Ford 2009 Annual Report Download - page 155

Notes to the Financial Statements
Ford Motor Company | 2009 Annual Report 153
NOTE 26. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, our operations are exposed to global market risks, including the effect of changes in
foreign currency exchange rates, certain commodity prices, and interest rates. To manage these risks, we enter into
various derivatives contracts. Foreign currency exchange contracts including forwards and options, are used to manage
foreign exchange exposure. Commodity contracts including forwards and options are used to manage commodity price
risk. Interest rate contracts including swaps, caps, and floors are used to manage the effects of interest rate fluctuations.
Cross-currency interest rate swap contracts are used to manage foreign currency and interest rate exposures on foreign-
denominated debt. The vast majority of our derivatives are over-the-counter customized derivative transactions and are
not exchange-traded. Management reviews our hedging program, derivative positions, and overall risk management
strategy on a regular basis. We only enter into transactions that we believe will be highly effective at offsetting the
underlying risk.
Consistent with the FASB's new standard on disclosures for derivative instruments and hedging activities effective
January 1, 2009, in this initial year of adoption, we have elected to not present earlier periods for comparative purposes.
Overall Derivative Financial Instruments and Hedge Accounting. All derivatives are recognized on the balance sheet
at fair value. To ensure consistency in our treatment of derivative and non-derivative exposures with regard to our master
agreements, we do not net our derivative position by counterparty for purposes of balance sheet presentation and
disclosure.
We have elected to apply hedge accounting to certain derivatives in both the Automotive and Financial Services
sectors; derivatives that receive designated hedge accounting treatment are documented and evaluated for effectiveness
at the time they are designated, as well as throughout the hedge period. Cash flows associated with designated hedges
are reported in the same category as the underlying hedged item.
Some derivatives do not qualify for hedge accounting; for others, we elect to not apply hedge accounting. We report
changes in the fair value of derivatives not designated as hedging instruments through Automotive cost of sales,
Automotive interest income and other non-operating income/(expense), net, or Financial Services other income/(loss), net
depending on the sector and underlying exposure. Cash flows associated with non-designated or de-designated
derivatives are reported in Net cash (used in)/provided by investing activities in our statements of cash flows.
Cash Flow Hedges. Our Automotive sector has designated certain forward and option contracts as cash flow hedges
of forecasted transactions with exposure to foreign currency exchange and commodity price risks. During the second half
of 2008, all foreign exchange forwards and options previously designated as cash flow hedges of forecasted transactions
under critical terms match were de-designated and re-designated under the "long-haul" method using regression analysis
to assess hedge effectiveness. Since 2007, we have had no commodity derivatives designated as cash flow hedges.
The effective portion of changes in the fair value of cash flow hedges is deferred in Accumulated other comprehensive
income/(loss) and is recognized in Automotive cost of sales when the hedged item affects earnings. The ineffective
portion is reported currently in Automotive cost of sales. Our policy is to de-designate cash flow hedges prior to the time
forecasted transactions are recognized as assets or liabilities on the balance sheet and report subsequent changes in fair
value through Automotive cost of sales. If it becomes probable that the originally-forecasted transaction will not occur, the
related amount also is reclassified from Accumulated other comprehensive income/(loss) and recognized in earnings.
Our cash flow hedges mature within two years or less.
Fair Value Hedges. Our Financial Services sector uses derivatives to reduce the risk of changes in the fair value of
liabilities. We have designated certain receive-fixed, pay-float interest rate swaps as fair value hedges of fixed-rate debt
under the "long haul" method of assessing effectiveness. The risk being hedged is the risk of changes in the fair value of
the hedged debt attributable to changes in the benchmark interest rate. We use regression analysis to assess hedge
effectiveness. If the hedge relationship is deemed to be highly effective, we record the changes in the fair value of the
hedged debt related to the risk being hedged in Financial Services debt with the offset in Financial Services other
income/(loss), net. The change in fair value of the related derivative (excluding accrued interest) also is recorded in
Financial Services other income/(loss), net. Hedge ineffectiveness, recorded directly in earnings, is the difference
between the two amounts.