FAIR VALUE MEASUREMENTS

Cash equivalents, marketable securities, and derivative financial instruments are presented on our financial statements at fair value. The fair value of finance receivables and debt is disclosed in Notes 7 and 18, respectively. Certain other assets and liabilities are measured at fair value on a nonrecurring basis, such as impairments, and vary based on specific circumstances.

Fair Value Measurements

In determining fair value, we use various valuation methodologies and prioritize the use of observable inputs. The use of observable and unobservable inputs and their significance in measuring fair value are reflected in our hierarchy assessment.


•	Level 1 — inputs include quoted prices for identical instruments and are the most observable


•	Level 2 — inputs include quoted prices for similar instruments and observable inputs such as interest rates, currency exchange rates and yield curves


•	Level 3 — inputs include data not observable in the market and reflect management judgment about the assumptions market participants would use in pricing the instruments

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)

Valuation Methodologies

Cash and Cash Equivalents. Included in Cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of changes in value due to interest rate, market price, or penalty on withdrawal. A debt security is classified as a cash equivalent if it meets these criteria and if it has a remaining time to maturity of 90 days or less from the date of acquisition. Amounts on deposit and available upon demand, or negotiated to provide for daily liquidity without penalty, are classified as Cash and cash equivalents. These include $1.8 billion of demand deposits with financial institutions which were classified as Marketable securities prior to 2011, and this amount is reported in Sales and maturities of securities in the 2011 consolidated statement of cash flows. Time deposits, certificates of deposit, and money market accounts that meet the above criteria are classified as Cash and cash equivalents, reported at par value, and excluded from the tables below.

Marketable Securities. Investments in securities with a maturity date greater than 90 days at the date of purchase and other securities for which there is a more than insignificant risk of changes in value because of interest rate, market price, or penalty on withdrawal are classified as Marketable securities. For marketable securities, we generally measure fair value using prices obtained from pricing services. Pricing methodologies and inputs to valuation models used by the pricing services depend on the security type (i.e., asset class). Where possible, fair values are generated using market inputs including quoted prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market information. For securities that are not actively traded, the pricing services obtain quotes for similar fixed-income securities or utilize broker quotes, matrix pricing, benchmark curves, or other factors to determine fair value. In certain cases, when observable pricing data are not available, we estimate the fair value of investment securities based on an income approach using industry standard valuation models and estimates regarding non-performance risk.

Derivative Financial Instruments. Our derivatives are over-the-counter customized derivative transactions and are not exchange traded. We estimate the fair value of these instruments based on an income approach using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, foreign exchange rates, and the contractual terms of the derivative instruments. The discount rate used is the relevant interbank deposit rate (e.g., LIBOR) plus an adjustment for non-performance risk. The adjustment reflects the full credit default swap ("CDS") spread applied to a net exposure, by counterparty, considering the master netting agreements and posted collateral. We use our counterparty's CDS spread when we are in a net asset position and our own CDS spread when we are in a net liability position. In certain cases, market data are not available and we develop assumptions, including the use of broker quotes, or use models (e.g., Black Scholes) to determine fair value. This includes situations where there is illiquidity for a particular currency or commodity or for longer-dated instruments.

Ford Credit's two Ford Upgrade Exchange Linked ("FUEL") notes securitization transactions have derivative features. These features include a mandatory exchange to Ford Credit unsecured notes when Ford Credit's senior unsecured debt receives two investment grade credit ratings among Fitch, Moody's and S&P, and a make-whole provision. We estimated the fair value of these features by comparing the market value of the FUEL notes to the value of a hypothetical debt instrument without these features.

Finance Receivables. We estimate the fair value of finance receivables based on an income approach using internal valuation models. These models project future cash flows of financing contracts based on scheduled contract payments (including principal and interest). The projected cash flows are discounted to a present value based on assumptions regarding credit losses, pre-payment speed, and the discount rate. Our assumptions regarding pre-payment speed and credit losses are based on historical performance.

Debt. We estimate the fair value of debt using quoted market prices or current market rates for similar debt with approximately the same remaining maturities, where possible. Where market prices or current market rates are not available, we estimate fair value using discounted cash flow models. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, our own credit risk and the contractual terms of the debt instruments. For certain short term debt issuances with an original maturity date of one year or less, we assume that book value is a reasonable approximation of the debt's fair value. For asset-backed debt issued in securitization transactions, the principal payments are based on projected payments for specific assets securing the underlying debt considering historical pre-payment speeds.

