Meritor Acquisition and 2022 Financial Results
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prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to
be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which
they relate.
Acquisition of Meritor - Valuation of Customer Relationships
As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of Meritor on August 3, 2022 for the total purchase price of $.9 billion,
including debt that was retired on the closing date of $248 million. Of the identifiable intangible assets acquired, management recognized customer relationships of $960
million. Management estimated the fair value of the customer relationships using the multi-period excess earnings method. Key assumptions used in the multi-period excess
earnings method include projections of revenue and earnings or losses before interest expense, income taxes, depreciation and amortization and non-controlling interests
(EBITDA), discount rate, customer attrition rates, and customer renewal rates.
The principal considerations for our determination that performing procedures relating to the valuation of the customer relationships acquired in the acquisition of Meritor is a
critical audit matter are (i) the significant judgment by management when determining the fair value estimate of the customer relationships acquired; (ii) a high degree of auditor
judgment, subjectivity, and effort in performing procedures and evaluating management's significant assumptions related to projections of EBITDA; and (iii) the audit effort
involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
These procedures included testing the effectiveness of controls relating to management's valuation of the customer relationships acquired, including controls over the
determination of the significant assumptions related to projections of EBITDA. These procedures also included, among others (i) reading the purchase agreement and (ii) testing
management's process for determining the fair value estimate of the customer relationships acquired. This included evaluating the appropriateness of the multi-period excess
earnings method, testing the completeness and accuracy of underlying data used in the multi-period excess earnings method, and evaluating the reasonableness of the significant
assumptions used by management related to projections of EBITDA. Evaluating management's significant assumptions related to projections of EBITDA involved considering
(i) the past performance of Meritor and (ii) the consistency with economic and industry data. Professionals with specialized skill and knowledge were used to assist in the
evaluation of the appropriateness of the Company's multi-period excess earnings method.
Base Product Warranty Liability
As described in Notes 1 and 14 to the consolidated financial statements, management estimates and records a liability for base product warranty programs at the time products
are sold. As of December 31, 2022, the total accrued liability for product warranty programs was $1,470 million. The estimate for one of the base product warranty programs is
based on historical experience and reflects management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when
actual costs differ. Management's estimate of the base product warranty liability is generally affected by component failure rates, repair costs, and the point of failure within the
product life cycle.
The principal considerations for our determination that performing procedures relating to the base product warranty liability is a critical audit matter are (i) the significant
judgment by management when determining the estimate for the base product warranty liability and (ii) a high degree of auditor judgment and effort in performing procedures
and evaluating management's significant assumptions related to component failure rates, repair costs, and the point of failure within the product life cycle.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
These procedures included testing the effectiveness of controls relating to management's estimate for the base product warranty liability, including controls related to the
determination of the significant assumptions related to component failure rates, repair costs, and the point of failure within the product life cycle. These procedures also
included, among others, testing management's process for determining the estimate for the base product warranty liability. This included evaluating the appropriateness of the
method used by management, testing the completeness and accuracy of underlying data used in the warranty
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