DELPHI 2011 Annual Report Download - page 76

Table of Contents
actively traded the derivative is. For many of our derivatives, the valuation does not require significant management judgment as the valuation inputs are
readily observable in the market. For other derivatives, however, valuation inputs are not as readily observable in the market, and significant management
judgment may be required.
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. Our derivative exposures are with
counterparties with long-term investment grade credit ratings. We estimate the fair value of our 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. We also consider the risk of non-performance in the estimation of fair value, and include
an adjustment for non-performance risk in the measure of fair value of derivative instruments. The non-performance risk adjustment reflects the full credit
default spread ("CDS") applied to the net commodity and foreign currency exposures by counterparty. When we are in a net derivative asset position, the
counterparty CDS rates are applied to the net derivative asset position. When we are 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, we use 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, we
generally survey investment banks and/or brokers and utilize the surveyed prices and rates in estimating fair value.
As of December 31, 2011 and 2010, we were in a net derivative liability position of $65 million and asset position of $76 million, respectively, and
there were no adjustments 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. Refer to Note 17. Fair Value of Financial Instruments, Derivatives and Hedging Activities to the audited
consolidated financial statements included herein for more information.
Share-Based Compensation
We expense the estimated fair value of the Value Creation Plan (as defined and further discussed in Note 21. Share-Based Compensation to the audited
consolidated financial statements included herein), a long-term incentive plan for key employees. Estimating the fair value for share-based payments requires
us to make assumptions regarding the nature of the payout of the award as well as changes in our stock price during the post-initial public offering period.
Any differences in actual results from management's estimates could result in fair values different from estimated fair values, which could materially impact
our future results of operations and financial condition. The following highlights the sensitivity to changes in our stock price:
Change in Estimate of Stock Price
Impact on 2012
Operating Expense
+ 10% + $9 million
- 10% - $9 million
The fair market value of the Class E-1 Interests (as defined and further discussed in Note 21. Share-Based Compensation to the audited consolidated
financial statements included herein) was estimated based on a contemporaneous valuation performed by an independent valuation specialist, utilizing
generally accepted valuation approaches. Under certain conditions with respect to our initial public offering or a change in control, as defined in the Board of
Managers 2010 Class E-1 Interest Incentive Plan, any interests that had not yet vested would immediately become vested. Approximately $8 million was
recognized as a charge to compensation expense since the criteria for immediate vesting was met with respect to the completion of our initial public offering
on November 22, 2011.
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