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Textron Inc. Annual Report ● 2012 65
We hedge our net investment position in major currencies and generate foreign currency interest payments that offset other
transactional exposures in these currencies. To accomplish this, we borrow directly in foreign currency and designate a portion of
foreign currency debt as a hedge of net investments. We also may utilize currency forwards as hedges of our related foreign net
investments. We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective
as cash flow hedges. 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. Currency effects on the effective portion of these hedges, which are reflected in the
foreign currency translation adjustment account within other comprehensive income, produced a $14 million after-tax loss in 2012,
resulting in an accumulated net gain balance of $4 million at December 29, 2012. The ineffective portion of these hedges was
insignificant.
Counterparty Credit Risk
Our exposure to loss from nonperformance by the counterparties to our derivative agreements at the end of 2012 was minimal. We
do not anticipate nonperformance by counterparties in the periodic settlements of amounts due. We historically have minimized
this potential for risk by entering into contracts exclusively with major, financially sound counterparties having no less than a long-
term bond rating of A. The credit risk generally is limited to the amount by which the counterparties’ contractual obligations
exceed our obligations to the counterparty. We continuously monitor our exposures to ensure that we limit our risks.
Assets Recorded at Fair Value on a Nonrecurring Basis
During 2012 and 2011, certain assets were measured at fair value on a nonrecurring basis using significant unobservable inputs
(Level 3). The table below sets forth the balance of those assets at the end of the year in which a fair value adjustment was taken.
(In millions)
December 29,
2012
December 31,
2011
Finance
g
rou
p
Finance receivables held for sale $ 140 $ 418
Im
p
aired finance receivables 72 81
Other assets 76 128
Manufacturin
g
Grou
p
Intan
g
ible assets
—
15
The following table provides the fair value adjustments recorded for the assets measured at fair value on a non-recurring basis
during 2012 and 2011.
Gain (Loss)
(In millions) 2012 2011
Finance
g
rou
p
Finance receivables held for sale $ 76 $
(
206
)
Im
p
aired finance receivables
(
11
)
(
82
)
Other assets
(
51
)
(
49
)
Manufacturin
g
Grou
p
Intan
g
ible assets
—
(
41
)
Finance receivables held for sale — Finance receivables held for sale are recorded at fair value on a nonrecurring basis during
periods in which the fair value is lower than the cost value. There are no active, quoted market prices for these finance
receivables. At December 29, 2012, our finance receivables held for sale included the entire Golf Mortgage portfolio. Fair value
of this portfolio was determined based on the use of discounted cash flow models to estimate the price we expect to receive in the
principal market for each pool of similar loans, in an orderly transaction. The discount rates utilized in these models are derived
from prevailing interest rate indices and are based on the nature of the assets, discussions with market participants and our
experience in the actual disposition of similar assets. The cash flow models also include the use of qualitative assumptions
regarding the borrower’s ability to pay and the period of time that will likely be required to restructure and/or exit the account
through acquisition of the underlying collateral. We utilize revenue and earnings multiples to determine the expected value of the
loan collateral. The range of multiples used is based on bids from prospective buyers, inputs from market participants and prices at
which sales have been transacted for similar properties. The gains on finance receivables held for sale during 2012 were primarily
the result of the payoff of loans in amounts, and sale of loans at prices, in excess of the values established in previous periods.
Based on our qualitative assumptions, we separate the loans into three categories for the cash flow models. In the first category,
we include loans that we assume will be paid in accordance with the contractual terms of the loan. In the second category, we
include loans where we perceive that the borrower has less of an ability to pay, and we assume that the loan will be restructured
and resolved typically over a period of one to four years. For the third category, we assume that the borrower will default on the
loan and that it will be resolved within an average of 24 months. The fair values of these finance receivables are sensitive to