FAIR VALUE MEASUREMENTS

Cash equivalents, marketable securities, and derivative financial instruments are presented on our financial statements on a recurring basis at fair value, while other assets and liabilities are measured at fair value on a nonrecurring basis. During 2014, we changed the accounting for our Venezuelan operations from the consolidated method to the cost method (see Note 1), and impaired our equity in net assets of Ford Sollers Netherlands B.V. (“Ford Sollers”) (see Note 22).

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 three months 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 three months 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. 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.

Realized and unrealized gains and losses and interest income on our marketable securities are recorded in Automotive interest income and other income/(expense), net and Financial Services other income/(loss), net. Realized gains and losses are measured using the specific identification method.

We enter into repurchase agreements from time to time 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 December 31, 2014 and 2013 was $15 million and $228 million, respectively.

NOTE 4. 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 any 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 is 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, we also measure at fair value retail contracts greater than 120 days past due or deemed to be uncollectible, and individual dealer loans 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 by multiplying the outstanding receivable balances by the average recovery value percentage to determine the fair value adjustment.

The fair value of collateral for dealer loans is determined 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 calculated 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 13) 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 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 at December 31 on our balance sheet (in millions):



	2014								2013
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Automotive Sector
Assets
Cash equivalents – financial instruments
U.S. government and agencies	$	—	$	64	$	—	$	64	$	—	$	33	$	—	$	33
Non-U.S. government and agencies	—		122		—		122		—		200		—		200
Corporate debt	—		20		—		20		—		—		—		—
Total cash equivalents (a)	—		206		—		206		—		233		—		233
Marketable securities
U.S. government and agencies	969		5,789		—		6,758		3,752		6,596		—		10,348
Non-U.S. government and agencies	—		7,004		—		7,004		—		6,538		—		6,538
Corporate debt	—		2,738		—		2,738		—		2,623		—		2,623
Equities	322		—		—		322		341		—		—		341
Other marketable securities	—		313		—		313		—		307		—		307
Total marketable securities	1,291		15,844		—		17,135		4,093		16,064		—		20,157
Derivative financial instruments (b)	—		517		—		517		—		579		1		580
Total assets at fair value	$	1,291	$	16,567	$	—	$	17,858	$	4,093	$	16,876	$	1	$	20,970
Liabilities
Derivative financial instruments (b)	$	—	$	710	$	3	$	713	$	—	$	416	$	2	$	418
Total liabilities at fair value	$	—	$	710	$	3	$	713	$	—	$	416	$	2	$	418

Financial Services Sector
Assets
Cash equivalents – financial instruments
Non-U.S. government and agencies	—		341		—		341		—		24		—		24
Corporate debt	—		10		—		10		—		—		—		—
Total cash equivalents (a)	—		351		—		351		—		24		—		24
Marketable securities
U.S. government and agencies	17		1,251		—		1,268		418		25		—		443
Non-U.S. government and agencies	—		405		—		405		—		184		—		184
Corporate debt	—		1,555		—		1,555		—		1,273		—		1,273
Other marketable securities	—		30		—		30		—		43		—		43
Total marketable securities	17		3,241		—		3,258		418		1,525		—		1,943
Derivative financial instruments (b)	—		859		—		859		—		585		—		585
Total assets at fair value	$	17	$	4,451	$	—	$	4,468	$	418	$	2,134	$	—	$	2,552
Liabilities
Derivative financial instruments (b)	$	—	$	167	$	—	$	167	$	—	$	506	$	—	$	506
Total liabilities at fair value	$	—	$	167	$	—	$	167	$	—	$	506	$	—	$	506

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(a)

Excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value on our balance sheet totaling $3.3 billion and $2.8 billion for Automotive sector and $3.8 billion and $6.7 billion for Financial Services sector at December 31, 2014 and December 31, 2013, respectively. In addition to these cash equivalents, we also had cash on hand totaling $1.1 billion and $2 billion for Automotive sector and $2 billion and $2.8 billion for Financial Services sector at December 31, 2014 and December 31, 2013, respectively.


(b)	See Note 16 for additional information regarding derivative financial instruments.