Fair Value Measurements

9 Months Ended

Aug. 02, 2020

Fair Value Measurements

Fair Value Measurements

(10)   Fair Value Measurements

Fair value is defined 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. To determine 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.

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant 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 significant unobservable inputs.

The fair values of financial instruments that do not approximate the carrying values were as follows (in millions of dollars):

	August 2, 2020				November 3, 2019				July 28, 2019
	Carrying		Fair		Carrying		Fair		Carrying		Fair
	Value		Value *		Value		Value *		Value		Value *
Receivables financed – net	$	28,076.5	$	28,275.8	$	28,382.5	$	28,396.6	$	28,155.1	$	28,165.9
Retail notes securitized – net		5,432.2		5,543.9		4,338.4		4,361.9		5,146.2		5,154.2
Securitization borrowings		5,324.1		5,380.7		4,277.0		4,301.7		4,994.8		5,017.6
Current maturities of long-term borrowings		4,910.2		4,958.2		5,716.6		5,727.9		6,269.5		6,276.3
Long-term borrowings		20,492.1		21,038.2		21,052.4		21,369.9		20,035.4		20,298.1

*    Fair value measurements above were Level 3 for all Receivables and Level 2 for all borrowings.

Fair values of Receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar Receivables. The fair values of the remaining Receivables approximated the carrying amounts.

Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows 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.

Assets and liabilities measured at fair value as Level 2 measurements on a recurring basis were as follows (in millions of dollars):

	August 2		November 3		July 28
	2020		2019		2019
Marketable securities
International debt securities	$	2.4	$	3.2	$	6.9
Receivables from John Deere
Derivatives:
Interest rate contracts		795.4		331.4		234.4
Cross-currency interest rate contracts		9.1		.5		.9
Other assets
Derivatives:
Interest rate contracts						.1
Foreign exchange contracts		3.7		1.9		4.7
Total assets *	$	810.6	$	337.0	$	247.0
Other payables to John Deere
Derivatives:
Interest rate contracts	$	42.5	$	44.4	$	53.3
Cross-currency interest rate contracts		.1		3.0		2.0
Accounts payable and accrued expenses
Derivatives:
Foreign exchange contracts		6.2		9.9		5.6
Total liabilities	$	48.8	$	57.3	$	60.9

*    Excluded from this table were the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of time deposits and money market funds.

The international debt securities mature within one year or less. At August 2, 2020, the amortized cost basis and fair value of these available-for-sale debt securities were $5.9 million and $2.4 million, respectively.

Fair value, nonrecurring Level 3 measurements from impairments were as follows (in millions of dollars):

	Fair Value *				Losses
					Three Months Ended		Nine Months Ended
	August 2	November 3		July 28	August 2	July 28	August 2		July 28
	2020	2019		2019	2020	2019	2020		2019
Equipment on operating leases – net		$	855.4				$	21.0
Other assets			141.9					9.8
Total		$	997.3				$	30.8

*    See Receivables with specific allowances in Note 4 that were not significant. See Note 6 for impairments on lease residual values.

The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:

Marketable securities – The international debt securities were valued using quoted prices for identical assets in inactive markets.

Derivatives – The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency futures, forwards, and swaps, and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.

Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.

Equipment on operating leases - net – The impairments are based on an income approach (discounted cash flow), using the contractual payments, plus estimates of return rates and equipment sale price at lease maturity. Inputs include historic return rates and realized sales values.

Other assets – The impairments are measured at the fair value of the matured operating lease inventory. The valuations were based on a market approach. The inputs include sales of comparable assets.