FAIR VALUE MEASUREMENTS
Cash equivalents, marketable securities, and derivative financial instruments are presented on our financial statements on a recurring basis at fair value, while other assets and liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset impairment.
Fair Value Measurements
In measuring fair value, we use various valuation methodologies and prioritize the use of observable inputs. The use of observable and unobservable inputs and their significance in measuring fair value are reflected in our fair value hierarchy assessment.
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• | Level 1 - inputs include quoted prices for identical instruments and are the most observable |
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• | Level 2 - inputs include quoted prices for similar instruments and observable inputs such as interest rates, currency exchange rates, and yield curves |
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• | Level 3 - inputs include data not observable in the market and reflect management judgment about the assumptions market participants would use in pricing the instruments |
We review the inputs to the fair value measurements to ensure they are appropriately categorized within the fair value hierarchy. Transfers into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.
Valuation Methodologies
Cash and Cash Equivalents. Included in Cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal. A debt security is classified as a cash equivalent if it meets these criteria and if it has a remaining time to maturity of three months or less from the date of acquisition. Amounts on deposit and available upon demand, or negotiated to provide for daily liquidity without penalty, are classified as Cash and cash equivalents. Time deposits, certificates of deposit, and money market accounts that meet the above criteria are reported at par value on our balance sheet and are excluded from the tables below.
NOTE 4. FAIR VALUE MEASUREMENTS (Continued)
Marketable Securities. Investments in securities with a maturity date greater than three months at the date of purchase and other securities for which there is more than an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal are classified as Marketable securities. We generally measure fair value using prices obtained from pricing services. Pricing methodologies and inputs to valuation models used by the pricing services depend on the security type (i.e., asset class). Where possible, fair values are generated using market inputs including
quoted prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market information. For fixed income securities that are not actively traded, the pricing services use alternative methods to determine fair value for the securities, including quotes for similar fixed-income securities, matrix pricing, discounted cash flow using benchmark curves, or other factors. In certain cases, when market data are not available, we may use broker quotes to determine fair value.
An annual review is performed on the security prices received from our pricing services, which includes discussion and analysis of the inputs used by the pricing services to value our securities. We also compare the price of certain securities sold close to the quarter end to the price of the same security at the balance sheet date to ensure the reported fair value is reasonable.
Realized and unrealized gains and losses and interest income on our marketable securities are recorded in Automotive interest income and other income/(expense), net and Financial Services other income/(loss), net. Realized gains and losses are measured using the specific identification method.
We have entered into repurchase agreements with certain counterparties where we are the transferee. These agreements allow us to offset our entire gross exposure in the event of default or breach of contract. The gross value of these assets and liabilities reflected on our balance sheet at December 31, 2013 and December 31, 2012 was $228 million and $51 million, respectively.
Derivative Financial Instruments. Our derivatives are over-the-counter customized derivative transactions and are not exchange traded. We estimate the fair value of these instruments using industry-standard valuation models such as a discounted cash flow. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, foreign exchange rates, commodity prices, and the contractual terms of the derivative instruments. The discount rate used is the relevant interbank deposit rate (e.g., LIBOR) plus an adjustment for non-performance risk. The adjustment reflects the full credit default swap (“CDS”) spread applied to a net exposure, by
counterparty, considering the master netting agreements and any posted collateral. We use our counterparty’s CDS spread when we are in a net asset position and our own CDS spread when we are in a net liability position. In certain cases, market data are not available and we use broker quotes and models (e.g., Black-Scholes) to determine fair value. This includes situations where there is lack of liquidity for a particular currency or commodity or when the instrument is longer dated.
