Innovation & Power of brand Year 2 Power 88 Performance Corporate Data Corporate Governance 32 Residual value risks 4) Counterparty 5) Pension loan authorization is made in a comprehensive manner by considering the following points: applicant’s  credit history; applicant’s capacity to pay which is estimated by debt ratio, payment to income ratio and  disposable income; applicant’s stability; and loan conditions, including the loan collateral, loan advance  and payment terms. In addition to carrying out this screening process, Nissan takes into account  qualitative information by conducting field visits to customers or referring to past business records with  Nissan, in accordance with characteristics of regional business practices and risks. Dealer finance for inventory vehicles is authorized on the basis of an internal rating system that  takes into account the financial position of dealers, and, if necessary, personal guarantees and/or  mortgage collateral are taken in pledge in addition to inventory vehicle collaterals. These scoring  models are regularly reviewed and revised to keep them current with actual practice. In some regions and products, Nissan also offers different pricing depending on the applicant’s  credit score to compensate the risks. As a matter of accounting policy, Nissan maintains an allowance for doubtful accounts and credit  losses adequately to cover probable losses. Nissan makes a best effort to recover the actual losses  from bad debt accounts as quickly as possible by taking necessary actions, including flexible and  effective organization changes for collection and utilization of third-party collection services. Vehicles on operating leases and some balloon type credits, where Nissan is the lessor, are  guaranteed end-of-term residual value by Nissan. Nissan is therefore exposed to the risks that sales  value of the vehicle could fall below its contractual residual values when the financed vehicle is  returned and sold in the used car market at the end of the contract term. To mitigate the risks mentioned above, Nissan objectively sets contractual residual value by using the  future end-of-term market value estimation by a third party such as Automotive Lease Guide in North  America, and the estimation from statistical analysis with historical data of the used car market in Japan. To support used car market value, Nissan takes several strategic initiatives, including control of  sales incentives for new car sales promotion, fleet sales volume control and introduction of the  Certified Pre-owned program. As a matter of accounting policy, Nissan evaluates the recoverability of carrying values of its  vehicles for impairment on an ongoing basis. If impaired, Nissan recognizes allowance for potential  residual value losses in a timely and adequate manner. Nissan has a certain amount of exposures to counterparties in making financial transactions, such as  bank deposits, investments and derivative contracts. While we work with competitive banking  counterparties, Nissan manages its counterparty risk by using a certain evaluation system. The evaluation system which Nissan uses is based on ratings of counterparties’ long-term credit  and financial strength, and the level of their shareholders’ equity. The system is applied to Nissan as a  group, and we set limits in terms of amount and term on a consolidated basis. By making the analysis  monthly, we are able to take action on a timely basis when any concerns arise. Nissan has defined benefit pension plans mainly in Japan, the United States and the United Kingdom.  Funding policy for pension plans is to make periodic contributions as required by applicable  regulations. Benefit obligations and pension costs are calculated using many different drivers, such as  discount rate and rate of salary/wage increase.  Plan assets are exposed to financial market risks as they are invested in various types of financial  assets including bonds and stocks. When the fair value of these assets declines, the amount of the  unfunded portion of pension plans increases, which could materially affect cash-out and costs for  Nissan in the form of future contribution to the pension plans. As countermeasures to manage such risks, the investment policy of these pension plans is based  upon the liability profile of the plans, long term investment views and benchmark information regarding  asset allocation of other corporate pension plans. In addition, Nissan convenes Global Pension Committees on a periodic basis to review investment  performance, manager performance, review asset allocations and discuss other issues related to  pension assets. NISSAN Annual Report 2012 Maintaining Trust Through Transparency