FORD MOTOR CO | 2013 | FY | 3


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.

Level 1 - inputs include quoted prices for identical instruments and are the most observable
Level 2 - inputs include quoted prices for similar instruments and observable inputs such as interest rates, currency exchange rates, and yield curves
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):
 
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

 __________
(a)
Includes notes issued by non-U.S. government agencies, as well as notes issued by supranational institutions.
(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.
(c)
Includes certificates of deposit and time deposits subject to changes in value.
(d)
See Note 16 for additional information regarding derivative financial instruments.
NOTE 4.  FAIR VALUE MEASUREMENTS (Continued)
 
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

 __________
(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.
(b)
Includes certificates of deposit and time deposits subject to changes in value.
(c)
See Note 16 for additional information regarding derivative financial instruments.
 
 
 
 

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