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Fair value disclosures
12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]  
Fair value disclosures
Fair value disclosures
 
A.
Fair value measurements
 
The guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques.  Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.  In accordance with this guidance, fair value measurements are classified under the following hierarchy:
 
Level 1 Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
 
When available, we use quoted market prices to determine fair value, and we classify such measurements within Level 1.  In some cases where market prices are not available, we make use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2.  If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates.  These measurements are classified within Level 3.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation.  A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.
 
Fair value measurement includes the consideration of nonperformance risk.  Nonperformance risk refers to the risk that an obligation (either by a counterparty or Caterpillar) will not be fulfilled.  For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price.  For certain other financial assets and liabilities (certain Level 2 and Level 3), our fair value calculations have been adjusted accordingly.
 
Available-for-sale securities
Our available-for-sale securities, primarily at Cat Insurance, include a mix of equity and debt instruments (see Note 11 for additional information).  Fair values for our U.S. treasury bonds and equity securities are based upon valuations for identical instruments in active markets.  Fair values for other government bonds, corporate bonds and mortgage-backed debt securities are based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.
 
Derivative financial instruments
The fair value of interest rate swap derivatives is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows.  The fair value of foreign currency and commodity forward, option and cross currency contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.
 
Guarantees
The fair value of guarantees is based on our estimate of the premium a market participant would require to issue the same guarantee in a stand-alone arms-length transaction with an unrelated party. If quoted or observable market prices are not available, fair value is based upon internally developed models that utilize current market-based assumptions.
 
Assets and liabilities measured on a recurring basis at fair value, primarily related to Financial Products, included in Statement 3 as of December 31, 2012, 2011 and 2010 are summarized below:

 
 
December 31, 2012
(Millions of dollars)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets / Liabilities,
at Fair Value
Assets
 
 

 
 

 
 

 
 

Available-for-sale securities
 
 

 
 

 
 

 
 

Government debt
 
 

 
 

 
 

 
 

U.S. treasury bonds
 
$
10

 
$

 
$

 
$
10

Other U.S. and non-U.S. government bonds
 

 
146

 

 
146

 
 
 
 
 
 
 
 
 
Corporate bonds
 
 

 
 
 
 

 
 

Corporate bonds
 

 
664

 

 
664

Asset-backed securities
 

 
96

 

 
96

 
 
 
 
 
 
 
 
 
Mortgage-backed debt securities
 
 

 
 
 
 

 
 

U.S. governmental agency
 

 
299

 

 
299

Residential
 

 
25

 

 
25

Commercial
 

 
127

 

 
127

 
 
 
 
 
 
 
 
 
Equity securities
 
 

 
 

 
 

 
 

Large capitalization value
 
185

 

 

 
185

Smaller company growth
 
34

 

 

 
34

Total available-for-sale securities
 
229

 
1,357

 

 
1,586

 
 
 
 
 
 
 
 
 
Derivative financial instruments, net
 

 
154

 

 
154

Total Assets
 
$
229

 
$
1,511

 
$

 
$
1,740

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Guarantees
 
$

 
$

 
$
14

 
$
14

Total Liabilities
 
$

 
$

 
$
14

 
$
14

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
(Millions of dollars)
 
Level 1
 
Level 2
 
Level 3
 
Total
 Assets / Liabilities,
 at Fair Value
Assets
 
 

 
 

 
 

 
 

Available-for-sale securities
 
 

 
 

 
 

 
 

Government debt
 
 

 
 

 
 

 
 

U.S. treasury bonds
 
$
10

 
$

 
$

 
$
10

Other U.S. and non-U.S. government bonds
 

 
92

 

 
92

 
 
 
 
 
 
 
 
 
Corporate bonds
 
 

 
 

 
 

 
 

Corporate bonds
 

 
572

 

 
572

Asset-backed securities
 

 
111

 

 
111

 
 
 
 
 
 
 
 
 
Mortgage-backed debt securities
 
 

 
 

 
 

 
 

U.S. governmental agency
 

 
310

 

 
310

Residential
 

 
30

 

 
30

Commercial
 

 
145

 

 
145

 
 
 
 
 
 
 
 
 
Equity securities
 
 

 
 

 
 

 
 

Large capitalization value
 
148

 

 

 
148

Smaller company growth
 
29

 

 

 
29

Total available-for-sale securities
 
187

 
1,260

 

 
1,447

 
 
 
 
 
 
 
 
 
Derivative financial instruments, net
 

 
145

 

 
145

Total Assets
 
$
187

 
$
1,405

 
$

 
$
1,592

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Guarantees
 
$

 
$

 
$
7

 
$
7

Total Liabilities
 
$

 
$

 
$
7

 
$
7

 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
(Millions of dollars)
 
Level 1
 
Level 2
 
Level 3
 
Total
 Assets / Liabilities,
 at Fair Value
Assets
 
 

 
 

 
 

 
 

Available-for-sale securities
 
 

 
 

 
 

 
 

Government debt
 
 

 
 

 
 

 
 

U.S. treasury bonds
 
$
12

 
$

 
$

 
$
12

Other U.S. and non-U.S. government bonds
 

 
77

 

 
77

 
 
 
 
 
 
 
 
 
Corporate bonds
 
 

 
 

 
 

 
 

Corporate bonds
 

 
511

 

 
511

Asset-backed securities
 

 
136

 

 
136

 
 
