Ford 2009 Annual Report Download - page 93

Notes to the Financial Statements
Ford Motor Company | 2009 Annual Report 91
NOTE 4. FAIR VALUE MEASUREMENTS
Certain assets and liabilities are presented on our financial statements at fair value. Assets and liabilities measured at
fair value on a recurring basis on our balance sheet include cash equivalents, marketable securities, derivative financial
instruments, retained interest in securitized assets, and pension assets. Assets and liabilities measured at fair value on a
recurring basis for disclosure only include debt and finance receivables. Fair value of these items are presented together
with the related carrying value in Notes 19 and 7, respectively. Assets and liabilities measured at fair value on a non-
recurring basis include held-for-sale operations, finance receivables, held-and-used long-lived assets, and equity method
investments.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value should be based on assumptions that market
participants would use, including a consideration of non-performance risk.
In determining fair value, we use various valuation methodologies and prioritize the use of observable inputs. The
availability of observable inputs varies by instrument and depends on a variety of factors including the type of instrument,
whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial
instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by
market participants, and the valuation does not require significant management discretion. For other financial
instruments, pricing inputs are less observable in the marketplace and may require management judgment.
We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used
in measuring fair value are observable in the market:
• Level 1 – inputs include quoted prices for identical instruments and are the most observable.
• Level 2 – inputs include quoted prices for similar assets and observable inputs such as interest rates, currency
exchange rates and yield curves.
• Level 3 – inputs are not observable in the market and include management's judgments about the assumptions
market participants would use in pricing the asset or liability.
For instruments measured using Level 3 inputs, a reconciliation of the beginning and ending balances is disclosed.
Valuation Methodologies
Cash Equivalents – Financial Instruments. Cash and all highly liquid investments with a maturity of 90 days or less at
date of purchase are classified as Cash and cash equivalents. We use quoted market prices where available and
industry-standard valuation models using market-based inputs when quoted prices are unavailable.
Marketable Securities. Fixed income and equity securities with a maturity date greater than 90 days at the date of
purchase are classified as marketable securities. We measure the fair value of these securities using quoted market
prices where available and industry-standard valuation models using market-based inputs when quoted prices are
unavailable. Where there is limited transparency to valuation inputs, we generally utilize dealer security quotes or
standard models using unobservable inputs.
Derivative Financial Instruments. We estimate the fair value of our derivatives using industry-standard valuation
models, including Black-Scholes and Curran's Approximation. 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, and
commodity prices, taking into account the contractual terms of the derivative instruments.