a calculated impairment test for indefinite-lived intangible assets is necessary. The adoption of this accounting standard did not impact our consolidated financial statements.

Comprehensive Income - Reporting of Reclassification Adjustments. During 2012, we early adopted the new accounting standard that requires us to disclose significant amounts reclassified out of each component of Accumulated other comprehensive income/(loss) (“AOCI”) and the affected income statement line item only if the item reclassified is required to be reclassified to net income in its entirety. See Note 18 for further disclosure regarding the significant amounts reclassified out of AOCI.



NOTE 1.  PRESENTATION (Continued)

Reconciliations between Consolidated and Sector Financial Statements

Sector to Consolidated Deferred Tax Assets and Liabilities. The difference between the total assets and total liabilities as presented on our sector balance sheet and consolidated balance sheet is the result of netting deferred income tax assets and liabilities. The reconciliation between the totals for the sector and consolidated balance sheets was as follows (in millions):
 
December 31,
2013
 
December 31,
2012
Sector balance sheet presentation of deferred income tax assets
 
 
 
Automotive sector current deferred income tax assets
$
1,574

 
$
3,488

Automotive sector non-current deferred income tax assets
13,283

 
13,325

Financial Services sector deferred income tax assets (a)
184

 
184

Total
15,041

 
16,997

Reclassification for netting of deferred income taxes
(1,726
)
 
(1,812
)
Consolidated balance sheet presentation of deferred income tax assets
$
13,315

 
$
15,185

 
 
 
 
Sector balance sheet presentation of deferred income tax liabilities
 

 
 

Automotive sector current deferred income tax liabilities
$
267

 
$
81

Automotive sector non-current deferred income tax liabilities
430

 
514

Financial Services sector deferred income tax liabilities
1,627

 
1,687

Total
2,324

 
2,282

Reclassification for netting of deferred income taxes
(1,726
)
 
(1,812
)
Consolidated balance sheet presentation of deferred income tax liabilities
$
598

 
$
470

__________
(a)
Financial Services deferred income tax assets are included in Financial Services other assets on our sector balance sheet.
NOTE 1.  PRESENTATION (Continued)

Sector to Consolidated Cash Flow. We present certain cash flows from wholesale and other receivables, interest supplements and residual support, and the acquisition of intersector debt differently on our sector and consolidated statements of cash flows. The reconciliation between totals for the sector and consolidated cash flows for the years ended December 31 was as follows (in millions):
 
2013
 
2012
 
2011
Automotive net cash provided by/(used in) operating activities
$
7,738

 
$
6,266

 
$
9,368

Financial Services net cash provided by/(used in) operating activities
3,352

 
2,043

 
418

Total sector net cash provided by/(used in) operating activities (Note 25)
11,090

 
8,309

 
9,786

Reclassifications from investing to operating cash flows
 

 
 

 
 
Purchases/Collections of wholesale receivables (a)
(2,971
)
 
(1,235
)
 
(2,010
)
Purchases/Collections of other receivables (b)
(73
)
 
57

 
21

Payments of interest supplements and residual support (c)
2,398

 
1,914

 
1,987

Consolidated net cash provided by/(used in) operating activities
$
10,444

 
$
9,045

 
$
9,784

 
 
 
 
 
 
Automotive net cash provided by/(used in) investing activities
$
(8,111
)
 
$
(8,024
)
 
$
(1,541
)
Financial Services net cash provided by/(used in) investing activities
(11,821
)
 
(4,404
)
 
1,401

Total sector net cash provided by/(used in) investing activities
(19,932
)
 
(12,428
)
 
(140
)
Reclassifications from investing to operating cash flows
 

 
 

 
 
Purchases/Collections of wholesale receivables (a)
2,971

 
1,235

 
2,010

Purchases/Collections of other receivables (b)
73

 
(57
)
 
(21
)
Payments of interest supplements and residual support (c)
(2,398
)
 
(1,914
)
 
(1,987
)
Reclassifications from investing to financing cash flows
 
 
 
 
 
Maturity of Financial Services sector debt held by Automotive sector (d)

 
(201
)
 

Elimination of investing activity to/(from) Financial Services in consolidation
(445
)
 
(925
)
 
(2,903
)
Consolidated net cash provided by/(used in) investing activities
$
(19,731
)
 
$
(14,290
)
 
$
(3,041
)
 
 
 
 
 
 
Automotive net cash provided by/(used in) financing activities
$
(822
)
 
$
40

 
$
(5,932
)
Financial Services net cash provided by/(used in) financing activities
8,510

 
2,539

 
(1,212
)
Total sector net cash provided by/(used in) financing activities
7,688

 
2,579

 
(7,144
)
Reclassifications from investing to financing cash flows
 

 
 

 
 
Maturity of Financial Services sector debt held by Automotive sector (d)

 
201

 

