DELPHI 2011 Annual Report Download - page 141

Table of Contents
Gains and losses on derivatives qualifying as cash flow hedges are recorded in OCI, to the extent that hedges are effective, until the underlying
transactions are recognized in earnings. Unrealized amounts in accumulated OCI will fluctuate based on changes in the fair value of hedge derivative
contracts at each reporting period. Net losses included in accumulated OCI as of December 31, 2011 were $45 million after-tax ($71 million pre-tax). Of this
pre-tax total, a loss of approximately $44 million is expected to be included in cost of sales within the next 12 months and a loss of approximately $27 million
is expected to be included in cost of sales in subsequent periods. Cash flow hedges are discontinued when Delphi determines it is no longer probable that the
originally forecasted transactions will occur. The amount included in cost of sales related to hedge ineffectiveness was approximately $1 million for the year
ended December 31, 2011 and insignificant for the year ended December 31, 2010.
Fair value measurements
Fair Value Measurements on a Recurring Basis
All derivative instruments are required to be reported on the balance sheet at fair value unless the transactions qualify and are designated as normal
purchases or sales. Changes in fair value are reported currently through earnings unless they meet hedge accounting criteria. Delphi's derivative exposures are
with counterparties with long-term investment grade credit ratings. Delphi estimates the fair value of its derivative contracts using an income approach based
on valuation techniques to convert future amounts to a single, discounted amount. Estimates of the fair value of foreign currency and commodity derivative
instruments are determined using exchange traded prices and rates. Delphi also considers the risk of non-performance in the estimation of fair value, and
includes an adjustment for non-performance risk in the measure of fair value of derivative instruments. The non-performance risk adjustment reflects the
credit default spread ("CDS") applied to the net commodity and foreign currency exposures by counterparty. When Delphi is in a net derivative asset position,
the counterparty CDS rates are applied to the net derivative asset position. When Delphi is in a net derivative liability position, estimates of peer companies'
CDS rates are applied to the net derivative liability position.
In certain instances where market data is not available, Delphi uses management judgment to develop assumptions that are used to determine fair value.
This could include situations of market illiquidity for a particular currency or commodity or where observable market data may be limited. In those situations,
Delphi generally surveys investment banks and/or brokers and utilizes the surveyed prices and rates in estimating fair value.
As of December 31, 2011 and 2010, Delphi was in a net derivative liability position of $65 million and net derivative asset position of $76 million,
respectively, and no significant adjustments were recorded for nonperformance risk based on the application of peer companies' CDS rates and because
Delphi's exposures were to counterparties with investment grade credit ratings.
As of December 31, 2011 and 2010, Delphi had the following assets measured at fair value on a recurring basis:
As of December 31, 2011: Total
Quoted Prices in
Active
Markets Level
1
Significant
Other
Observable
Inputs Level 2
Significant
Unobservable
Inputs
Level 3
(in millions)
Commodity derivatives $ 1 $ — $ 1 $ —
Foreign currency derivatives 3 — 3 —
Total $ 4 $ — $ 4 $ —
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