Ford Credit’s two Ford Upgrade Exchange Linked securitization transactions (“FUEL Notes”) had derivative features that included a mandatory exchange to Ford Credit unsecured notes when Ford Credit’s senior unsecured debt received two investment grade credit ratings among Fitch, Moody’s, and S&P, and a make-whole provision. Ford Credit estimated the fair value of these features by comparing the fair value of the FUEL Notes to the value of a hypothetical debt instrument without these features. In the second quarter of 2012, Ford Credit received two investment grade credit ratings, thereby triggering the mandatory exchange feature and the FUEL Notes derivatives were extinguished.
Finance Receivables. We measure finance receivables at fair value for purposes of disclosure (see Note 6) using internal valuation models. These models project future cash flows of financing contracts based on scheduled contract payments (including principal and interest). The projected cash flows are discounted to present value based on assumptions regarding credit losses, pre-payment speed, and applicable spreads to approximate current rates. Our assumptions regarding pre-payment speed and credit losses are based on historical performance. The fair value of finance receivables is categorized within Level 3 of the hierarchy.
On a nonrecurring basis, we also measure at fair value retail contracts greater than 120 days past due or deemed to be uncollectible, and individual dealer loans probable of foreclosure. We use the fair value of collateral, adjusted for estimated costs to sell, to determine the fair value of our receivables. The collateral for a retail receivable is the vehicle financed, and for dealer loans is real estate or other property.
NOTE 4. FAIR VALUE MEASUREMENTS (Continued)
The fair value of collateral for retail receivables is calculated based on the number of contracts multiplied by the loss severity and the probability of default (“POD”) percentage, or the outstanding receivable balances multiplied by the average recovery value (“ARV”) percentage to determine the fair value adjustment.
The fair value of collateral for dealer loans is determined by reviewing various appraisals, which include total adjusted appraised value of land and improvements, alternate use appraised value, broker's opinion of value, and purchase offers. The fair value adjustment is calculated by comparing the net carrying value of the dealer loan and the estimated fair value of collateral.
The fair value of retail and dealer loans measured on a non-recurring basis was $61 million and $80 million at December 31, 2013 and December 31, 2012, respectively. Changes in the significant unobservable inputs will not materially affect the fair value of these loans. The fair value adjustment recorded to expense for these receivables was $20 million, $25 million and $37 million in 2013, 2012 and 2011, respectively.
Debt. We measure debt at fair value for purposes of disclosure (see Note 15) using quoted prices for our own debt with approximately the same remaining maturities, where possible. Where quoted prices are not available, we estimate fair value using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt instruments. For certain short-term debt with an original maturity date of one year or less, we assume that book value is a reasonable approximation of the debt’s fair value. The fair value of debt is categorized within Level 2 of the hierarchy.
NOTE 4. FAIR VALUE MEASUREMENTS (Continued)
Input Hierarchy of Items Measured at Fair Value on a Recurring Basis
The following tables categorize the fair values of items measured at fair value on a recurring basis on our balance sheet (in millions):
