NET INVESTMENT IN OPERATING LEASES

Net investment in operating leases consist primarily of lease contracts for vehicles with retail customers, daily rental companies, government entities, and fleet customers with terms of 60 months or less.

Revenue from rental payments received on operating leases is recognized on a straight-line basis over the term of the lease. The accrual of revenue on operating leases is discontinued at the earlier of the time an account is determined to be uncollectible, at bankruptcy status notification, or greater than 120 days past due.

As of December 31, 2013, we changed our accounting method for payments made by Ford on behalf of the retail lease customer and certain lease acquisition costs at the time we acquire the lease. Prior to the fourth quarter of 2013, we presented the receipt of interest supplements and residual support paid by Ford at acquisition of the operating lease as part of Other liabilities and deferred income and the amortization of interest supplements as part of Financing revenue, Operating leases.

We now recognize these upfront collections from Ford and other vehicle acquisition costs as part of Net investment in operating leases, which are amortized to Depreciation on vehicles subject to operating leases. The Company believes this change in accounting method is preferable as it better represents the economics of the transaction as a reduction in the acquisition cost of the operating lease vehicle. For 2012, this reclassification decreased Other liabilities and deferred income and Net investment in operating leases by $1.1 billion. This reclassification also decreased Financing revenue, Operating leases and Depreciation on vehicles subject to operating leases by $693 million and $659 million for the years ended December 31, 2012 and 2011 respectively.

Consistent with the above changes, the upfront lease supplements and the deferral of acquisition costs are now included in the consolidated statement of cash flows as part of Net cash used in investing activities. For the years ended December 31, 2012 and 2011, this reclassification decreased Net cash used in investing actives and Net cash provided by operating activities by $1.0 billion and $1.0 billion, respectively.

These changes had no impact on Net financing margin, Income before income taxes, or Retained earnings. We have reclassified prior period amounts to reflect the above changes.

Depreciation expense on vehicles subject to operating leases is provided on a straight-line basis in an amount necessary to reduce the leased vehicle value to its estimated residual value at the end of the lease term. Our policy is to promptly sell returned off-lease vehicles. We evaluate our depreciation for leased vehicles on a regular basis taking into consideration various assumptions, such as expected residual values at lease termination (including residual value support payments from Ford) and the estimated number of vehicles that will be returned to us. Adjustments to depreciation expense reflecting revised estimates of expected residual values at the end of the lease terms are recorded prospectively on a straight-line basis. Upon disposition of the vehicle, the difference between net book value and actual proceeds is recorded as an adjustment to Depreciation on vehicles subject to operating leases.

We evaluate the carrying value of held-and-used long-lived asset groups (such as vehicles subject to operating leases) for potential impairment when we determine a triggering event has occurred. When a triggering event occurs, a test for recoverability is performed by 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 in accordance with the fair value measurement framework. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. For the periods presented, we have not recorded any impairment charges.

NOTE 3. NET INVESTMENT IN OPERATING LEASES (Continued)

Net investment in operating leases were as follows (in millions):



	December 31, 2013			December 31, 2012
Vehicles, at cost, including acquisition costs	$	21,092		$	15,609
Less: Accumulated depreciation	(2,792		)	(2,033		)
Net investment in operating leases before allowance for credit losses (a)	18,300			13,576
Less: Allowance for credit losses	(23		)	(23		)
Net investment in operating leases	$	18,277		$	13,553

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(a)

At December 31, 2013 and 2012, includes net investment in operating leases of $8.1 billion and $6.3 billion, respectively, that have been included in securitization transactions but continue to be reported in our consolidated financial statements. These net investment in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. See Note 5 for additional information.

The amounts contractually due for minimum rentals on operating leases at December 31, 2013 were as follows (in millions):



	2014		2015		2016		2017		2018
Minimum rentals on operating leases	$	2,569	$	2,175	$	1,536	$	206	$	5