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)

Input Hierarchy of Items Measured at Fair Value on a Recurring Basis

The following tables categorize the fair values of items measured at fair value on a recurring basis on our balance sheet at December 31 (in millions):



	2011
	Level 1 (a)		Level 2 (a)		Level 3		Total
Automotive Sector
Assets
Cash equivalents – financial instruments (b)
U.S. government	$	—	$	—	$	—	$	—
U.S. government-sponsored enterprises	—		319		—		319
Non-U.S. government	—		168		—		168
Non-U.S. government agencies (c)	—		820		—		820
Corporate debt	—		2		—		2
Total cash equivalents – financial instruments	—		1,309		—		1,309
Marketable securities (d)
U.S. government	2,960		—		—		2,960
U.S. government-sponsored enterprises	—		4,852		—		4,852
Non-U.S. government agencies (c)	—		4,558		—		4,558
Corporate debt	—		1,631		—		1,631
Mortgage-backed and other asset-backed	—		38		—		38
Equities	129		—		—		129
Non-U.S. government	—		598		—		598
Other liquid investments (e)	—		17		—		17
Total marketable securities	3,089		11,694		—		14,783
Derivative financial instruments
Foreign exchange contracts	—		198		14		212
Commodity contracts	—		1		1		2
Other – warrants	—		—		4		4
Total derivative financial instruments (f)	—		199		19		218
Total assets at fair value	$	3,089	$	13,202	$	19	$	16,310
Liabilities
Derivative financial instruments
Foreign exchange contracts	$	—	$	442	$	6	$	448
Commodity contracts	—		289		83		372
Total derivative financial instruments (f)	—		731		89		820
Total liabilities at fair value	$	—	$	731	$	89	$	820

__________


(a)	There were no transfers between Level 1 and 2 during the year.


(b)	"Cash equivalents - financial instruments" in this table excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value totaling $4.6 billion as of December 31, 2011 for the Automotive sector. In addition to these cash equivalents, our Automotive sector also had cash on hand totaling $2.1 billion as of December 31, 2011.


(c)	Includes notes issued by Non-U.S. government agencies, as well as notes issued by supranational institutions.


(d)	Excludes an investment in Ford Credit debt securities held by the Automotive sector with a carrying value of $201 million and an estimated fair value of $201 million as of December 31, 2011; see Note 18 for additional detail.


(e)	"Other liquid investments" in this table includes certificates of deposit and time deposits subject to changes in value.


(f)	See Note 25 for additional information regarding derivative financial instruments.

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)



	2011
	Level 1 (a)		Level 2 (a)		Level 3		Total
Financial Services Sector
Assets
Cash equivalents – financial instruments (b)
U.S. government	$	1	$	—	$	—	$	1
U.S. government-sponsored enterprises	—		75		—		75
Non-U.S. government	—		15		—		15
Non-U.S. government agencies (c)	—		150		—		150
Corporate debt	—		—		—		—
Mortgage-backed and other asset-backed	—		—		—		—
Total cash equivalents – financial instruments	1		240		—		241
Marketable securities
U.S. government	619		—		—		619
U.S. government-sponsored enterprises	—		713		—		713
Non-U.S. government agencies (c)	—		778		—		778
Corporate debt	—		1,186		—		1,186
Mortgage-backed and other asset-backed	—		88		—		88
Non-U.S. government	—		444		—		444
Other liquid investments (d)	—		7		—		7
Total marketable securities	619		3,216		—		3,835
Derivative financial instruments
Interest rate contracts	—		1,196		—		1,196
Foreign exchange contracts	—		30		—		30
Cross currency interest rate swap contracts	—		12		—		12
Other (e)	—		—		137		137
Total derivative financial instruments (f)	—		1,238		137		1,375
Total assets at fair value	$	620	$	4,694	$	137	$	5,451
Liabilities
Derivative financial instruments
Interest rate contracts	$	—	$	237	$	—	$	237
Foreign exchange contracts	—		50		—		50
Cross-currency interest rate swap contracts	—		12		—		12
Total derivative financial instruments (f)	—		299		—		299
Total liabilities at fair value	$	—	$	299	$	—	$	299

__________


(a)	There were no transfers between Level 1 and 2 during the year.

(b)

"Cash equivalents - financial instruments" in this table excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value on our balance sheet totaling $6 billion as of December 31, 2011 for the Financial Services sector. In addition to these cash equivalents, our Financial Services sector also had cash on hand totaling $3 billion as of December 31, 2011.


(c)	Includes notes issued by Non-U.S. government agencies, as well as notes issues by supranational institutions.


(d)	"Other liquid investments" in this table includes certificates of deposit and time deposits subject to changes in value.


(e)	"Other" in this table represents derivative features included in the FUEL notes.


(f)	See Note 25 for additional information regarding derivative financial instruments.

