GM » Topics » 8. Investment in Operating Leases

These excerpts taken from the GM 10-K filed Mar 5, 2009.

Investment in Operating Leases

Investment in operating leases is reported at cost, less accumulated depreciation and net of impairment charges and origination fees or costs. Income from operating lease assets, which includes lease origination fees net of lease origination costs, is recognized as operating lease revenue on a straight-line basis over the scheduled lease term. Depreciation of vehicles is generally provided on a straight-line basis to an estimated residual value over a period, consistent with the term of the underlying operating lease agreement. We evaluate our depreciation policy for leased vehicles on a regular basis.

We have significant investments in the residual values of assets in our operating lease portfolio. The residual values represent an estimate of the values of the assets at the end of the lease contracts and are initially determined based on residual values established at contract inception by consulting independently published residual value guides. Realization of the residual values is dependent on our future ability to market the vehicles under the prevailing market conditions. Over the life of the lease, we evaluate the adequacy of our estimate of the residual value and may make adjustments to the depreciation rates to the extent the expected value of the vehicle (including any residual support payments from GM) at lease termination changes. In addition to estimating the residual value at lease termination, we also evaluate the current value of the operating lease asset and test for impairment to the extent necessary based on market considerations and portfolio characteristics. Impairment is determined to exist if the undiscounted expected future cash flows are lower than the carrying value of the asset. Certain triggering events necessitated an impairment review of the investment in operating leases of our Global Automotive Finance operations beginning in the second quarter of 2008. Refer to Note 8 for a discussion of the impairment charges recognized in 2008.

When a lease vehicle is returned to us, the asset is reclassified from investment in operating leases to other assets at the lower-of-cost or estimated fair value, less costs to sell.

Investment in Operating Leases

Investment in
operating leases is reported at cost, less accumulated depreciation and net of impairment charges and origination fees or costs. Income from operating lease assets, which includes lease origination fees net of lease origination costs, is recognized
as operating lease revenue on a straight-line basis over the scheduled lease term. Depreciation of vehicles is generally provided on a straight-line basis to an estimated residual value over a period, consistent with the term of the underlying
operating lease agreement. We evaluate our depreciation policy for leased vehicles on a regular basis.

We have significant investments in
the residual values of assets in our operating lease portfolio. The residual values represent an estimate of the values of the assets at the end of the lease contracts and are initially determined based on residual values established at contract
inception by consulting independently published residual value guides. Realization of the residual values is dependent on our future ability to market the vehicles under the prevailing market conditions. Over the life of the lease, we evaluate the
adequacy of our estimate of the residual value and may make adjustments to the depreciation rates to the extent the expected value of the vehicle (including any residual support payments from GM) at lease termination changes. In addition to
estimating the residual value at lease termination, we also evaluate the current value of the operating lease asset and test for impairment to the extent necessary based on market considerations and portfolio characteristics. Impairment is
determined to exist if the undiscounted expected future cash flows are lower than the carrying value of the asset. Certain triggering events necessitated an impairment review of the investment in operating leases of our Global Automotive Finance
operations beginning in the second quarter of 2008. Refer to Note 8 for a discussion of the impairment charges recognized in 2008.

SIZE="2">When a lease vehicle is returned to us, the asset is reclassified from investment in operating leases to other assets at the lower-of-cost or estimated fair value, less costs to sell.

STYLE="margin-top:10px;margin-bottom:0px">Mortgage Servicing Rights

Primary servicing involves
the collection of payments from individual borrowers and the distribution of these payments to the investors. Master servicing rights represent our right to service mortgage- and asset-backed securities and whole-loan packages issued for investors.
Master servicing involves the collection of borrower payments from primary servicers and the distribution of those funds to investors in mortgage- and asset-backed securities and whole-loan packages.

STYLE="margin-top:10px;margin-bottom:0px; text-indent:3%">We capitalize the value expected to be realized from performing specified mortgage servicing activities for others as mortgage servicing rights (MSRs).
These capitalized servicing rights are purchased or retained upon sale or securitization of mortgage loans. Mortgage servicing rights are not recorded on securitizations accounted for as secured financings. We measure mortgage servicing assets and
liabilities at fair value at the date of sale.

We define our classes of servicing rights based on both the availability of market inputs
and the manner in which we manage the risks of our servicing assets and liabilities. We manage our servicing rights at the legal entity level domestically and the reportable operating segment level internationally, and sufficient market inputs exist
to determine the fair value of our recognized servicing assets and liabilities.

Since quoted market prices for MSRs are not available, we
estimate the fair value of MSRs by determining the present value of future expected cash flows using modeling techniques that incorporate management’s best estimates of key variables, including expected cash flows, credit losses, prepayment
speeds, and return requirements commensurate with the risks

 


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Notes to Consolidated Financial Statements

FACE="Times New Roman" SIZE="1">GMAC LLC Ÿ Form 10-K

 



involved. Cash flow assumptions are based on our actual performance, and where possible, the reasonableness of assumptions is periodically validated through
comparisons to other market participants. Credit loss assumptions are based upon historical experience and the characteristics of individual loans underlying the MSRs. Prepayment speed estimates are determined from historical prepayment rates on
similar assets or obtained from third-party data. Return requirement assumptions are determined using data obtained from market participants, where available, or based on current relevant interest rates plus a risk-adjusted spread. Since many
factors can affect the estimate of the fair value of mortgage servicing rights, we regularly evaluate the major assumptions and modeling techniques used in our estimate and review these assumptions against market comparables, if available. We
monitor the actual performance of our MSRs by regularly comparing actual cash flow, credit, and prepayment experience to modeled estimates.

