Ford 2014 Annual Report Download - page 124

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FAIR VALUE MEASUREMENTS (Continued)
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 is 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.
Finance Receivables. We measure finance receivables at fair value for purposes of disclosure (see Note 5) 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.
The fair value of collateral for retail receivables is calculated by multiplying the outstanding receivable balances by the
average recovery value 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.
Debt. We measure debt at fair value for purposes of disclosure (see Note 13) 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.
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