Ford 2010 Annual Report Download - page 166

Notes to the Financial Statements
164 Ford Motor Company | 2010 Annual Report
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. Our derivatives are over-the-counter customized derivative transactions and are not exchange-traded.
We review our hedging program, derivative positions, and overall risk management strategy on a regular basis.
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 do, however, consider our net position for determining fair value.
We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated are documented
and the relationships are evaluated for effectiveness using regression analysis at the time they are designated, as well as
throughout the hedge period. Cash flows and profit impact 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 not to apply hedge accounting. Regardless
of hedge accounting treatment, we only enter into transactions that we believe will be highly effective at offsetting the
underlying economic risk. 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.
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 one year 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.
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. 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 change in fair value of the derivative and the change in the fair value of the hedged debt that is attributable to
the changes in the benchmark interest rate.
When a derivative is de-designated from a fair value hedge relationship, or when the derivative in a fair value hedge
relationship is terminated before maturity, the fair value adjustment to the hedged debt continues to be reported as part of
the carrying value of the debt and is amortized over its remaining life.