This excerpt taken from the GM 10-K filed Feb 28, 2008.
8.  Investment in Operating Leases
 
Investments in operating leases were as follows:
 
                     
December 31, ($ in millions)   2007   2006    
 
 
Vehicles and other equipment, at cost
    $40,410       $30,281      
Accumulated depreciation
    (8,062 )     (6,097 )    
 
 
Investment in operating leases, net (a)
    $32,348       $24,184      
(a) On November 22, 2006, $12.6 billion of operating lease assets consisting of $15.7 billion of vehicles at cost, net of $3.1 billion of accumulated depreciation were distributed to GM. Refer to Note 19 for further description of the distribution.
 
The future lease payments due from customers for equipment on operating leases at December 31, 2007, totaled $15,531 million and are due as follows: $6,873 million in 2008, $5,016 million in 2009, $2,887 million in 2010, $714 million in 2011, and $41 million in 2012 and after.
 
Our investments in operating lease assets represents the expected future cash flows we expect to realize under the operating leases and includes both customer payments and the expected residual value upon remarketing the vehicle at the end of the lease. As described in Note 19, GM may sponsor residual support programs that result in the contractual residual value being in excess of our standard residual value. GM reimburses us if remarketing sales proceeds are less than the customer’s contract residual value limited to our standard residual value. In addition to residual support programs, GM also participates in a risk-sharing arrangement whereby GM shares equally in residual losses to the extent that remarketing proceeds are below our standard residual rates (limited to a floor). In connection with the sale of 51% ownership interest in GMAC, GM settled its estimated liabilities with respect to residual support and risk sharing on a portion of our operating lease portfolio. Based on the December 31, 2007 outstanding U.S. operating lease portfolio, the maximum amount that could be paid by GM under the residual support programs and the risk-sharing arrangement is approximately $1.1 billion and $1.1 billion, respectively, as more fully discussed in Note 19.
 
This excerpt taken from the GM 10-K filed Mar 15, 2007.
 Investment in Operating Leases
 
Investments in operating leases were as follows:
 
                 
December 31, ($ in millions)   2006   2005
 
 
Vehicles and other equipment, at cost
    $30,281       $39,443  
Accumulated depreciation
    (6,097 )     (8,232 )
 
 
Investment in operating leases, net (a)
    $24,184       $31,211  
 
 
(a)  On November 22, 2006, $12.6 billion of operating lease assets comprised of $15.7 billion of vehicles at cost, net of $3.1 billion of accumulated depreciation were distributed to GM. Refer to Note 18 to our Consolidated Financial Statements for further description of the distribution.
 
The future lease payments due from customers for equipment on operating leases at December 31, 2006, totaled $11,390 million and are due as follows: $4,937 million in 2007, $3,553 million in 2008, $2,187 million in 2009, $673 million in 2010 and $40 million in 2011 and after.
 
Our investments in operating lease assets represents the expected future cash flows we expect to realize under the operating leases and includes both customer payments and the expected residual value upon remarketing the vehicle at the end of the lease. As described in Note 18 to our Consolidated Financial Statements, GM may sponsor residual support programs that result in the contractual residual value being in excess of our standard residual value. GM reimburses us if remarketing sales proceeds are less than the customer’s contract residual value limited to our standard residual value. In addition to residual support programs, GM also participates in a risk sharing arrangement whereby GM shares equally in residual losses to the extent that remarketing proceeds are below our standard residual rates (limited to a floor). In connection with the sale of 51 percent ownership interest in GMAC, GM settled its estimated liabilities with respect to residual support and risk sharing on a portion of our operating lease portfolio. Based on the December 31, 2006 outstanding U.S. operating lease portfolio, the maximum amount that could be paid by GM under the residual support programs and the risk sharing arrangement is approximately $276 million and $339 million, respectively, as more fully discussed in Note 18 to our Consolidated Financial Statements.
 
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This excerpt taken from the GM 10-K filed Mar 28, 2006.
Investment in Operating Leases
Investments in operating leases were as follows:
                 
December 31, ($ in millions)   2005   2004
 
Vehicles and other equipment, at cost
    $39,443       $33,390  
Accumulated depreciation
    (8,232 )     (7,318 )
 
Investment in operating leases, net
    $31,211       $26,072  
 
The future lease payments due from customers for equipment on operating leases at December 31, 2005, totaled $13,857 million and are due as follows: $6,238 million in 2006, $4,420 million in 2007, $2,478 million in 2008, $693 million in 2009 and $28 million in 2010 and after.
Our investments in operating lease assets represents the expected future cash flows we expect to realize under the operating leases and includes both customer payments and the expected residual value upon remarketing the vehicle at the end of the lease. As described in Note 19 GM may sponsor residual support programs that result in the contractual residual value being in excess of our standard residual value. In evaluating the realizability of our residual values we consider any payments that GM may be required to make under these residual support programs. Based on the December 31, 2005 portfolio the amount that we would expect to be paid by GM under the lease residual support programs would be $2.5 billion as more fully discussed in Note 19.

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Notes to Consolidated Financial Statements
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