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FAIR VALUE MEASUREMENTS
9 Months Ended
Aug. 02, 2020
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

(17)  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 in millions of dollars follow:

 

August 2, 2020

November 3, 2019

July 28, 2019

 

Carrying
Value

Fair
Value *

Carrying
Value

Fair
Value *

Carrying
Value

Fair
Value *

 

Financing receivables – net:

   

   

   

Equipment operations

$

111

$

102

$

65

$

61

$

100

$

93

Financial services

27,703

27,929

29,130

29,106

   

26,949

26,921

Total

$

27,814

$

28,031

$

29,195

$

29,167

$

27,049

$

27,014

Financing receivables securitized – net:

 

Equipment operations

$

37

$

34

$

44

$

43

$

54

$

52

Financial services

5,432

5,544

4,339

4,362

5,146

5,154

Total

$

5,469

$

5,578

$

4,383

$

4,405

$

5,200

$

5,206

Short-term
securitization borrowings:

 

Equipment operations

$

37

$

37

$

44

$

45

$

53

$

54

Financial services

5,324

5,381

4,277

4,302

4,995

5,017

Total

$

5,361

$

5,418

$

4,321

$

4,347

$

5,048

$

5,071

Long-term borrowings due within one year: **

Equipment operations

$

507

$

504

$

642

 

$

645

$

1,009

$

1,013

Financial services

6,114

6,168

 

6,786

 

6,788

 

6,922

6,914

Total

$

6,621

$

6,672

$

7,428

$

7,433

$

7,931

$

7,927

Long-term borrowings: **

Equipment operations

$

10,184

$

12,163

$

5,415

 

$

6,138

$

5,364

$

6,017

Financial services

23,820

24,464

 

24,814

 

25,122

 

23,878

24,143

Total

$

34,004

$

36,627

$

30,229

$

31,260

$

29,242

$

30,160

*Fair value measurements above were Level 3 for all financing receivables, Level 3 for equipment operations short-term securitization borrowings, and Level 2 for all other borrowings.

** Carrying values exclude finance lease liabilities that are presented as borrowings beginning in 2020 (see Notes 3 and 15).

Fair values of the 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*:

 

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Level 1:

Marketable securities

International equity securities ***

$

2

Equity fund ***

68

$

59

$

59

U.S. government debt securities

50

 

50

 

49

Total Level 1 marketable securities

120

109

108

Level 2:

Marketable securities

U.S. government debt securities

105

81

73

Municipal debt securities

64

 

60

 

57

Corporate debt securities

185

 

165

 

156

International debt securities

2

5

9

Mortgage-backed securities **

159

 

160

 

158

Total Level 2 marketable securities

515

 

471

 

453

Other assets

Derivatives:

Interest rate contracts

895

 

363

 

265

Foreign exchange contracts

57

 

20

 

53

Cross-currency interest rate contracts

9

 

1

 

2

Total Level 2 other assets

 

961

384

320

Accounts payable and accrued expenses

Derivatives:

Interest rate contracts

 

115

65

99

Foreign exchange contracts

55

 

71

 

45

Cross-currency interest rate contracts

3

2

Total Level 2 accounts payable and accrued expenses

 

170

139

146

Level 3:

Marketable securities

International debt securities

 

5

1

4

*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 money market funds and time deposits.

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

***During the third quarter of 2020 and 2019, net unrealized gains on equity securities of $10 million and $1 million, respectively, were recorded in “Other income.” During the first nine months of 2020 and 2019, net unrealized gains on equity securities were $8 million and $7 million, respectively.

The contractual maturities of debt securities at August 2, 2020 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

Fair

Cost

Value

Due in one year or less

 

$

27

$

24

Due after one through five years

89

95

Due after five through 10 years

102

114

Due after 10 years

160

178

Mortgage-backed securities

150

159

Debt securities

 

$

528

 

$

570

Fair value, recurring Level 3 measurements from available-for-sale marketable securities in millions of dollars follow:

    

Three Months Ended 

Nine Months Ended 

August 2

July 28

August 2

July 28

2020

2019

2020

2019

Beginning of period balance

 

$

1

$

4

$

1

$

8

Purchases

5

5

Principal payments

(1)

(1)

(5)

Other

1

End of period balance

$

5

 

$

4

$

5

$

4

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

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

 

Other receivables

$

1

$

2

$

2

Equipment on operating leases – net

$

855

$

22

Property and equipment – net

$

8

$

5

$

67

Investments in unconsolidated affiliates

$

20

Other intangible assets – net

$

2

$

2

Other assets

$

19

$

142

$

24

$

34

*  See financing receivables with specific allowances in Note 11. The fair value measurement for the investment in unconsolidated affiliates was Level 1. The other fair value measurements were Level 3.

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 SecuritiesThe portfolio of investments, except for the Level 3 measurement international debt securities, 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. Funds are primarily valued using the fund’s net asset value, based on the fair value of the underlying securities. The Level 3 measurement international debt securities are primarily valued using an income approach based on discounted cash flows using yield curves derived from limited, observable market data.

DerivativesThe 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.

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.

Other Receivables – The impairment was based on the expected realization of value-added tax receivables related to a closed factory operation (see Note 20).

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 (see Note 20).

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 (see Note 20).

Investment in Unconsolidated Affiliates – Other than temporary impairments for investments measured as the difference between the implied fair value and the carrying value of the investments. The fair value for publicly traded entities is the share price multiplied by the shares owned (see Note 20).

Other Intangible Assets – Net – The impairment was measured at the remaining net book value of customer relationships related to a closed factory operation (see Note 20).

Other Assets – The impairments of matured operating lease inventory are measured at the fair value of that inventory. The valuations were based on a market approach. The inputs include sales of comparable assets (see Note 20). The impairment of the German lawn mower business recorded in other assets was measured at the realizable value. Fair value was based on the probable sale price. The inputs included estimates of the final sale price (see Note 20).