FAIR VALUE MEASUREMENTS

Cash equivalents, marketable securities, and derivative financial instruments are presented in our financial statements on a recurring basis at fair value, while other assets and liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset impairment.

Fair Value Measurements

In measuring 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 fair value 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

We review the inputs to the fair value measurements to ensure they are appropriately categorized within the fair value hierarchy. Transfers into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.

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 change in value due to interest rate, quoted 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. Time deposits, certificates of deposit, and money market accounts that meet the above criteria are reported at par value on our balance sheet and are 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 more than an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal are classified as 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 fixed income securities that are not actively traded, the pricing services use alternative methods to determine fair value for the securities, including: quotes for similar fixed-income securities, matrix pricing, discounted cash flow using benchmark curves, or other factors to determine fair value. In certain cases, when market data are not available, we may use broker quotes to determine fair value.

An annual review is performed on the security prices received from our pricing services, which includes discussion and analysis of the inputs used by the pricing services to value our securities. We also compare the price of certain securities sold close to the quarter-end to the price of the same security at the balance sheet date to ensure the reported fair value is reasonable.

We have entered into repurchase agreements with certain counterparties where we are the transferee. These agreements allow us to offset our entire gross exposure in the event of default or breach of contract. The gross value of these assets and liabilities reflected on our balance sheet at June 30, 2013 and December 31, 2012 was $128 million and $51 million, respectively.

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)

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 using industry-standard valuation models such as a discounted cash flow. 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, commodity prices, 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 use broker quotes and models (e.g., Black-Scholes) to determine fair value. This includes situations where there is lack of liquidity for a particular currency or commodity or when the instrument is longer-dated.

Finance Receivables. We measure finance receivables at fair value for purposes of disclosure (see Note 5) 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 present value based on assumptions regarding credit losses, pre-payment speed, and applicable spreads to approximate current rates. Our assumptions regarding pre-payment speed and credit losses are based on historical performance. The fair value of finance receivables is categorized within Level 3 of the hierarchy.

On a nonrecurring basis, when retail contracts are greater than 120 days past due or deemed to be uncollectible, or if individual dealer loans are probable of foreclosure, we use the fair value of collateral, adjusted for estimated costs to sell, to determine the fair value of our receivables. The collateral for a retail receivable is the vehicle financed, and for dealer loans is real estate or other property.

The fair value of collateral for retail receivables is calculated based on the number of contracts multiplied by the loss severity and the probability of default ("POD") percentage, or the outstanding receivable balances multiplied by the average recovery value ("ARV") percentage to determine the fair value adjustment.

The nonrecurring fair value measurements for dealer loans are based on an assessment of the estimated fair value of collateral. The assessment is performed by reviewing various appraisals, which include total adjusted appraised value of land and improvements, alternate use appraised value, broker's opinion of value, and purchase offers. The fair value adjustment is determined by comparing the net carrying value of the dealer loan and the estimated fair value of collateral.

Debt. We measure debt at fair value for purposes of disclosure (see Note 11) using quoted prices for our own debt with approximately the same remaining maturities, where possible. Where quoted prices are not available, we estimate fair value using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt instruments. For certain short-term debt 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. The fair value of debt is categorized within Level 2 of the hierarchy.

NOTE 3. 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 (in millions):



	June 30, 2013								December 31, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Automotive Sector
Assets
Cash equivalents – financial instruments
U.S. government	$	403	$	—	$	—	$	403	$	—	$	—	$	—	$	—
U.S. government-sponsored enterprises	—		350		—		350		—		718		—		718
Non-U.S. government	—		—		—		—		—		139		—		139
Non-U.S. government agencies (a)	—		191		—		191		—		365		—		365
Corporate debt	—		—		—		—		—		—		—		—
Total cash equivalents – financial instruments (b)	403		541		—		944		—		1,222		—		1,222
Marketable securities
U.S. government	4,372		—		—		4,372		4,493		—		—		4,493
U.S. government-sponsored enterprises	—		6,189		—		6,189		—		5,459		—		5,459
Non-U.S. government agencies (a)	—		5,955		—		5,955		—		4,794		—		4,794
Corporate debt	—		2,232		—		2,232		—		1,871		—		1,871
Mortgage-backed and other asset-backed	—		186		—		186		—		25		—		25
Equities	262		—		—		262		142		—		—		142
Non-U.S. government	—		1,036		—		1,036		—		1,367		—		1,367
Other liquid investments (c)	—		28		—		28		—		27		—		27
Total marketable securities	4,634		15,626		—		20,260		4,635		13,543		—		18,178
Derivative financial instruments
Foreign currency exchange contracts	—		548		—		548		—		218		—		218
Commodity contracts	—		11		1		12		—		19		4		23
Total derivative financial instruments (d)	—		559		1		560		—		237		4		241
Total assets at fair value	$	5,037	$	16,726	$	1	$	21,764	$	4,635	$	15,002	$	4	$	19,641
Liabilities
Derivative financial instruments
Foreign currency exchange contracts	$	—	$	328	$	—	$	328	$	—	$	486	$	—	$	486
Commodity contracts	—		70		12		82		—		112		12		124
Total derivative financial instruments (d)	—		398		12		410		—		598		12		610
Total liabilities at fair value	$	—	$	398	$	12	$	410	$	—	$	598	$	12	$	610

__________


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

(b)

Excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value on our balance sheet totaling $2.6 billion and $3 billion at June 30, 2013 and December 31, 2012, respectively, for the Automotive sector. In addition to these cash equivalents, our Automotive sector also had cash on hand totaling $1.9 billion and $2 billion at June 30, 2013 and December 31, 2012, respectively.


