Ford 2010 Annual Report Download - page 129

Notes to the Financial Statements
Ford Motor Company | 2010 Annual Report 127
NOTE 18. RETIREMENT BENEFITS (Continued)
Expected Long-Term Rate of Return on Assets. The long-term return assumption at year-end 2010 is 8.00% for the
U.S. plans, and 7.75% for the U.K. and Canadian plans, and averages 7.20% for all non-U.S. plans. A generally
consistent approach is used worldwide to develop this assumption. This approach considers various sources, primarily
inputs from a range of advisors for long-term capital market returns, inflation, bond yields and other variables, adjusted for
specific aspects of our investment strategy by plan. Historical returns also are considered where appropriate.
At December 31, 2010, our actual 10-year annual rate of return on pension plan assets was 7.3% for the U.S. plans,
4.1% for the U.K. plans, and 3.7% for the Canadian plans. At December 31, 2009, our actual 10-year annual rate of
return on pension plan assets was 6.3% for the U.S. plans, 2.6% for the U.K. plans, and 3.4% for the Canadian plans.
Fair Value of Plan Assets. Pension assets are recorded at fair value, and include primarily equity and fixed income
securities, derivatives, and alternative investments, which include hedge funds, private equity, and real estate. Equity and
fixed income securities may each be combined into commingled fund investments. Commingled funds are valued to
reflect the pension fund's interest in the fund based on the reported year-end net asset value ("NAV"). Alternative
investments are valued based on year-end reported net asset value, with adjustments as appropriate for lagged reporting
of 1-6 months.
Equities. Equity securities are valued based on quoted prices and are primarily exchange-traded. Securities for which
official close or last trade pricing on an active exchange is available are classified as Level 1 in the fair value hierarchy. If
closing prices are not available, securities are valued at the last quoted bid price or may be valued using the last available
price and typically are categorized as Level 2. Level 3 securities often are thinly traded or delisted, with unobservable
pricing data.
Fixed Income – Government and Agency Debt Securities and Corporate Debt Securities. U.S. government and
government agency obligations, foreign government and government agency obligations, municipal securities,
supranational obligations, corporate bonds, bank notes, floating rate notes, and preferred securities are valued based on
quotations received from independent pricing services or from dealers who make markets in such securities. Pricing
services utilize matrix pricing, which considers readily available inputs such as the yield or price of bonds of comparable
quality, coupon, maturity and type, as well as dealer-supplied prices, and generally are categorized as Level 2 inputs in
the fair value hierarchy. Securities categorized as Level 3 typically are priced by dealers and pricing services that use
proprietary pricing models which incorporate unobservable inputs. These inputs primarily consist of yield and credit
spread assumptions.
Fixed Income – Agency and Non-Agency Mortgage and Other Asset-Backed Securities. U.S. and foreign
government agency mortgage and asset-backed securities, non-agency collateralized mortgage obligations,
commercial mortgage securities, residential mortgage securities, and other asset-backed securities are valued based
on quotations received from independent pricing services or from dealers who make markets in such securities.
Pricing services utilize matrix pricing, which considers prepayment speed assumptions, attributes of the collateral,
yield or price of bonds of comparable quality, coupon, maturity and type, as well as dealer-supplied prices, and
generally are categorized as Level 2 inputs in the fair value hierarchy. Securities categorized as Level 3 typically are
priced by dealers and pricing services that use proprietary pricing models which incorporate unobservable inputs.
These inputs primarily consist of prepayment curves, discount rates, default assumptions and recovery rates.
Derivatives. Exchange-traded derivatives for which market quotations are readily available are valued at the last
reported sale price or official closing price as reported by an independent pricing service on the primary market or
exchange on which they are traded and are categorized as Level 1. Over-the-counter derivatives typically are valued by
independent pricing services and categorized as Level 2. Level 3 derivatives typically are priced by dealers and pricing
services that use proprietary pricing models which incorporate unobservable inputs, including extrapolated or model-
derived assumptions such as volatilities and yield and credit spread assumptions.