E-Z-GO 2009 Annual Report Download - page 75

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Notes to the Consolidated Financial Statements
66
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 categorized by the level of inputs used in the
valuation of each asset and liability:
January 2, 2010 January 3, 2009
(In millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets
Manufacturing group
Foreign currency exchange contracts $ — $ 57 $ — $ — $ 2 $ —
Forward contracts for Textron Inc. stock 7 — — — — —
Finance group
Derivative financial instruments — 61 — — 133 —
Total assets $ 7 $ 118 $ — $ — $ 135 $ —
Liabilities
Manufacturing group
Forward contracts for Textron Inc. stock $ — $ — $ — $ 98 $ — $ —
Foreign currency exchange contracts — 5 — — 84 —
Finance group
Derivative financial instruments — 17 — — 21 —
Total liabilities $ — $ 22 $ — $ 98 $ 105 $ —
Valuation Techniques
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 cash flow
hedges, in OCI. 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 earnings.
Cash settlement forward 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.
The Finance group’s derivative contracts are not exchange traded. Derivative financial instruments are measured at fair value utilizing widely
accepted, third-party developed valuation models. The actual terms of each individual contract are entered into a valuation model, along with
interest rate and foreign exchange rate data, which is based on readily observable market data published by third-party leading financial news and
data providers. Credit risk is factored into the fair value of derivative assets and liabilities based on the differential between both our credit default
swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared with a standard AA-rated counterparty;
however, this had no significant impact on the valuation at the end of 2009 and 2008 as most of our counterparties are AA-rated, and the vast
majority of our derivative instruments are in an asset position.