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)



	2010
	Level 1 (a)		Level 2 (a)		Level 3		Total
Automotive Sector
Assets
Cash equivalents – financial instruments (b)
U.S. government	$	—	$	—	$	—	$	—
U.S. government-sponsored enterprises	—		224		—		224
Non-U.S. government	—		133		—		133
Non-U.S. government agencies (c)	—		1,619		—		1,619
Corporate debt	—		199		—		199
Total cash equivalents – financial instruments	—		2,175		—		2,175
Marketable securities (d)
U.S. government	2,718		—		—		2,718
U.S. government-sponsored enterprises	—		4,809		—		4,809
Non-U.S. government agencies (c)	—		3,215		1		3,216
Corporate debt	—		517		—		517
Mortgage-backed and other asset-backed	—		20		—		20
Equities	203		—		—		203
Non-U.S. government	—		818		1		819
Other liquid investments (e)	—		1,704		—		1,704
Total marketable securities	2,921		11,083		2		14,006
Derivative financial instruments
Foreign exchange contracts	—		58		—		58
Commodity contracts	—		36		33		69
Other – warrants	—		—		5		5
Total derivative financial instruments (f)	—		94		38		132
Total assets at fair value	$	2,921	$	13,352	$	40	$	16,313
Liabilities
Derivative financial instruments
Foreign exchange contracts	$	—	$	93	$	—	$	93
Commodity contracts	—		6		—		6
Total derivative financial instruments (f)	—		99		—		99
Total liabilities at fair value	$	—	$	99	$	—	$	99

__________


(a)	There were no transfers between Level 1 and 2 during the year.


(b)	"Cash equivalents - financial instruments" in this table excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value totaling $2.2 billion as of December 31, 2010 for the Automotive sector. In addition to these cash equivalents, our Automotive sector also had cash on hand totaling $1.9 billion as of December 31, 2010.


(c)	Includes notes issued by Non-U.S. government agencies, as well as notes issued by supranational institutions.


(d)	Excludes an investment in Ford Credit debt securities held by the Automotive sector with a carrying value of $201 million and an estimated fair value of $203 million as of December 31, 2010; see Note 18 for additional detail.


(e)	"Other liquid investments" in this table includes certificates of deposit and time deposits subject to changes in value.


(f)	See Note 25 for additional information regarding derivative financial instruments.

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)



	2010
	Level 1 (a)		Level 2 (a)		Level 3		Total
Financial Services Sector
Assets
Cash equivalents – financial instruments (b)
U.S. government	$	9	$	—	$	—	$	9
U.S. government-sponsored enterprises	—		150		—		150
Non-U.S. government	—		323		—		323
Non-U.S. government agencies (c)	—		100		—		100
Corporate debt	—		200		—		200
Total cash equivalents – financial instruments	9		773		—		782
Marketable securities
U.S. government	1,671		—		—		1,671
U.S. government-sponsored enterprises	—		2,905		—		2,905
Non-U.S. government agencies (c)	—		821		1		822
Corporate debt	—		732		—		732
Mortgage-backed and other asset-backed	—		177		—		177
Non-U.S. government	—		364		—		364
Other liquid investments (d)	—		88		—		88
Total marketable securities	1,671		5,087		1		6,759
Derivative financial instruments
Interest rate contracts	—		1,035		177		1,212
Foreign exchange contracts	—		24		—		24
Cross currency interest rate swap contracts	—		25		—		25
Total derivative financial instruments (e)	—		1,084		177		1,261
Total assets at fair value	$	1,680	$	6,944	$	178	$	8,802
Liabilities
Derivative financial instruments
Interest rate contracts	$	—	$	134	$	195	$	329
Foreign exchange contracts	—		73		—		73
Cross-currency interest rate swap contracts	—		118		71		189
Total derivative financial instruments (e)	—		325		266		591
Total liabilities at fair value	$	—	$	325	$	266	$	591

__________


(a)	There were no transfers between Level 1 and 2 during the year.

(b)

"Cash equivalents - financial instruments" in this table excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value on our balance sheet totaling $5.7 billion as of December 31, 2010 for the Financial Services sector. In addition to these cash equivalents, our Financial Services sector also had cash on hand totaling $2 billion as of December 31, 2010.


(c)	Includes notes issued by Non-U.S. government agencies, as well as notes issues by supranational institutions.


(d)	"Other liquid investments" in this table includes certificates of deposit and time deposits subject to changes in value.


(e)	See Note 25 for additional information regarding derivative financial instruments.

