FAIR VALUE MEASUREMENTS

9 Months Ended

Jul. 31, 2013

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

(15) The fair values of financial instruments that do not approximate the carrying values in millions of dollars follow:

	July 31, 2013				October 31, 2012				July 31, 2012
	Carrying Value		Fair Value *		Carrying Value		Fair Value *		Carrying Value		Fair Value *
Financing receivables - net	$	24,183	$	24,143	$	22,159	$	22,244	$	20,685	$	20,707
Financing receivables securitized - net	3,891		3,868		3,618		3,615		3,164		3,165
Short-term securitization borrowings	3,780		3,778		3,575		3,584		3,028		3,038
Long-term borrowings due within one year:
Equipment operations	$	787	$	814	$	195	$	194	$	322	$	317
Financial services	4,320		4,370		4,790		4,871		4,491		4,552
Total	$	5,107	$	5,184	$	4,985	$	5,065	$	4,813	$	4,869
Long-term borrowings:
Equipment operations	$	4,892	$	5,162	$	5,445	$	6,237	$	5,357	$	6,288
Financial services	16,807		16,980		17,008		17,438		15,800		16,110
Total	$	21,699	$	22,142	$	22,453	$	23,675	$	21,157	$	22,398

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

Fair values of financing 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 financing receivables.  The fair values of the remaining financing 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 included adjustments related to fair value hedges.

Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow:

	July 31		October 31		July 31
	2013*		2012*		2012*
Marketable securities
Equity fund	$	13
U.S. government debt securities	1,408		$	1,200	$	1,288
Municipal debt securities	35		38		37
Corporate debt securities	130		110		105
Mortgage-backed securities **	120		122		116
Total marketable securities	1,706		1,470		1,546
Other assets
Derivatives:
Interest rate contracts	365		609		653
Foreign exchange contracts	36		17		10
Cross-currency interest rate contracts	12		11		23
Total assets ***	$	2,119	$	2,107	$	2,232
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts	$	155	$	72	$	70
Foreign exchange contracts	36		18		52
Cross-currency interest rate contracts	40		59		87
Total liabilities	$	231	$	149	$	209

* All measurements above were Level 2 measurements except for Level 1 measurements of U.S. government debt securities of $1,347 million, $1,139 million and $1,241 million at July 31, 2013, October 31, 2012 and July 31, 2012, respectively, and the equity fund of $13 million at July 31, 2013.  There were no transfers between Level 1 and Level 2 during the first nine months of 2013 or 2012.

** Primarily issued by U.S. government sponsored enterprises.

*** Excluded from this table are the Company’s cash equivalents, which were carried at cost that approximates fair value.  The cash equivalents consist primarily of money market funds that were Level 1 measurements.

The contractual maturities of debt securities at July 31, 2013 in millions of dollars are shown below.  Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.

	Amortized Cost		Fair Value
Due in one year or less	$	811	$	811
Due after one through five years	577		582
Due after five through 10 years	114		114
Due after 10 years	65		66
Mortgage-backed securities	121		120
Debt securities	$	1,688	$	1,693

Fair value, nonrecurring, Level 3 measurements from impairments in millions of dollars follow:

	Fair Value *				Losses
					Nine Months Ended
	July 31		October 31	July 31	July 31
	2013		2012	2012	2013		2012
Property and equipment - net	$	39			$	43
Other intangible assets - net	$	2			$	7

* See financing receivables with specific allowances in Note 10.  Losses were not significant.

The fair value measurements and impairment losses shown above were a result of changes in circumstances that indicate it was probable the future cash flows would not cover the carrying amounts of certain long-lived assets.  The total losses of $50 million pretax, or $44 million after-tax, were recognized in the third quarter and first nine months of 2013.  The impairments were associated with the Company’s John Deere Water operations, which are included in the agriculture and turf operating segment, and were due to a decline in the forecasted financial performance.  The loss for property and equipment was included in cost of sales and the loss for other intangibles was included in selling, administrative and general expenses.

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.

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.  In determining 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.

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 portfolio of investments is primarily valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk and prepayment speeds.

Derivatives — The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency 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.

Financing 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.

Property and Equipment - Net — The impairments are measured at the lower of the carrying amount, or fair value.  The valuations were based on a cost approach.  The inputs include replacement cost estimates adjusted for physical deterioration and economic obsolescence.

Other Intangible Assets - Net — The impairments are measured at the lower of the carrying amount, or fair value.  The valuations were based on an income approach (discounted cash flows).  The inputs include estimates of future cash flows.