John Deere 2009 Annual Report Download - page 45

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26. FINANCIAL INSTRUMENTS
The fair values of fi nancial instruments that do not approximate
the carrying values in the fi nancial statements at October 31 in
millions of dollars follow:
2009 2008
______________ ______________
Carrying Fair Carrying Fair
Value Value Value Value
Financing receivables ...................... $ 15,255 $ 15,434 $ 16,017 $ 15,588
Restricted fi nancing receivables ....... $ 3,108 $ 3,146 $ 1,645 $ 1,640
Short-term secured borrowings*....... $ 3,132 $ 3,162 $ 1,682 $ 1,648
Long-term borrowings:
Equipment Operations ................. $ 3,073 $ 3,303 $ 1,992 $ 1,895
Financial Services ....................... 14,319 14,818 11,907 11,112
Total ....................................... $ 17,392 $ 18,121 $ 13,899 $ 13,007
* See Note 18.
Fair values of the long-term fi nancing receivables were
based on the discounted values of their related cash fl ows at
current market interest rates. The fair values of the remaining
fi nancing receivables approximated the carrying amounts.
Fair values of long-term borrowings and short-term secured
borrowings were based on the discounted values of their related
cash fl ows at current market interest rates. Certain long-term
borrowings have been swapped to current variable interest rates.
The carrying values of these long-term borrowings include
adjustments related to fair value hedges.
All derivative instruments are recorded at fair values and
classifi ed as either other assets or accounts payable and accrued
expenses on the balance sheet. The total amounts of the
company’s derivatives at October 31, 2009 and 2008 that were
recorded in other assets were $740 million and $417 million,
respectively. The total amounts recorded in accounts payable
and accrued expenses for the same periods were $154 million
and $129 million, respectively, (see Note 27).
Assets and liabilities measured at October 31 at fair value
in the fi nancial statements on a recurring basis in millions of
dollars follow:
2009
______________________
Total Level 1 Level 2
Marketable securities
U.S. government debt securities .......... $ 52 $ 32 $ 20
Municipal debt securities ..................... 24 24
Corporate debt securities ..................... 43 43
Residential mortgage-backed
securities* ...................................... 73 73
Total marketable securities ...................... 192 32 160
Other assets
Derivatives:
Interest rate contracts ......................... 550 550
Foreign exchange contracts ................. 17 17
Cross-currency interest rate contracts .. 173 173
Total assets ................................................. $ 932 $ 32 $ 900
* Primarily issued by U.S. government sponsored enterprises.
(continued)
2009
______________________
Total Level 1 Level 2
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts ......................... $ 121 $ 121
Foreign exchange contracts ................. 32 32
Cross-currency interest rate contracts .. 1 1
Total liabilities .............................................. $ 154 $ 154
Financial assets measured at fair value at October 31 on a
nonrecurring basis and the losses during the year in millions of
dollars were as follows:
2009
_______________
Level 3 Losses
Financing receivables ................................................... $ 23 $ 21
Trade receivables ......................................................... $ 1
Level 1 measurements consist of quoted prices in active
markets for identical assets or liabilities. Level 2 measurements
include signifi cant other observable inputs such as quoted prices
for similar assets or liabilities in active markets; identical assets or
liabilities in inactive markets; observable inputs such as interest
rates and yield curves; and other market-corroborated inputs.
Level 3 measurements include signifi cant unobservable inputs.
Fair value is defi ned as the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
In determining fair value, the company uses various methods
including market and income approaches. The company utilizes
valuation models and techniques that maximize the use of
observable inputs. The models are industry-standard models that
consider various assumptions including time values and yield
curves as well as other economic measures. These valuation
techniques are consistently applied.
The following is a description of the valuation
methodologies the company uses to measure fi nancial
instruments at fair value:
Marketable Securities – The portfolio of investments is
primarily valued on a matrix pricing model in which all
signifi cant inputs are observable or can be derived from or
corroborated by observable market data such as interest rates,
yield curves, volatilities, credit risk and prepayment speeds.
Derivatives – The company’s derivative fi nancial instru-
ments consist of interest rate swaps and caps, foreign currency
forwards and cross-currency interest rate swaps. The portfolio is
valued based on a discounted cash fl ow approach using market
observable inputs, including swap curves and both forward and
spot exchange rates for currencies.
Financing and Trade Receivables – Receivables with
specifi c reserves established due to payment defaults are valued
based on a discounted cash fl ow approach, appraisal values or
realizable values for the underlying collateral. The related credit
allowances represent cumulative adjustments to measure those
specifi c receivables at fair value.