(c)	Includes certificates of deposit and time deposits subject to changes in value.


(d)	See Note 12 for additional information regarding derivative financial instruments.

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)



	June 30, 2013								December 31, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Services Sector
Assets
Cash equivalents – financial instruments
U.S. government	$	201	$	—	$	—	$	201	$	200	$	—	$	—	$	200
U.S. government-sponsored enterprises	—		—		—		—		—		20		—		20
Non-U.S. government	—		46		—		46		—		103		—		103
Corporate debt	—		—		—		—		—		1		—		1
Total cash equivalents – financial instruments (a)	201		46		—		247		200		124		—		324
Marketable securities
U.S. government	1,235		—		—		1,235		620		—		—		620
U.S. government-sponsored enterprises	—		400		—		400		—		12		—		12
Non-U.S. government agencies (b)	—		36		—		36		—		95		—		95
Corporate debt	—		1,249		—		1,249		—		1,155		—		1,155
Mortgage-backed and other asset-backed	—		56		—		56		—		67		—		67
Non-U.S. government	—		108		—		108		—		142		—		142
Other liquid investments (c)	—		—		—		—		—		15		—		15
Total marketable securities	1,235		1,849		—		3,084		620		1,486		—		2,106
Derivative financial instruments
Interest rate contracts	—		778		—		778		—		1,291		—		1,291
Foreign currency exchange contracts	—		14		—		14		—		9		—		9
Cross-currency interest rate swap contracts	—		26		—		26		—		—		—		—
Total derivative financial instruments (d)	—		818		—		818		—		1,300		—		1,300
Total assets at fair value	$	1,436	$	2,713	$	—	$	4,149	$	820	$	2,910	$	—	$	3,730
Liabilities
Derivative financial instruments
Interest rate contracts	$	—	$	316	$	—	$	316	$	—	$	256	$	—	$	256
Foreign currency exchange contracts	—		12		—		12		—		8		—		8
Cross-currency interest rate swap contracts	—		58		—		58		—		117		—		117
Total derivative financial instruments (d)	—		386		—		386		—		381		—		381
Total liabilities at fair value	$	—	$	386	$	—	$	386	$	—	$	381	$	—	$	381

__________


(a)	Excludes time deposits, certificates of deposit, and money market accounts reported at par value on our balance sheet totaling $5.3 billion and $6.5 billion at June 30, 2013 and December 31, 2012, respectively. In addition to these cash equivalents, we also had cash on hand totaling $2.3 billion and $2.6 billion at June 30, 2013 and December 31, 2012, respectively.


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


(c)	Includes certificates of deposit and time deposits subject to changes in value.


(d)	See Note 12 for additional information regarding derivative financial instruments.

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)

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

The following table summarizes the items measured at fair value subsequent to initial recognition on a nonrecurring basis, all of which are Level 3 (in millions):



	June 30, 2013		December 31, 2012
Financial Services Sector
North America
Retail receivables	$	41	$	52
Dealer loans	—		2
Total North America	41		54
International
Retail receivables	23		26
Total International	23		26
Total Financial Services sector	$	64	$	80

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 income statement for the periods ended June 30, related to items still held on our balance sheet at those dates (in millions):



	Total Gains/(Losses)
	Second Quarter						First Half
	2013			2012			2013			2012
Financial Services Sector
North America
Retail receivables	$	(2	)	$	(7	)	$	(16	)	$	(15	)
Dealer loans	—			—			—			—
Total North America	(2		)	(7		)	(16		)	(15		)
International
Retail receivables	(2		)	(5		)	(5		)	(10		)
Total International	(2		)	(5		)	(5		)	(10		)
Total Financial Services sector	$	(4	)	$	(12	)	$	(21	)	$	(25	)

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

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)

Information About Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

The following table summarizes significant unobservable inputs and the variability of those inputs to alternate methodologies (in millions):



			June 30, 2013		December 31, 2012
	Valuation Technique	Unobservable Input	Fair Value	Fair Value Range	Fair Value	Fair Value Range
Automotive Sector
Recurring basis
Net commodity contracts	Income Approach	Forward commodity prices for certain commodity types. A lower forward price will result in a lower fair value.	$(11)	$(10) - $(11)	$(8)	$(7) - $(8)
Financial Services Sector
Nonrecurring basis
Retail receivables
North America	Income Approach	POD percentage	$41	$28 - $41	$52	$38 - $52
International	Income Approach	ARV percentage	$23	$21 - $25	$26	$25 - $27
Dealer loans	Income Approach	Estimated fair value	$—	$—	$2	$1 - $3

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15A

-Subparagraph a-d

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15C, 15D

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 3, 10, 14, 15

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 32, 33, 34

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 21

-URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 133

-Paragraph 44A, 44B

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 7: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 10

-URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 28

-URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612

Reference 9: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258

Reference 10: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 30

-URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612

Reference 11: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 16

-URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611

Reference 12: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15B

-Subparagraph a, b

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 13: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 159

-Paragraph 17-22, 27, 28

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

+ Details