FAIR VALUE MEASUREMENTS

3 Months Ended

Jan. 31, 2021

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:

	January 31, 2021				November 1, 2020				February 2, 2020
	Carrying Value		Fair Value *		Carrying Value		Fair Value *		Carrying Value		Fair Value *
Financing receivables – net:
Equipment operations	$	103	$	100	$	105	$	103	$	130	$	123
Financial services		29,335		29,591		29,645		29,838		27,164		27,177
Total	$	29,438	$	29,691	$	29,750	$	29,941	$	27,294	$	27,300
Financing receivables securitized – net:
Equipment operations	$	18	$	17	$	26	$	26	$	42	$	40
Financial services		3,913		4,002		4,677		4,773		4,436		4,464
Total	$	3,931	$	4,019	$	4,703	$	4,799	$	4,478	$	4,504
Short-term securitization borrowings:
Equipment operations	$	17	$	17	$	26	$	26	$	42	$	42
Financial services		3,952		3,986		4,656		4,698		4,374		4,403
Total	$	3,969	$	4,003	$	4,682	$	4,724	$	4,416	$	4,445
Long-term borrowings due within one year: **
Equipment operations	$	191	$	198	$	79	$	78	$	567	$	567
Financial services		7,341		7,424		6,870		6,936		6,638		6,650
Total	$	7,532	$	7,622	$	6,949	$	7,014	$	7,205	$	7,217
Long-term borrowings: **
Equipment operations	$	10,103	$	11,813	$	10,085	$	11,837	$	5,544	$	6,403
Financial services		22,633		23,219		22,610		23,170		24,908		25,299
Total	$	32,736	$	35,032	$	32,695	$	35,007	$	30,452	$	31,702

* 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.

** Excludes finance lease liabilities (see Note 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*:

	January 31		November 1		February 2
	2021		2020		2020
Level 1:
Marketable securities
International equity securities	$	2	$	2	$	3
U.S. equity fund		70		62		62
U.S. government debt securities		60		55		52
Total Level 1 marketable securities		132		119		117
Level 2:
Marketable securities
U.S. government debt securities		119		113		87
Municipal debt securities		71		68		62
Corporate debt securities		197		188		173
International debt securities		8		2		4
Mortgage-backed securities**		140		147		165
Total Level 2 marketable securities		535		518		491
Other assets
Derivatives:
Interest rate contracts		568		669		443
Foreign exchange contracts		34		48		37
Cross-currency interest rate contracts		3		8		1
Total Level 2 other assets		605		725		481
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts		97		88		57
Foreign exchange contracts		76		26		40
Cross-currency interest rate contracts		2		1		4
Total Level 2 accounts payable and accrued expenses		175		115		101
Level 3:
Marketable securities
International debt securities				4		1

* 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.

The contractual maturities of debt securities at January 31, 2021 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	$	21	$	22
Due after one through five years		89		94
Due after five through 10 years		117		124
Due after 10 years		203		215
Mortgage-backed securities		134		140
Debt securities	$	564	$	595

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

	Three Months Ended
	January 31		February 2
	2021		2020
Beginning of period balance	$	4	$	1
Principal payments
Other		(4)
End of period balance			$	1

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

	Fair Value *					Losses
						Three Months Ended
	January 31		November 1		February 2	January 31		February 2
	2021		2020		2020	2021		2020
Other receivables			$	1
Equipment on operating leases – net			$	371
Property and equipment – net	$	41	$	135		$	44
Investments in unconsolidated affiliates			$	19
Other assets	$	1	$	59		$	6

*  Financing receivables with specific allowances were not significant.

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, 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.

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.

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.

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

Property and Equipment - Net – The impairments are measured at the lower of the carrying amount, or fair value. The valuations were based on cost and market approaches. The inputs include replacement cost estimates adjusted for physical deterioration and economic obsolescence or quoted prices when available.

Investment in Unconsolidated Affiliates – Other than temporary impairments for investments are measured as the difference between the implied fair value and the carrying value of the investments or the estimated realization amount.

Other Assets – The impairments were measured at the fair value of the matured operating lease inventory or the right of use operating lease asset. The inputs for matured operating lease inventory include sales of comparable assets.