E-Z-GO 2008 Annual Report Download - page 82

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Textron Inc.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the assets and liabilities measured at fair value on a recurring basis at January 3, 2009 categorized by the level of inputs
used in the valuation of each asset and liability:
Quoted Prices
in Active
Markets for Significant
Identical Other Significant
Assets or Observable Unobservable
Liabilities Inputs Inputs
(In millions) Total (Level 1) (Level 2) (Level 3)
Assets
Manufacturing group
Foreign currency exchange contracts $ 2 $ — $ 2 $ —
Total Manufacturing group 2 — 2 —
Finance group
Derivative financial instruments, net 112 — 112 —
Interest-only securities 12 — — 12
Total Finance group 124 — 112 12
Total assets $ 126 $ — $ 114 $ 12
Liabilities
Manufacturing group
Cash settlement forward contract $ 98 $ 98 $ — $ —
Foreign currency exchange contracts 84 — 84 —
Total Manufacturing group 182 98 84 —
Total liabilities $ 182 $ 98 $ 84 $ —
Valuation Techniques
Manufacturing Group
Foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this technique utilize
current foreign currency exchange forward market rates published by third-party leading financial news and data providers. This is observable
data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual
transactions so they are classified as Level 2. We record changes in the fair value of these contracts, to the extent they are effective as hedges, in
other comprehensive income. If a contract does not qualify for hedge accounting or is designated as a fair value hedge, changes in the fair value of
the contract are recorded in income.
Cash settlement forward contracts on our common stock are used to manage the expense related to stock-based compensation awards. The use
of these forward contracts modifies compensation expense exposure to changes in the stock price with the intent of reducing potential variability.
These contracts are measured at fair value using the market method valuation technique. Since the input to this technique is based on the quoted
price of our common stock at the measurement date, it is classified as Level 1. Gains or losses on these instruments are recorded as an
adjustment to compensation expense.
Finance Group
Interest-only securities are generally retained upon the sale of finance receivables to qualified special purpose trusts. These interest-only
securities are initially recorded at the allocated carrying value, which is determined based on the relative fair values of the finance receivables sold
and the interests retained. We estimate fair value upon the initial recognition of the retained interest based on the present value of expected future
cash flows using our best estimates of key assumptions — credit losses, prepayment speeds, forward interest rate yield curves and discount
rates commensurate with the risks involved. These inputs are classified as Level 3 since they reflect our own assumptions about the assumptions
market participants would use in pricing these assets based on the best information available in the circumstances as there is no active market for
these assets. We review the fair values of the interest-only securities quarterly using a discounted cash flow model and updated assumptions and
compare such amounts with the carrying value. When a change in fair value is deemed temporary, we record a corresponding credit or charge to
other comprehensive income for any unrealized gains or losses. If a decline in the fair value is determined to be other than temporary, we record a
corresponding charge to income. During 2008, we recognized impairment charges of $15 million and $6 million related to the Distribution
Finance revolving securitization and the Aviation Finance securitization trust, respectively, due to changes in our assumptions.
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