John Deere 2013 Annual Report Download - page 25

Estimates used in determining end of lease market values
for equipment on operating leases significantly impact the
amount and timing of depreciation expense. If future market
values for this equipment were to decrease 10 percent from
the company’s present estimates, the total impact would be
to increase the company’s annual depreciation for equipment
on operating leases by approximately $95 million.
FINANCIAL INSTRUMENT MARKET RISK INFORMATION
The company is naturally exposed to various interest rate and
foreign currency risks. As a result, the company enters into
derivative transactions to manage certain of these exposures that
arise in the normal course of business and not for the purpose
of creating speculative positions or trading. The company’s
financial services manage the relationship of the types and
amounts of their funding sources to their receivable and lease
portfolio in an effort to diminish risk due to interest rate and
foreign currency fluctuations, while responding to favorable
financing opportunities. Accordingly, from time to time, these
operations enter into interest rate swap agreements to manage
their interest rate exposure. The company also has foreign
currency exposures at some of its foreign and domestic opera-
tions related to buying, selling and financing in currencies other
than the functional currencies. The company has entered into
agreements related to the management of these foreign currency
transaction risks.
Interest Rate Risk
Quarterly, the company uses a combination of cash flow models
to assess the sensitivity of its financial instruments with interest
rate exposure to changes in market interest rates. The models
calculate the effect of adjusting interest rates as follows.
Cash flows for financing receivables are discounted at the
current prevailing rate for each receivable portfolio. Cash flows
for marketable securities are primarily discounted at the
applicable benchmark yield curve plus market credit spreads.
Cash flows for unsecured borrowings are discounted at the
applicable benchmark yield curve plus market credit spreads for
similarly rated borrowers. Cash flows for securitized borrowings
are discounted at the swap yield curve plus a market credit
spread for similarly rated borrowers. Cash flows for interest rate
swaps are projected and discounted using forward rates from the
swap yield curve at the repricing dates. The net loss in these
financial instruments’ fair values which would be caused by
decreasing the interest rates by 10 percent from the market rates
at October 31, 2013 would have been approximately $14 million.
The net loss from decreasing the interest rates by 10 percent at
October 31, 2012 would have been approximately $33 million.
Foreign Currency Risk
In the equipment operations, the company’s practice is to hedge
significant currency exposures. Worldwide foreign currency
exposures are reviewed quarterly. Based on the equipment
operations’ anticipated and committed foreign currency cash
inflows, outflows and hedging policy for the next twelve
months, the company estimates that a hypothetical 10 percent
weakening of the U.S. dollar relative to other currencies
through 2014 would decrease the 2014 expected net cash
inflows by $10 million. At October 31, 2012, a hypothetical
10 percent weakening of the U.S. dollar under similar assump-
tions and calculations indicated a potential $68 million adverse
effect on the 2013 net cash inflows.
In the financial services operations, the company’s
policy is to hedge the foreign currency risk if the currency of
the borrowings does not match the currency of the receivable
portfolio. As a result, a hypothetical 10 percent adverse change
in the value of the U.S. dollar relative to all other foreign
currencies would not have a material effect on the financial
services cash flows.
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