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| December 31, 2013 | | December 31, 2012 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Automotive Sector | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | |
Cash equivalents – financial instruments | | | | | | | | | | | | | | | |
U.S. government | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
U.S. government-sponsored enterprises | — |
| | 24 |
| | — |
| | 24 |
| | — |
| | 718 |
| | — |
| | 718 |
|
Non-U.S. government | — |
| | 200 |
| | — |
| | 200 |
| | — |
| | 139 |
| | — |
| | 139 |
|
Non-U.S. government agencies (a) | — |
| | — |
| | — |
| | — |
| | — |
| | 365 |
| | — |
| | 365 |
|
Total cash equivalents – financial instruments (b) | — |
| | 233 |
| | — |
| | 233 |
| | — |
| | 1,222 |
| | — |
| | 1,222 |
|
Marketable securities | |
| | |
| | |
| | |
| | | | | | | | |
U.S. government | 3,752 |
| | — |
| | — |
| | 3,752 |
| | 4,493 |
| | — |
| | — |
| | 4,493 |
|
U.S. government-sponsored enterprises | — |
| | 6,596 |
| | — |
| | 6,596 |
| | — |
| | 5,459 |
| | — |
| | 5,459 |
|
Non-U.S. government agencies (a) | — |
| | 5,423 |
| | — |
| | 5,423 |
| | — |
| | 4,794 |
| | — |
| | 4,794 |
|
Corporate debt | — |
| | 2,623 |
| | — |
| | 2,623 |
| | — |
| | 1,871 |
| | — |
| | 1,871 |
|
Mortgage-backed and other asset-backed | — |
| | 295 |
| | — |
| | 295 |
| | — |
| | 25 |
| | — |
| | 25 |
|
Equities | 341 |
| | — |
| | — |
| | 341 |
| | 142 |
| | — |
| | — |
| | 142 |
|
Non-U.S. government | — |
| | 1,115 |
| | — |
| | 1,115 |
| | — |
| | 1,367 |
| | — |
| | 1,367 |
|
Other liquid investments (c) | — |
| | 12 |
| | — |
| | 12 |
| | — |
| | 27 |
| | — |
| | 27 |
|
Total marketable securities | 4,093 |
| | 16,064 |
| | — |
| | 20,157 |
| | 4,635 |
| | 13,543 |
| | — |
| | 18,178 |
|
Derivative financial instruments | |
| | |
| | |
| | |
| | | | | | | | |
Foreign currency exchange contracts | — |
| | 557 |
| | — |
| | 557 |
| | — |
| | 218 |
| | — |
| | 218 |
|
Commodity contracts | — |
| | 22 |
| | 1 |
| | 23 |
| | — |
| | 19 |
| | 4 |
| | 23 |
|
Total derivative financial instruments (d) | — |
| | 579 |
| | 1 |
| | 580 |
| | — |
| | 237 |
| | 4 |
| | 241 |
|
Total assets at fair value | $ | 4,093 |
| | $ | 16,876 |
| | $ | 1 |
| | $ | 20,970 |
| | $ | 4,635 |
| | $ | 15,002 |
| | $ | 4 |
| | $ | 19,641 |
|
Liabilities | |
| | |
| | |
| | |
| | | | | | | | |
Derivative financial instruments | |
| | |
| | |
| | |
| | | | | | | | |
Foreign currency exchange contracts | $ | — |
| | $ | 399 |
| | $ | — |
| | $ | 399 |
| | $ | — |
| | $ | 486 |
| | $ | — |
| | $ | 486 |
|
Commodity contracts | — |
| | 17 |
| | 2 |
| | 19 |
| | — |
| | 112 |
| | 12 |
| | 124 |
|
Total derivative financial instruments (d) | — |
| | 416 |
| | 2 |
| | 418 |
| | — |
| | 598 |
| | 12 |
| | 610 |
|
Total liabilities at fair value | $ | — |
| | $ | 416 |
| | $ | 2 |
| | $ | 418 |
| | $ | — |
| | $ | 598 |
| | $ | 12 |
| | $ | 610 |
|
__________
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(a) | Includes notes issued by non-U.S. government agencies, as well as notes issued by supranational institutions. |
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(b) | Excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value on our balance sheet totaling $2.7 billion and $3 billion at December 31, 2013 and 2012, respectively, for the Automotive sector. In addition to these cash equivalents, our Automotive sector also had cash on hand totaling $2 billion and $2 billion at December 31, 2013 and 2012, respectively. |
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(c) | Includes certificates of deposit and time deposits subject to changes in value. |
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(d) | See Note 16 for additional information regarding derivative financial instruments. |
