Ford 2010 Annual Report Download - page 90

Notes to the Financial Statements
88 Ford Motor Company | 2010 Annual Report
NOTE 4. FAIR VALUE MEASUREMENTS
Cash equivalents, marketable securities, and derivative financial instruments are presented on our financial statements
at fair value. The fair value of finance receivables and debt, together with the related carrying value, is disclosed in Notes
7 and 19, respectively. Certain other assets and liabilities are measured at fair value on a nonrecurring basis and vary
based on specific circumstances such as impairments.
Fair Value Measurements
In determining fair value, we use various valuation methodologies and prioritize the use of observable inputs. We
assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in
measuring fair value are observable in the market:
• Level 1 – inputs include quoted prices for identical instruments and are the most observable.
• Level 2 – inputs include quoted prices for similar assets and observable inputs such as interest rates, currency
exchange rates and yield curves.
• Level 3 – inputs include data not observable in the market and reflect management's judgments about the
assumptions market participants would use in pricing the asset or liability.
The use of observable and unobservable inputs and their significance in measuring fair value are reflected in our
hierarchy assessment.
Valuation Methodologies
Cash Equivalents and Marketable Securities. Highly liquid investments with a maturity of 90 days or less at date of
purchase are classified as Cash and cash equivalents. Investments in securities with a maturity date greater than
90 days at the date of purchase are classified as Marketable securities. Time deposits, certificates of deposit, and money
market accounts are reported at par value, which approximates fair value. For other investment securities, we generally
measure fair value based on a market approach using prices obtained from pricing services. We review all pricing data
for reasonability and observability of inputs. Pricing methodologies and inputs to valuation models used by the pricing
services depend on the security type (i.e., asset class). Where possible, fair values are generated using market inputs
including quoted prices (the closing price in an exchange market), bid prices (the price at which a dealer stands ready to
purchase) and other market information. For securities that are not actively traded, the pricing services obtain quotes for
similar fixed-income securities or utilize matrix pricing, benchmark curves or other factors to determine fair value. In
certain cases, when observable pricing data is not available, we estimate the fair value of investment securities based on
an income approach using industry standard valuation models and estimates regarding non-performance risk.
Derivative Financial Instruments. Our derivatives are over-the-counter customized derivative transactions and are not
exchange traded. We estimate the fair value of these instruments based on an income approach using industry standard
valuation models. These models project future cash flows and discount the future amounts to a present value using
market-based expectations for interest rates, foreign exchange rates and the contractual terms of the derivative
instruments. The discount rate used is the relevant interbank deposit rate (e.g., LIBOR) plus an adjustment for non-
performance risk. The adjustment reflects the full credit default swap ("CDS") spread applied to a net exposure, by
counterparty, considering the master netting agreements and posted collateral. We use our counterparty's CDS spread
when we are in a net asset position and our own CDS spread when we are in a net liability position.
In certain cases, market data are not available and we develop assumptions (e.g., Black Scholes) which are used to
determine fair value. This includes situations where there is illiquidity for a particular currency or commodity or for longer-
dated instruments. Also, for interest rate swaps and cross-currency interest rate swaps used in securitization
transactions, the notional amount of the swap is reset based on actual payments on the securitized contracts. We use
management judgment to estimate the timing and amount of the swap cash flows based on historical pre-payment
speeds.