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)

Reconciliation of Changes in Level 3 Balances

The following tables summarize the changes in Level 3 items measured at fair value on a recurring basis on our balance sheet for the years ended December 31 (in millions):



	2011
	Marketable Securities
	Non-U.S. Government Agencies			Corporate Debt			Mortgage- Backed and Other Asset- Backed			Non-U.S. Government			Total Marketable Securities			Derivative Financial Instruments, Net			Total Level 3 Fair Value
Automotive Sector
Beginning balance	$	1		$	—		$	—		$	1		$	2		$	38		$	40
Realized/unrealized gains/(losses)
Cost of sales	—			—			—			—			—			(99		)	(99		)
Interest income and other non-operating income/(expense), net	—			—			—			(1		)	(1		)	(1		)	(2		)
Other comprehensive income/(loss) (a)	—			—			—			—			—			—			—
Total realized/unrealized gains/(losses)	—			—			—			(1		)	(1		)	(100		)	(101		)
Purchases, issues, sales, and settlements
Purchases	—			5			1			1			7			—			7
Issues	—			—			—			—			—			—			—
Sales	—			—			—			(1		)	(1		)	—			(1		)
Settlements	—			—			—			—			—			(14		)	(14		)
Total purchases, issues, sales, and settlements	—			5			1			—			6			(14		)	(8		)
Transfers into Level 3 (b)	—			—			—			—			—			—			—
Transfers out of Level 3 (b)	(1		)	(5		)	(1		)	—			(7		)	6			(1		)
Ending balance	$	—		$	—		$	—		$	—		$	—		$	(70	)	$	(70	)
Unrealized gains/ (losses) on instruments still held	$	—		$	—		$	—		$	—		$	—		$	(69	)	$	(69	)

Financial Services Sector
Beginning balance	$	1		$	—		$	—		$	—		$	1		$	(89	)	$	(88	)
Realized/unrealized gains/(losses)
Other income/(loss), net	—			—			—			—			—			382			382
Other comprehensive income/(loss) (a)	—			—			—			—			—			(1		)	(1		)
Interest income/(expense) (c)	—			—			—			—			—			90			90
Total realized/unrealized gains/(losses)	—			—			—			—			—			471			471
Purchases, issues, sales, and settlements
Purchases	—			5			—			—			5			—			5
Issues (d)	—			—			—			—			—			73			73
Sales	—			—			—			—			—			—			—
Settlements	—			—			—			—			—			114			114
Total purchases, issues, sales, and settlements	—			5			—			—			5			187			192
Transfers into Level 3 (b)	—			—			—			—			—			—			—
Transfers out of Level 3 (b)	(1		)	(5		)	—			—			(6		)	(432		)	(438		)
Ending balance	$	—		$	—		$	—		$	—		$	—		$	137		$	137
Unrealized gains/ (losses) on instruments still held	$	—		$	—		$	—		$	—		$	—		$	65		$	65

__________


(a)	"Other comprehensive income/(loss)" represents foreign currency translation on derivative asset and liability balances held by non-U.S. dollar foreign affiliates.

(b)

Represents transfers due to the increase in availability of observable data for $13 million of marketable securities as a result of greater market activity for these securities and transfers for $6 million due to shorter duration of Automotive Sector derivative financial instruments. The transfer of $432 million Financial Services derivative financial instruments was primarily the result of management's validation of the observable data and determination that certain unobservable inputs had an insignificant impact on the valuation of these instruments. The company's policy is to recognize transfers in and transfers out at the value at the end of the reporting period.


(c)	Recorded in Interest expense.


(d)	Reflects derivative features included in the FUEL notes.

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)



	2010
	Marketable Securities
	Non-U.S. Government Agencies		Corporate Debt			Mortgage-Backed and Other Asset- Backed			Non-U.S. Government		Total Marketable Securities			Derivative Financial Instruments, Net			Retained Interest in Securitized Assets			Total Level 3 Fair Value
Automotive Sector
Beginning balance	$	—	$	8		$	17		$	—	$	25		$	9		$	—		$	34
Realized/unrealized gains/(losses)
Cost of sales	—		—			—			—		—			39			—			39
Interest income and other non-operating income/(expense), net	—		—			(1		)	—		(1		)	2			—			1
Other comprehensive income/(loss) (a)	—		—			—			—		—			—			—			—
Total realized/unrealized gains/(losses)	—		—			(1		)	—		(1		)	41			—			40
Purchases, issues, sales, and settlements
Purchases	1		13			—			1		15			—			—			15
Issues	—		—			—			—		—			—			—			—
Sales	—		(11		)	(16		)	—		(27		)	—			—			(27		)
Settlements	—		—			—			—		—			(12		)	—			(12		)
Total purchases, issues, sales, and settlements	1		2			(16		)	1		(12		)	(12		)	—			(24		)
Transfers into Level 3 (b)	—		—			—			—		—			—			—			—
Transfers out of Level 3 (b)	—		(10		)	—			—		(10		)	—			—			(10		)
Ending balance	$	1	$	—		$	—		$	1	$	2		$	38		$	—		$	40
Unrealized gains/ (losses) on instruments still held	$	—	$	—		$	—		$	—	$	—		$	29		$	—		$	29