Elimination of investing activity to/(from) Financial Services in consolidation
445

 
925

 
2,903

Consolidated net cash provided by/(used in) financing activities
$
8,133

 
$
3,705

 
$
(4,241
)
 __________
(a)
In addition to the cash flow from vehicles sold by us, the cash flow from wholesale finance receivables (being reclassified from investing to operating) includes dealer financing by Ford Credit of used and non-Ford vehicles. One hundred percent of cash flows from these wholesale finance receivables have been reclassified for consolidated presentation as the portion of these cash flows from used and non-Ford vehicles is impracticable to separate.
(b)
Includes cash flows of other receivables purchased/collected by the Financial Services sector from certain divisions and subsidiaries of the Automotive sector.
(c)
Payments from Automotive sector to Ford Credit on behalf of the retail customer that represent interest supplements and residual support.
(d)
Cash inflows related to these transactions are reported as financing activities on the consolidated statement of cash flows and investing activities on the sector statement of cash flows.



NOTE 1.  PRESENTATION (Continued)

Certain Transactions Between Automotive and Financial Services Sectors

Intersector transactions occur in the ordinary course of business. Additional detail regarding certain transactions and the effect on each sector’s balance sheet was as follows (in billions):
 
December 31, 2013
 
December 31, 2012
 
Automotive
 
Financial
Services
 
Automotive
 
Financial
Services
Finance receivables, net (a)
 
 
$
3.3

 
 
 
$
4.8

Unearned interest supplements and residual support (b)
 
 
(3.1
)
 
 
 
(2.6
)
Wholesale receivables/Other (c)
 
 
0.8

 
 
 
0.8

Net investment in operating leases (d)
 
 
0.6

 
 
 
0.5

Intersector receivables/(payables) (e)
$
(0.2
)
 
0.2

 
$
(0.3
)
 
0.3

__________
(a)
Automotive sector receivables (generated primarily from vehicle and parts sales to third parties) sold to Ford Credit.  These receivables are classified as Other receivables, net on our consolidated balance sheet and Finance receivables, net on our sector balance sheet.
(b)
We pay amounts to Ford Credit at the point of retail financing or lease origination that represent interest supplements and residual support.
(c)
Primarily wholesale receivables with entities that are consolidated subsidiaries of Ford.  
(d)
Sale-leaseback agreement between Automotive and Financial Services sectors relating to vehicles that we lease to our employees.
(e)
Amounts owed to the Financial Services sector by Automotive sector, or vice versa.

Venezuelan Operations

On February 13, 2013, the Venezuelan government effected a devaluation of the bolivar, from an exchange rate of 4.3 bolivars to the U.S. dollar to an exchange rate of 6.3 bolivars to the U.S. dollar. This resulted in a remeasurement loss of $186 million in the first quarter. For periods subsequent to the date of the devaluation, assets, liabilities, and results of operations from our Venezuelan subsidiary are remeasured at this new exchange rate.

At December 31, 2013, we had a bolivar denominated net monetary position of $749 million, including $765 million of bolivar denominated cash and cash equivalents. Based on our net monetary position at December 31, 2013, a further devaluation from an exchange rate of 6.3 bolivars to the U.S. dollar to an exchange rate of 12 bolivars to the U.S. dollar would have resulted in a balance sheet remeasurement loss of approximately $360 million.

At December 31, 2013, our investment in our Venezuelan subsidiary (which includes undistributed earnings) was $881 million. Also, at December 31, 2013, it had $300 million of U.S. dollar currency exchange requests pending with and in transit to the governmental controlled currency exchange, including $295 million payable to other Ford consolidated affiliates.

The operating environment in Venezuela continues to be challenging.  Foreign exchange control regulations have affected our Venezuelan operation’s ability to pay dividends and obligations denominated in U.S. dollars, and are constraining parts availability and our ability to maintain normal production. Recent developments in Venezuela, including price controls and a very limited and uneven supply of foreign currency to support production, have affected adversely our business and results of operations.  These and other restrictions could limit our ability to benefit from our investment and maintain a controlling interest in our Venezuelan subsidiary.

SIGNIFICANT ACCOUNTING POLICIES concept us-gaap:SignificantAccountingPoliciesTextBlock
SUMMARY OF ACCOUNTING POLICIES

For each accounting topic that is addressed in its own footnote, the description of the accounting policy may be found in the related footnote.  The other significant accounting policies are described below.

Use of Estimates

The preparation of financial statements requires us to make estimates and assumptions that affect our results during the periods reported. Estimates are used to account for certain items such as marketing accruals, warranty costs, employee benefit programs, etc.  Estimates are based on assumptions that we believe are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

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 Other comprehensive income/(loss).  Upon sale or upon complete or substantially complete 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.

