DELPHI 2014 Annual Report Download - page 82

Download and view the complete annual report

Please find page 82 of the 2014 DELPHI annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 162

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162

60
profitability. Changes in our estimates, due to unforeseen events or otherwise, could have a material impact on our financial
condition and results of operations.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual
results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when
identified. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our
estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and
circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the
benefit recognized and measured and tax position taken or expected to be taken on our tax return. To the extent that our
assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.
We report tax-related interest and penalties as a component of income tax expense. We do not believe there is a reasonable
likelihood that there will be a material change in the tax related balances or valuation allowance balances. However, due to the
complexity of some of these uncertainties, the ultimate resolution may be materially different from the current estimate. Refer
to Note 14. Income Taxes to the audited consolidated financial statements included herein for additional information.
Fair Value Measurement of Derivative Instruments
In determining the fair value of our derivatives, we utilize valuation techniques as prescribed by FASB ASC 820-10, Fair
Value Measurements and Disclosures, and also prioritize the use of observable inputs. The availability of observable inputs
varies amongst derivatives and depends on the type of derivative and how 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, 2014 and 2013, we were in a net derivative liability position of $104 million and $2 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. Derivatives
and Hedging Activities to the audited consolidated financial statements included herein for more information.
Share-Based Compensation
The Delphi Automotive PLC Long Term Incentive Plan (“PLC LTIP”) allows for the grant of share-based awards for
long-term compensation to the employees, directors, consultants and advisors of the Company (further discussed in Note 21.
Share-Based Compensation to the audited consolidated financial statements included herein). Grants of restricted stock units
(“RSUs”) to Delphi's executives were made under the PLC LTIP in 2012, 2013 and 2014 and are expected to be made annually.
The RSU awards include a time-based vesting portion and a performance-based vesting portion. The performance-based
vesting portion includes performance and market conditions in addition to service conditions. We determine the grant date fair
value of the RSUs based on the closing price of the Company's ordinary shares on the date of the grant of the award and a
contemporaneous valuation performed by an independent valuation specialist with respect to certain market conditions that
impact the performance-based vesting portion of the RSUs. We recognize compensation expense based upon the grant date fair
value of the awards applied to the Company's best estimate of ultimate performance against the respective targets on a straight-
line basis over the requisite vesting period of the awards, adjusted for an estimate for forfeitures. The performance conditions
require management to make assumptions regarding the likelihood of achieving certain performance goals. Changes in these
performance assumptions, as well as differences in actual results from management's estimates, could result in estimated or