NOTE 4. FAIR VALUE MEASUREMENTS (Continued)
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| December 31, 2013 | | December 31, 2012 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial Services Sector | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | |
Cash equivalents – financial instruments | | | | | | | | | | | | | | | |
U.S. government | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 200 |
| | $ | — |
| | $ | — |
| | $ | 200 |
|
U.S. government-sponsored enterprises | — |
| | — |
| | — |
| | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
Non-U.S. government | — |
| | 24 |
| | — |
| | 24 |
| | — |
| | 103 |
| | — |
| | 103 |
|
Corporate debt | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Total cash equivalents – financial instruments (a) | — |
| | 24 |
| | — |
| | 24 |
| | 200 |
| | 124 |
| | — |
| | 324 |
|
Marketable securities | |
| | |
| | |
| | |
| | | | | | | | |
U.S. government | 418 |
| | — |
| | — |
| | 418 |
| | 620 |
| | — |
| | — |
| | 620 |
|
U.S. government-sponsored enterprises | — |
| | 25 |
| | — |
| | 25 |
| | — |
| | 12 |
| | — |
| | 12 |
|
Non-U.S. government agencies | — |
| | 128 |
| | — |
| | 128 |
| | — |
| | 95 |
| | — |
| | 95 |
|
Corporate debt | — |
| | 1,273 |
| | — |
| | 1,273 |
| | — |
| | 1,155 |
| | — |
| | 1,155 |
|
Mortgage-backed and other asset-backed | — |
| | 43 |
| | — |
| | 43 |
| | — |
| | 67 |
| | — |
| | 67 |
|
Non-U.S. government | — |
| | 56 |
| | — |
| | 56 |
| | — |
| | 142 |
| | — |
| | 142 |
|
Other liquid investments (b) | — |
| | — |
| | — |
| | — |
| | — |
| | 15 |
| | — |
| | 15 |
|
Total marketable securities | 418 |
| | 1,525 |
| | — |
| | 1,943 |
| | 620 |
| | 1,486 |
| | — |
| | 2,106 |
|
Derivative financial instruments | |
| | |
| | |
| | |
| | | | | | | | |
Interest rate contracts | — |
| | 584 |
| | — |
| | 584 |
| | — |
| | 1,291 |
| | — |
| | 1,291 |
|
Foreign currency exchange contracts | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 9 |
| | — |
| | 9 |
|
Cross-currency interest rate swap contracts | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total derivative financial instruments (c) | — |
| | 585 |
| | — |
| | 585 |
| | — |
| | 1,300 |
| | — |
| | 1,300 |
|
Total assets at fair value | $ | 418 |
| | $ | 2,134 |
| | $ | — |
| | $ | 2,552 |
| | $ | 820 |
| | $ | 2,910 |
| | $ | — |
| | $ | 3,730 |
|
Liabilities | |
| | |
| | |
| | |
| | | | | | | | |
Derivative financial instruments | |
| | |
| | |
| | |
| | | | | | | | |
Interest rate contracts | $ | — |
| | $ | 305 |
| | $ | — |
| | $ | 305 |
| | $ | — |
| | $ | 256 |
| | $ | — |
| | $ | 256 |
|
Foreign currency exchange contracts | — |
| | 25 |
| | — |
| | 25 |
| | — |
| | 8 |
| | — |
| | 8 |
|
Cross-currency interest rate swap contracts | — |
| | 176 |
| | — |
| | 176 |
| | — |
| | 117 |
| | — |
| | 117 |
|
Total derivative financial instruments (c) | — |
| | 506 |
| | — |
| | 506 |
| | — |
| | 381 |
| | — |
| | 381 |
|
Total liabilities at fair value | $ | — |
| | $ | 506 |
| | $ | — |
| | $ | 506 |
| | $ | — |
| | $ | 381 |
| | $ | — |
| | $ | 381 |
|
__________
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(a) | Excludes time deposits, certificates of deposit, and money market accounts reported at par value on our balance sheet totaling $6.7 billion and $6.5 billion at December 31, 2013 and 2012, respectively. In addition to these cash equivalents, we also had cash on hand totaling $2.8 billion and $2.6 billion at December 31, 2013 and 2012, respectively. |
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(b) | Includes certificates of deposit and time deposits subject to changes in value. |
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(c) | See Note 16 for additional information regarding derivative financial instruments. |
