John Deere 2014 Annual Report Download - page 36

sheet and are classified as “Financing receivables securitized
- net.” The company recognizes finance income over the lives
of these receivables using the interest method.
Receivables and Allowances
All financing and trade receivables are reported on the balance
sheet at outstanding principal adjusted for any charge-offs,
the allowance for credit losses, and any deferred fees or costs on
originated financing receivables. Allowances for credit losses are
maintained in amounts considered to be appropriate in relation
to the receivables outstanding based on collection experience,
economic conditions and credit risk quality. Receivables are
written-off to the allowance when the account is considered
uncollectible.
Impairment of Long-Lived Assets, Goodwill and
Other Intangible Assets
The company evaluates the carrying value of long-lived assets
(including property and equipment, goodwill and other
intangible assets) when events or circumstances warrant such
a review. Goodwill and intangible assets with indefinite lives
are tested for impairment annually at the end of the third fiscal
quarter each year, or more often if events or circumstances
indicate a reduction in the fair value below the carrying value.
Goodwill is allocated and reviewed for impairment by reporting
units, which consist primarily of the operating segments and
certain other reporting units. The goodwill is allocated to the
reporting unit in which the business that created the goodwill
resides. To test for goodwill impairment, the carrying value
of each reporting unit is compared with its fair value. If the
carrying value of the goodwill or long-lived asset is considered
impaired, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset (see Note 5).
Derivative Financial Instruments
It is the company’s policy that derivative transactions are
executed only to manage exposures arising 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. The company
also has foreign currency exposures at some of its foreign and
domestic operations related to buying, selling and financing in
currencies other than the functional currencies.
All derivatives are recorded at fair value on the balance
sheet. Cash collateral received or paid is not offset against the
derivative fair values on the balance sheet. Each derivative is
designated as either a cash flow hedge, a fair value hedge, or
remains undesignated. Changes in the fair value of derivatives
that are designated and effective as cash flow hedges are recorded
in other comprehensive income and reclassified to the income
statement when the effects of the item being hedged are
recognized in the income statement. Changes in the fair value of
derivatives that are designated and effective as fair value hedges
are recognized currently in net income. These changes are offset
in net income to the extent the hedge was effective by fair value
changes related to the risk being hedged on the hedged item.
Changes in the fair value of undesignated hedges are recognized
currently in the income statement. All ineffective changes in
derivative fair values are recognized currently in net income.
All designated hedges are formally documented as to the
relationship with the hedged item as well as the risk-management
strategy. Both at inception and on an ongoing basis the hedging
instrument is assessed as to its effectiveness. If and when a
derivative is determined not to be highly effective as a hedge,
or the underlying hedged transaction is no longer likely to
occur, or the hedge designation is removed, or the derivative
is terminated, the hedge accounting discussed above is discon-
tinued (see Note 27).
Foreign Currency Translation
The functional currencies for most of the company’s foreign
operations are their respective local currencies. The assets and
liabilities of these operations are translated into U.S. dollars
at the end of the period exchange rates. The revenues and
expenses are translated at weighted-average rates for the period.
The gains or losses from these translations are recorded in
other comprehensive income. Gains or losses from transactions
denominated in a currency other than the functional currency
of the subsidiary involved and foreign exchange forward
contracts are included in net income. The pretax net losses for
foreign exchange in 2014, 2013 and 2012 were $47 million,
$26 million and $96 million, respectively.
3. NEW ACCOUNTING STANDARDS
New Accounting Standards Adopted
In the first quarter of 2014, the company adopted Financial
Accounting Standards Board (FASB) Accounting Standards
Update (ASU) No. 2011-11, Disclosures about Offsetting
Assets and Liabilities, which amends Accounting Standards
Codification (ASC) 210, Balance Sheet. This ASU requires
entities to disclose gross and net information about both
instruments and transactions eligible for offset in the statement
of financial position and those subject to an agreement similar
to a master netting arrangement. This includes derivatives
and other financial securities arrangements. The adoption did
not have a material effect on the company’s consolidated
financial statements.
In the first quarter of 2014, the company adopted
FASB ASU No. 2013-02, Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income, which
amends ASC 220, Comprehensive Income. This ASU
requires the disclosure of amounts reclassified out of accumu-
lated other comprehensive income by component and by net
income line item. The disclosure may be provided either
parenthetically on the face of the financial statements or in the
notes. The company provided the disclosure in the notes.
The adoption did not have a material effect on the company’s
consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08,
Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity, which amends ASC 205,
Presentation of Financial Statements, and ASC 360, Property,
Plant and Equipment. This ASU defines a discontinued
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