 
 
 
 
 
 
 
Mortgage-backed debt securities
 
 

 
 

 
 

 
 

U.S. governmental agency
 

 
273

 

 
273

Residential
 

 
40

 

 
40

Commercial
 

 
168

 

 
168

 
 
 
 
 
 
 
 
 
Equity securities
 
 

 
 

 
 

 
 

Large capitalization value
 
122

 

 

 
122

Smaller company growth
 
31

 

 

 
31

Total available-for-sale securities
 
165

 
1,205

 

 
1,370

 
 
 
 
 
 
 
 
 
Derivative financial instruments, net
 

 
267

 

 
267

Total Assets
 
$
165

 
$
1,472

 
$

 
$
1,637

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Guarantees
 
$

 
$

 
$
10

 
$
10

Total Liabilities
 
$

 
$

 
$
10

 
$
10

 
 
 
 
 
 
 
 
 

 
Below are roll-forwards of liabilities measured at fair value using Level 3 inputs for the years ended December 31, 2012, 2011 and 2010.  These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions of a marketplace participant.
 
(Millions of dollars)
 
Guarantees
Balance at December 31, 2009
 
$
17

Valuation adjustment
 
(6
)
Issuance of guarantees
 
7

Expiration of guarantees
 
(8
)
Balance at December 31, 2010
 
$
10

Issuance of guarantees
 
4

Expiration of guarantees
 
(7
)
Balance at December 31, 2011
 
$
7

Acquisitions
 
6

Issuance of guarantees
 
7

Expiration of guarantees
 
(6
)
Balance at December 31, 2012
 
$
14

 
 
 

 
There were no unrealized losses on guarantees recognized in earnings for the years ended December 31, 2012, 2011 or 2010 related to liabilities still held at December 31, 2012, 2011 or 2010, respectively.
 
In addition to the amounts above, Cat Financial impaired loans are subject to measurement at fair value on a nonrecurring basis. A loan is considered impaired when management determines that collection of contractual amounts due is not probable.  In these cases, an allowance for credit losses may be established based primarily on the fair value of associated collateral.  As the collateral’s fair value is based on observable market prices and/or current appraised values, the impaired loans are classified as Level 2 measurements. Cat Financial had impaired loans with a fair value of $161 million, $141 million and $171 million for the years ended December 31, 2012, 2011 and 2010, respectively.  
 
B.
Fair values of financial instruments
 
In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair value measurements section above, we used the following methods and assumptions to estimate the fair value of our financial instruments:
 
Cash and short-term investments
Carrying amount approximated fair value.
 
Restricted cash and short-term investments
Carrying amount approximated fair value.  Restricted cash and short-term investments are included in Prepaid expenses and other current assets in Statement 3.
 
Finance receivables
Fair value was estimated by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
 
Wholesale inventory receivables
Fair value was estimated by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
 
Short-term borrowings
Carrying amount approximated fair value.
 
Long-term debt
Fair value for fixed and floating rate debt was estimated based on quoted market prices.
 
Please refer to the table below for the fair values of our financial instruments.
 
TABLE III—Fair Values of Financial Instruments
 
 
2012
 
2011
 
2010
 
 
 
 
(Millions of dollars)
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Fair Value Levels
 
Reference
Assets at December 31,
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Cash and short-term investments
 
$
5,490

 
$
5,490

 
$
3,057

 
$
3,057

 
$
3,592

 
$
3,592

 
1
 
Statement 3
Restricted cash and short-term investments
 
53

 
53

 
87

 
87

 
91

 
91

 
1
 
Statement 3
Available-for-sale securities
 
1,586

 
1,586

 
1,447

 
1,447

 
1,370

 
1,370

 
1 & 2
 
Notes 11 & 18
Finance receivables–net (excluding finance leases 1)
 
15,404

 
15,359

 
12,689

 
12,516

 
12,568

 
12,480

 
2
 
Note 6
Wholesale inventory receivables–net (excluding finance leases 1)
 
1,674

 
1,609

 
1,591

 
1,505

 
1,062

 
1,017

 
2
 
Note 6
Foreign currency contracts–net
 

 

 

 

 
63

 
63

 
2
 
Notes 3 & 18
Interest rate swaps–net
 
219

 
219

 
241

 
241

 
187

 
187

 
2
 
Notes 3 & 18
Commodity contracts–net
 
1

 
1

 

 

 
17

 
17

 
2
 
Notes 3 & 18
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities at December 31,
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Short-term borrowings
 
5,287

 
5,287

 
3,988

 
3,988

 
4,056

 
4,056

 
1
 
Note 13
Long-term debt (including amounts due within one year):
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Machinery and Power Systems
 
9,779

 
11,969

 
8,973

 
10,737

 
5,000

 
5,968

 
2
 
Note 14
Financial Products
 
25,077

 
26,063

 
21,631

 
22,674

 
19,362

 
20,364

 
2
 
Note 14
Foreign currency contracts–net
 
66

 
66

 
89

 
89

 

 

 
2
 
Notes 3 & 18
Commodity contracts–net
 

 

 
7

 
7

 

 

 
2
 
Notes 3 & 18
Guarantees
 
14

 
14

 
7

 
7

 
10

 
10

 
3
 
Note 20
 
1 
Total excluded items have a net carrying value at December 31, 2012, 2011 and 2010 of $7,959 million, $7,324 million and $7,292 million, respectively.