Summary of significant accounting policies

Organization and Description of the Business

Navistar International Corporation (“NIC”), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation (“NFC”). References herein to the “Company,” “we,” “our,” or “us” refer collectively to NIC, its subsidiaries, and certain variable interest entities (“VIEs”) of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Engine, Parts (collectively called “manufacturing operations”), and Financial Services, which consists of NFC and our foreign finance operations (collectively called “financial services operations”). These segments are discussed in Note 13, Segment reporting.

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our manufacturing operations and our financial services operations, including VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts. Certain reclassifications were made to prior year amounts to conform to the 2011 presentation.

We prepared the accompanying unaudited consolidated financial statements in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2010 and should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.

Revision of Previously Issued Financial Statements

Starting with the first quarter of 2011, the Company changed its method of accruing for certain incentive compensation, specifically relating to cash bonuses, for interim reporting purposes from a ratable method to a performance-based method. The Company believes that the performance-based method is preferable because it links the accrual of incentive compensation with the achievement of performance. We have revised our previously reported Consolidated Statements of Operations for the three months and six months ended April 30, 2010 and our Condensed Consolidated Statement of Cash Flows and Consolidated Statement of Stockholders' Deficit for the six months ended April 30, 2010, on a retrospective basis to reflect this change in principle based on information that would have been available as of our previous filing. The change will have no impact on our annual financial results.

The following table sets forth the effects of the revision on our Consolidated Statement of Operations for the three months ended April 30, 2010:













	As Previously Reported		Revisions for Change in Accounting Principle			As Revised
(in millions, except per share data)
Selling, general and administrative expenses	$	372	$	(13	)	$	359
Net income	43		13			56
Net income attributable to Navistar International Corporation	30		13			43
Basic earnings per share attributable to Navistar International Corporation	0.43		0.18			0.61
Diluted earnings per share attributable to Navistar International Corporation	0.42		0.18			0.60

The following table sets forth the effects of the revision on our Consolidated Statement of Operations for the six months ended April 30, 2010:



	As Previously Reported		Revisions for Change in Accounting Principle			As Revised
(in millions, except per share data)
Selling, general and administrative expenses	$	710	$	(15	)	$	695
Net income	73		15			88
Net income attributable to Navistar International Corporation	47		15			62
Basic earnings per share attributable to Navistar International Corporation	0.66		0.21			0.87
Diluted earnings per share attributable to Navistar International Corporation	0.65		0.21			0.86

The following table sets forth the effects of the revision on our Condensed Consolidated Statement of Cash Flows for the six months ended April 30, 2010:



	As Previously Reported			Revisions for Change in Accounting Principle			As Revised
(in millions)
Net income	$	73		$	15		$	88
Changes in other assets and liabilities, exclusive of the effects of businesses acquired and disposed	(102		)	(15		)	(117		)

The following table sets forth the effects of the revision on our Consolidated Statement of Stockholders’ Deficit as of April 30, 2010:



	2010
(in millions)
Stockholders’ deficit, as previously reported	$	(1,209	)
Effect of revision adjustments on net income for the six months ended April 30, 2010	15
Stockholders’ deficit, as revised	$	(1,194	)

The following table sets forth the effects of the change on our Consolidated Statement of Operations for the three months ended April 30, 2011:



	As Computed Under the Ratable Method		As Reported Under the Performance- Based Method		Effect of Change
(in millions, except per share data)
Selling, general and administrative expenses	$	351	$	354	$	3
Net income	91		88		(3		)
Net income attributable to Navistar International Corporation	77		74		(3		)
Basic earnings per share attributable to Navistar International Corporation	1.05		1.01		(0.04		)
Diluted earnings per share attributable to Navistar International Corporation	0.98		0.93		(0.05		)

The following table sets forth the effects of the change on our Consolidated Statement of Operations for the six months ended April 30, 2011:



	As Computed Under the Ratable Method		As Reported Under the Performance- Based Method		Effect of Change
(in millions, except per share data)
Selling, general and administrative expenses	$	690	$	672	$	(18	)
Net income	76		94		18
Net income attributable to Navistar International Corporation	50		68		18
Basic earnings per share attributable to Navistar International Corporation	0.69		0.93		0.24
Diluted earnings per share attributable to Navistar International Corporation	0.65		0.87		0.22

The following table sets forth the effects of the change on our Consolidated Balance Sheet as of April 30, 2011:



	As Computed Under the Ratable Method			As Reported Under the Performance- Based Method			Effect of Change
(in millions)
Other current liabilities	$	1,122		$	1,104		$	(18	)
Accumulated deficit	(1,828		)	(1,810		)	18

The following table sets forth the effects of the change on our Condensed Consolidated Statement of Cash Flows for the six months ended April 30, 2011:



	As Computed Under the Ratable Method			As Reported Under the Performance- Based Method			Effect of Change
(in millions)
Net income	$	76		$	94		$	18
Changes in other assets and liabilities, exclusive of the effects of businesses acquired and disposed	(99		)	(117		)	(18		)

Variable Interest Entities

We are the primary beneficiary of several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our variable interests that we are the primary beneficiary as we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and have the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of the consolidated entities. Assets of these entities are not available to satisfy claims against our general assets.

We are the primary beneficiary of our Blue Diamond Parts (“BDP”) and Blue Diamond Truck (“BDT”) joint ventures with Ford Motor Company (“Ford”). As a result, our Consolidated Balance Sheets include assets of $261 million and $312 million and liabilities of $170 million and $150 million as of April 30, 2011 and October 31, 2010, respectively, from BDP and BDT, including $16 million of cash and cash equivalents at both dates, which are not readily available to satisfy our other obligations. The creditors of BDP and BDT do not have recourse to our general credit.

Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include assets of $1.7 billion and liabilities of $1.6 billion as of both April 30, 2011 and October 31, 2010, all of which are involved in securitizations that are treated as borrowings. In addition, our Consolidated Balance Sheets include assets of $317 million and $353 million and related liabilities of $254 million and $236 million as of April 30, 2011 and October 31, 2010, respectively, all of which are involved in structures in which we transferred assets in transactions that do not qualify for sale accounting treatment and are therefore treated as borrowings. Investors that hold securitization debt have a priority claim on the cash flows generated by the securitized assets of the respective trusts to the extent that those trusts are entitled to make principal and interest payments. Investors in securitizations of these entities have no recourse to the general credit of NIC or any other consolidated entity.

Prior to the adoption of new guidance on accounting for transfers of financial assets on November 1, 2010, our Financial Services segment did not consolidate the assets and liabilities of the conduit funding facility of Truck Retail Accounts Corporation (“TRAC”), our consolidated special purpose entity (“SPE”), as we were not the primary beneficiary of the conduit and transfers of finance receivables to the facility qualified for sales accounting treatment. TRAC retained residual economic interests in the future cash flows of the securitized assets that were owned by the conduit. We carried these retained interests as an asset, included in Finance receivables, net on our Consolidated Balance Sheets. Subsequent to the adoption of the new accounting guidance, previous transfers of finance receivables from our Financial Services segment to the TRAC conduit retained their sales accounting treatment while prospective transfers of finance receivables no longer receive sale accounting treatment.

We are also involved with other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.

We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in loss of non-consolidated affiliates represents our share of the net loss of these entities.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, sales of receivables, income tax contingency accruals and valuation allowances, product warranty accruals, asbestos and other product liability accruals, asset impairment, and litigation-related accruals. Actual results could differ from our estimates.

Concentration Risks

Our financial condition, results of operations, and cash flows are subject to concentration risks related to concentrations of union employees and two customers. As of April 30, 2011, approximately 6,400, or 57%, of our hourly workers and approximately 600, or 7%, of our salaried workers are represented by labor unions and are covered by collective bargaining agreements. Our collective bargaining agreement with the National Automobile, Aerospace and Agricultural Implement Workers of Canada, covering approximately 900, or 8%, of our hourly workers as of April 30, 2011, expired on June 30, 2009. As a result, we have temporarily ceased production at our Chatham, Canada facility. Negotiations for a new collective bargaining agreement are ongoing. See Note 13, Segment reporting, for discussion of customer concentrations. Additionally, our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and global, political, and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).

Product Warranty Liability

Accrued product warranty and deferred warranty revenue activity is as follows:



	Six Months Ended April 30,
	2011			2010
(in millions)
Accrued product warranty and deferred warranty revenue, at beginning of period	$	506		$	492
Costs accrued and revenues deferred	175			117
Adjustments to pre-existing warranties^(A)	36			9
Payments and revenues recognized	(187		)	(146		)
Accrued product warranty and deferred warranty revenue, at end of period	530			472
Less: Current portion	240			228
Noncurrent accrued product warranty and deferred warranty revenue	$	290		$	244

_______________

(A)

Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historic and expected trends and are also impacted by authorized field campaigns. In the second quarter of 2011, we recorded adjustments for changes in estimates of $27 million, or $0.34 per diluted share.

The amount of deferred revenue related to extended warranty programs was $194 million and $167 million at April 30, 2011 and October 31, 2010, respectively. Revenue recognized under our extended warranty programs was $13 million and $25 million for the three and six months ended April 30, 2011 and $11 million and $23 million for the three and six months ended April 30, 2010, respectively.

Recently Adopted Accounting Standards

As of January 31, 2011, we adopted new guidance regarding disclosures about the credit quality of financing receivables and the allowance for credit losses. The guidance requires disaggregated information about the credit quality of financing receivables and the allowance for credit losses based on portfolio segment and class, as well as disclosure of credit quality indicators, and past due information. We have complied with the disclosure requirements of the new guidance within Note 4, Allowance for doubtful accounts.

As of November 1, 2010, we adopted new guidance on accounting for transfers of financial assets. The guidance eliminates the concept of a qualifying special purpose entity (“QSPE”), changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. Upon adoption, transfers of finance receivables from our Financial Services segment to the TRAC funding conduit no longer receive sale accounting treatment. The adoption of this guidance did not have a material impact on our consolidated financial statements.

As of November 1, 2010, we adopted new guidance regarding the consolidation of VIEs. The guidance amends the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate the VIE, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis includes, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Prior guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. QSPEs, which were previously exempt from the application of this guidance, are subject to the provisions of this guidance. The guidance also requires enhanced disclosures about an enterprise’s involvement with a VIE. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards

Accounting guidance that has not yet become effective with respect to our consolidated financial statements is described below, together with our assessment of the potential impact it may have on our consolidated financial statements:

In May 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance to clarify the application of existing fair value measurement requirements and to change particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, applied prospectively. Our effective date is February 1, 2012. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. When effective, we will comply with the disclosure provisions of this guidance.

In April 2011, FASB issued new guidance which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The new guidance will require creditors to evaluate modifications and restructuring of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Our effective date is August 1, 2011. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In January 2010, the FASB issued new guidance regarding disclosures about fair value measurements. The guidance requires new disclosures related to activity in Level 3 fair value measurements. This guidance requires purchases, sales, issuances, and settlements to be presented separately in the rollforward of activity in Level 3 fair value measurements and is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Our effective date is November 1, 2011. When effective, we will comply with the disclosure provisions of this guid