Organization and Consolidation

12 Months Ended

Oct. 31, 2011

Organization and Consolidation

Organization and Consolidation

Note 1. Organization and Consolidation

Corporate Organization

John Deere Capital Corporation and its subsidiaries (Capital Corporation), and its other consolidated entities are collectively called the Company. John Deere Financial Services, Inc. (JDFS), a wholly-owned finance holding subsidiary of Deere & Company, owns all of the outstanding common stock of John Deere Capital Corporation. The Company conducts business in Australia, New Zealand, the U.S., and in several countries in Asia, Europe and Latin America. Deere & Company and its wholly-owned subsidiaries are collectively called John Deere.

In August 2010, the Company sold John Deere Risk Protection, the crop insurance managing general agency, to JDFS at its carrying value of $.3 million.

Retail notes, revolving charge accounts, wholesale receivables, financing leases and operating loans are collectively called “Receivables.” Receivables and operating leases are collectively called “Receivables and Leases.”

The Company bears substantially all of the credit risk (net of recovery from withholdings from certain John Deere dealers, and customer guarantees from certain John Deere dealers and John Deere Financial multi-use (formerly known as Farm Planä) and PowerPlanâ merchants) associated with its holding of Receivables and Leases. A small portion of the Receivables and Leases held (less than 5 percent) is guaranteed by certain subsidiaries of Deere & Company. The Company also performs substantially all servicing and collection functions. Servicing and collection functions for a small portion of the Receivables and Leases held (less than 5 percent) are provided by John Deere. John Deere is reimbursed for staff and other administrative services at estimated cost, and for credit lines provided to the Company based on utilization of those lines.

Principles of Consolidation

The consolidated financial statements include the financial statements of John Deere Capital Corporation and its subsidiaries. The consolidated financial statements represent primarily the consolidation of all companies in which John Deere Capital Corporation has a controlling interest. Certain variable interest entities (VIEs) are consolidated since the Capital Corporation has both the power to direct the activities that most significantly impact the VIEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. The Capital Corporation records its investment in each unconsolidated affiliated company (generally 20 to 50 percent ownership) at its related equity in the net assets of such affiliate (see Note 24).

Reclassification

Certain items previously reported in specific financial statement captions have been reclassified to conform to the 2011 financial statement presentation. Short-term securitization borrowings have been shown separately from other notes payable on the Consolidated Balance Sheets as a result of the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2009-17 (see Note 3). The investing activities on the Statements of Consolidated Cash Flows have costs and collections related to wholesale receivables presented on a net basis. These receivables have short durations with a high turnover rate. The total cash flows for the investing activities have not changed.

Variable Interest Entities

The Capital Corporation is the primary beneficiary of and consolidates certain VIEs that are special purpose entities (SPEs) related to the securitization of receivables. These restricted retail notes are included in the retail notes securitized shown in the table in Note 6.

During the fourth quarter of 2010, the Capital Corporation began utilizing a legal entity that served as a centralized hedging center. This entity was created by the parent of the Capital Corporation, JDFS, to more efficiently manage counterparty credit risk to the banking sector and to better facilitate collateral posting requirements. The Capital Corporation was the primary beneficiary of and consolidated this entity as a VIE. The Capital Corporation would absorb a majority of the VIE’s expected losses based on the externally and internally matched derivative structure described below. From time to time, the VIE would enter into derivative agreements with external counterparties to more efficiently manage exposures of the Capital Corporation arising in the normal course of business. When the VIE entered into the derivative transactions with the external counterparty, the VIE simultaneously entered into a derivative transaction with the Capital Corporation. Except for collateral provisions, the terms of the derivative transaction between the VIE and Capital Corporation were structured to offset the terms of the transaction between the VIE and the external counterparty. In addition to this derivative structure, the Capital Corporation would also absorb credit losses of the VIE through a loss sharing agreement. This agreement required the Capital Corporation to absorb any credit losses the VIE incurred on derivative transactions the VIE entered into to manage exposures of the Capital Corporation. No additional support of the VIE beyond what was previously contractually required was provided during 2010. The assets of the VIE that were consolidated at October 31, 2010 totaled $7.3 million and consisted primarily of other assets related to derivative agreements transacted with external counterparties. The liabilities of the VIE totaled $7.3 million and consisted primarily of accounts payable and accrued expenses related to derivative agreements transacted between the VIE and the Capital Corporation. Upon consolidation of the VIE the $7.3 million accounts payable and accrued expenses were eliminated against $7.3 million of the Capital Corporation’s other assets. The gains and losses the VIE experienced on external derivative agreements were financed by the related gains and losses on the internally matched derivative agreements transacted with the Capital Corporation. The external counterparties of the VIE did not have recourse to the general credit of the Capital Corporation. Payment obligations of the VIE on derivative transactions with external counterparties were guaranteed by Deere & Company, the parent of JDFS.

During the first quarter of 2011, the VIE created by the Capital Corporation’s parent, JDFS, that serves as a centralized hedging center, was merged into JDFS. As a result, the VIE was deconsolidated with no gains or losses recognized. All of the Capital Corporation’s derivative agreements and transactions outstanding with the VIE at the time of the merger were assumed by JDFS. In conjunction with this merger, the Capital Corporation began utilizing JDFS as a centralized hedging center to execute certain derivative transactions. Further detail regarding the structure of this centralized hedging center can be found in Note 22.