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, Selling, administrative, and other expenses, and Automotive interest income and other income/(loss), net.  The pre-tax gains/(losses) of this activity for 2013, 2012, and 2011 was $(349) million, $(426) million, and $4 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 initially are recorded at the transaction amount. We record an allowance for doubtful accounts representing our estimate of the probable losses. 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. Receivables are charged to the allowance for doubtful accounts when an account is deemed to be uncollectible.  

Net Intangible Assets

We capitalize and amortize our finite-lived intangible assets over their estimated useful lives. Indefinite-lived intangible assets are not amortized, but are tested for impairment annually or more frequently if events or circumstances indicate the asset may be impaired. Our intangible assets are comprised primarily of license and advertising agreements, land rights, patents, customer contracts, and technology. Our indefinite-lived intangibles have been tested for impairment in 2013 and no impairment was required.

The net carrying amount of our intangible asset was $85 million and $87 million at December 31, 2013 and 2012, respectively, and is reported in Other Assets on our balance sheet. Pre-tax amortization expense was $11 million, $10 million, and $12 million at December 31, 2013, 2012, and 2011, respectively. Amortization for intangible assets is forecasted to be $11 million in 2014 and each year thereafter.

      









NOTE 2.  SUMMARY OF ACCOUNTING POLICIES (Continued)

Long-Lived Asset Impairment

We test long-lived asset groups for recoverability, at the operating segment level when changes in circumstances indicate the carrying value may not be recoverable. Events that trigger a test for recoverability include material adverse changes in projected revenues and expenses, significant underperformance relative to historical and projected future operating results, significant negative industry or economic trends, and a significant adverse change in the manner in which an asset group is used or in its physical condition. When a triggering event occurs, a test for recoverability is performed, comparing projected undiscounted future cash flows to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the asset group’s fair value is measured relying primarily on a discounted cash flow methodology. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over their remaining useful life.

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 Other 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.  Proceeds from the sale of the vehicle at auction are recognized in Automotive revenues at the time of sale.

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, including the accretion of certain direct origination costs that are deferred. Revenue from rental payments received on operating leases is recognized on a straight-line basis over the term of the lease. 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.

Retail and Lease Incentives

We offer special retail financing and lease incentives to dealers’ customers who choose to finance or lease Ford- or Lincoln-brand vehicles from Ford Credit. The estimated cost for these incentives is recorded as a revenue reduction to Automotive revenues when the vehicle is sold to the dealer. See Note 1 for additional information regarding transactions between Automotive and Financial Services sectors. We pay the discounted value of the incentive directly to Ford Credit on behalf of the retail customer upon acquisition of the retail finance or lease contract to compensate Ford Credit for the lower interest or lease rates offered to the retail customer.  The Financial Services sector recognized revenue of $1.5 billion, $1.6 billion, and $2.1 billion in 2013, 2012, and 2011, respectively, for special financing consistent with the earnings process of the underlying receivable, and lower depreciation of $946 million, $850 million, and $889 million in 2013, 2012 and 2011, respectively, related to leasing programs.






NOTE 2.  SUMMARY OF ACCOUNTING POLICIES (Continued)

Sales and Marketing Incentives

Sales and marketing incentives generally are recognized by the Automotive sector as revenue reductions in Automotive revenues.  The incentives generally take the form of cash payments to dealers and dealers’ customers.  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 may, at times, 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 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 Incentives

We receive incentives from U.S. and non-U.S. governmental entities in the form of tax rebates or credits, grants, and loans.  Government 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 discount is calculated on government loans with a below-market interest rate. The benefit of these incentives generally is recorded when all conditions as specified in the agreement are fulfilled.

Selected Other Costs

Engineering, research, and development costs are included in Automotive cost of sales; advertising costs are included in Selling, administrative, and other expenses. Engineering, research, and development costs are expensed as incurred when performed internally or when performed by a supplier if we guarantee reimbursement.  Advertising costs are expensed as incurred.  Engineering, research, development, and advertising expenses for the years ended December 31 were as follows (in billions):
 
2013
 
2012
 
2011
Engineering, research, and development
$
6.4

 
$
5.5

 
$
5.3

Advertising
4.4

 
4.0

 
4.1



Presentation of Sales and Sales-Related Taxes

We collect and remit taxes assessed by different governmental authorities that are both imposed on and concurrent with a revenue-producing transaction between us and our customers.  These taxes may include, but are not limited to, sales, use, value-added, and some excise taxes.  We report the collection of these taxes on a net basis (excluded from revenues).

REVENUE RECOGNITION concept us-gaap:RevenueRecognitionPolicyTextBlock
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 Other 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.  Proceeds from the sale of the vehicle at auction are recognized in Automotive revenues at the time of sale.

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, including the accretion of certain direct origination costs that are deferred. Revenue from rental payments received on operating leases is recognized on a straight-line basis over the term of the lease. 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.


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