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Allowance for Credit Losses
 12 Months Ended
Dec. 31, 2012
Financing Receivable, Allowance for Credit Loss, Additional Information [Abstract]  
ALLOWANCE FOR CREDIT LOSSES
ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses represents our estimate of the probable loss on the collection of finance receivables and operating leases as of the balance sheet date. The adequacy of the allowance for credit losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly. Because credit losses may vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain. The majority of our credit losses are attributable to our consumer receivables.

Additions to the allowance for credit losses are made by recording charges to the Provision for credit losses on the income statement. The uncollectible portion of finance receivables and investments in operating leases are charged to the allowance for credit losses at the earlier of when an account is deemed to be uncollectible or when an account is 120 days delinquent, taking into consideration the financial condition of the customer, borrower or lessee, the value of the collateral, recourse to guarantors and other factors.

In the event we repossess the collateral, the receivable is written off and we record the collateral at its estimated fair value less costs to sell and report it in Other assets on the balance sheet. Recoveries on finance receivables and investment in operating leases previously charged-off as uncollectible are credited to the allowance for credit losses.

Consumer

We estimate the allowance for credit losses on our consumer receivables and on our investments in operating leases using a combination of measurement models and management judgment. The models consider factors such as historical trends in credit losses and recoveries (including key metrics such as delinquencies, repossessions and bankruptcies), the composition of the present portfolio (including vehicle brand, term, risk evaluation and new/used vehicles), trends in historical and projected used vehicle values, and economic conditions. Estimates from these models rely on historical information and may not fully reflect losses inherent in the present portfolio. Therefore, we may adjust the estimate to reflect management judgment regarding justifiable changes in recent economic trends and conditions, portfolio composition and other relevant factors.

We make projections of two key assumptions to assist in estimating the consumer allowance for credit losses:

•
Frequency – number of finance receivables and operating lease contracts that are expected to default over the loss emergence period, measured as repossessions

•
Loss severity – expected difference between the amount a customer owes when the finance contract is charged-off and the amount received, net of expenses, from selling the repossessed vehicle, including any recoveries from the customer

Collective Allowance for Credit Losses. The collective allowance is evaluated primarily using a collective loss-to-receivables ("LTR") model that, based on historical experience, indicates credit losses have been incurred in the portfolio even though the particular accounts that are uncollectible cannot be specifically identified. The LTR model is based on the most recent years of history. Each LTR is calculated by dividing credit losses by average end-of-period receivables or average end-of-period investment in operating leases, excluding unearned interest supplements and allowance for credit losses. An average LTR is calculated for each class and multiplied by the end-of-period balances for that given class.

The loss emergence period ("LEP") is a key assumption within our models and represents the average amount of time between when a loss event first occurs to when it is charged-off. This time period starts when the consumer begins to experience financial difficulty. It is evidenced, typically through delinquency, before eventually resulting in a charge-off. The LEP is a multiplier in the calculation of the collective consumer allowance for credit losses.

For accounts greater than 120 days past due, the uncollectible portion is charged-off, such that the remaining recorded investment is equal to the estimated fair value of the collateral less costs to sell.






NOTE 5. ALLOWANCE FOR CREDIT LOSSES (Continued)

Specific Allowance for Impaired Receivables. Consumer receivables involved in TDRs are specifically assessed for impairment. A specific allowance is estimated based on the present value of the expected future cash flows of the receivable discounted at the loan's original effective interest rate or the fair value of any collateral adjusted for estimated costs to sell.     

After establishing the collective and specific allowances for credit losses, if management believes the allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant factors, an adjustment is made based on management judgment.

Non-Consumer

We estimate the allowance for credit losses for non-consumer receivables based on historical LTR ratios, expected future cash flows, and the fair value of collateral.

Collective Allowance for Credit Losses. We estimate an allowance for non-consumer receivables that are not specifically identified as impaired using a LTR model for each financing product based on historical experience. This LTR is an average of the most recent historical experience and is calculated consistent with the consumer receivables LTR approach. All accounts that are specifically identified as impaired are excluded from the calculation of the non-specific or collective allowance.

Specific Allowance for Impaired Receivables. Dealer financing is evaluated by segmenting individual loans by the risk characteristics of the loan (such as the amount of the loan, the nature of the collateral, and the financial status of the debtor). The loans are analyzed to determine whether individual loans are impaired, and a specific allowance is estimated based on the present value of the expected future cash flows of the receivable discounted at the loan's original effective interest rate or the fair value of the collateral adjusted for estimated costs to sell.

After establishing the collective and specific allowances for credit losses, if management believes the allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant factors, an adjustment is made based on management judgment.


























NOTE 5. ALLOWANCE FOR CREDIT LOSSES (Continued)

Following is an analysis of the allowance for credit losses related to finance receivables and net investment in operating leases for the years ended December 31 (in millions):
 
 
 
 
 
 
 
 
 
 
 
2012
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
451

 
$
43

 
$
494

 
$
40

 
$
534

Charge-offs
(311
)
 
(8
)
 
(319
)
 
(47
)
 
(366
)
Recoveries
169

 
12

 
181

 
49

 
230

Provision for credit losses
44

 
(18
)
 
26

 
(19
)
 
7

Other (a)
3

 
—

 
3

 
—

 
3

Ending balance
$
356

 
$
29

 
$
385

 
$
23

 
$
408

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for credit losses
 
 
 
 
 
 
 
 
 
Collective impairment allowance
$
337

 
$
27

 
$
364

 
$
23

 
$
387

Specific impairment allowance
19

 
2

 
21

 
—

 
21

Ending balance
$
356

 
$
29

 
$
385

 
$
23

 
$
408

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables and net investment in operating leases
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
46,560

 
$
28,419

 
$
74,979

 
$
14,724

 
 
Specifically evaluated for impairment
422

 
47

 
469

 
—

 
 
Recorded investment (b)
$
46,982

 
$
28,466

 
$
75,448

 
$
14,724

 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
$
46,626

 
$
28,437

 
$
75,063

 
$
14,701

 
 
__________
(a)
Represents amounts related to translation adjustments.
(b)
Represents finance receivables and net investment in operating leases before allowance for credit losses.































NOTE 5. ALLOWANCE FOR CREDIT LOSSES (Continued)
 
 
 
 
 
 
 
 
 
 
 
2011
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
701

 
$
66

 
$
767

 
$
87

 
$
854

Charge-offs
(400
)
 
(10
)
 
(410
)
 
(89
)
 
(499
)
Recoveries
205

 
7

 
212

 
86

 
298

Provision for credit losses
(54
)
 
(20
)
 
(74
)
 
(44
)
 
(118
)
Other (a)
(1
)
 
—

 
(1
)
 
—

 
(1
)
Ending balance
$
451

 
$
43

 
$
494

 
$
40

 
$
534

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for credit losses
 
 
 
 
 
 
 
 
 
Collective impairment allowance
$
435

 
$
35

 
$
470

 
$
40

 
$
510

Specific impairment allowance
16

 
8

 
24

 
—

 
24

Ending balance
$
451

 
$
43

 
$
494

 
$
40

 
$
534

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables and net investment in operating leases
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
45,497

 
$
26,458

 
$
71,955

 
$
11,138

 
 
Specifically evaluated for impairment
382

 
64

 
446

 
—

 
 
Recorded investment (b)
$
45,879

 
$
26,522

 
$
72,401

 
$
11,138

 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
$
45,428

 
$
26,479

 
$
71,907

 
$
11,098

 
 
__________
(a)
Represents amounts related to translation adjustments.
(b)
Represents finance receivables and net investment in operating leases before allowance for credit losses.