Financial Services Sector
Beginning balance	$	—	$	4		$	—		$	—	$	4		$	(155	)	$	26		$	(125	)
Realized/unrealized gains/(losses)
Other income/(loss), net	—		(4		)	—			—		(4		)	(91		)	(3		)	(98		)
Other comprehensive income/(loss) (a)	—		—			—			—		—			(6		)	2			(4		)
Interest income/(expense)	—		—			—			—		—			—			—			—
Total realized/unrealized gains/(losses)	—		(4		)	—			—		(4		)	(97		)	(1		)	(102		)
Purchases, issues, sales, and settlements
Purchases	1		10			—			—		11			—			—			11
Issues	—		—			—			—		—			—			—			—
Sales	—		—			—			—		—			—			—			—
Settlements	—		—			—			—		—			164			(25		)	139
Total purchases, issues, sales, and settlements	1		10			—			—		11			164			(25		)	150
Transfers into Level 3 (b)	—		—			—			—		—			—			—			—
Transfers out of Level 3 (b)	—		(10		)	—			—		(10		)	(1		)	—			(11		)
Ending balance	$	1	$	—		$	—		$	—	$	1		$	(89	)	$	—		$	(88	)
Unrealized gains/(losses) on instruments still held	$	—	$	—		$	—		$	—	$	—		$	64		$	—		$	64

__________


(a)	"Other comprehensive income/(loss)" represents foreign currency translation on derivative asset and liability balances held by non-U.S. dollar foreign affiliates.


(b)	Represents transfers due to the increase in availability of observable data for $20 million of marketable securities as a result of greater market activity for these securities and $1 million due to shorter duration of derivative financial instruments. The company's policy is to recognize transfers in and transfers out at the value at the end of the reporting period.

NOTE 4. FAIR VALUE MEASUREMENTS (Continued)

Input Hierarchy of Items Measured at Fair Value on a Nonrecurring Basis

The following tables summarize the items measured at fair value subsequent to initial recognition on a nonrecurring basis by input hierarchy for the years ended December 31 that were still held on our balance sheet at those dates (in millions):



	2011								2010
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Services Sector
North America
Retail receivables (a)	$	—	$	—	$	70	$	70	$	—	$	—	$	82	$	82
Dealer loans, net (a)	—		—		6		6		—		—		22		22
Total North America	—		—		76		76		—		—		104		104
International
Retail receivables (a)	—		—		39		39		—		—		45		45
Total International	—		—		39		39		—		—		45		45
Total Financial Services sector	$	—	$	—	$	115	$	115	$	—	$	—	$	149	$	149

__________

(a)

Finance receivables, including retail accounts that have been charged off and individual dealer loans where foreclosure is probable, are measured based on the fair value of the collateral adjusted for estimated costs to sell. The collateral for retail receivables is the vehicle being financed and for dealer loans is real estate or other property. See Note 9 for additional information related to the development of Ford Credit's allowance for credit losses.

Nonrecurring Fair Value Changes

The following table summarizes the total change in value of items for which a nonrecurring fair value adjustment has been included in our statement of operations for the years ended December 31 related to items still held on our balance sheet at those dates (in millions):



	Total Gains / (Losses)
	2011			2010			2009
Automotive Sector
First Aquitaine investment (a)	$	—		$	—		$	(79	)
U.S. consolidated dealership investment (a)	—			—			(78		)
Total Automotive sector	$	—		$	—		$	(157	)

Financial Services Sector
North America
Retail receivables (b)	$	(23	)	$	(29	)	$	(24	)
Dealer loans, net (b)	—			(3		)	(1		)
Total North America	(23		)	(32		)	(25		)
International
Retail receivables (b)	(14		)	(25		)	(141		)
Total International	(14		)	(25		)	(141		)
Total Financial Services sector	$	(37	)	$	(57	)	$	(166	)

__________


(a)	Other-than-temporary impairments of investments are recorded in Automotive cost of sales.


(b)	Fair value changes related to retail finance receivables that have been written down or dealer loans that have been impaired based on the fair value of the collateral adjusted for estimated costs to sell are recorded in Financial Services provision for credit and insurance losses.