Derivative Financial Instruments and Hedging Activities (Notes)

12 Months Ended

Dec. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates, certain commodity prices, and interest rates. To manage these risks, we enter into highly effective derivative contracts:

• Foreign currency exchange contracts, including forwards, that are used to manage foreign exchange exposure;

• Commodity contracts, including forwards, that are used to manage commodity price risk;

• Interest rate contracts, including swaps, that are used to manage the effects of interest rate fluctuations; and

• Cross-currency interest rate swap contracts that are used to manage foreign currency and interest rate exposures on foreign-denominated debt.

Our derivatives are over-the-counter customized derivative transactions and are not exchange-traded. We review our hedging program, derivative positions, and overall risk management strategy on a regular basis.

Derivative Financial Instruments and Hedge Accounting. Derivatives are recorded on the balance sheet at fair value and presented on a gross basis. Derivative assets are reported in Other assets and derivative liabilities are reported in Payables and Other liabilities and deferred revenue.

We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.

Cash Flow Hedges. Our Automotive segment has designated certain forward contracts as cash flow hedges of forecasted transactions with exposure to foreign currency exchange and commodity price risks.

The effective portion of changes in the fair value of cash flow hedges is deferred in Accumulated other comprehensive income/(loss) and is recognized in Cost of sales when the hedged item affects earnings. The ineffective portion is reported in Cost of sales in the period of measurement. Our policy is to de-designate foreign currency exchange cash flow hedges prior to the time forecasted transactions are recognized as assets or liabilities on the balance sheet and report subsequent changes in fair value through Cost of sales. If it becomes probable that the originally-forecasted transaction will not occur, the related amount included in Accumulated other comprehensive income/(loss) is reclassified and recognized in earnings. The majority of our cash flow hedges mature in two years or less.

Fair Value Hedges. Our Financial Services segmentuses derivatives to reduce the risk of changes in the fair value of debt. We have designated certain receive-fixed, pay-float interest rate swaps as fair value hedges of fixed-rate debt. The risk being hedged is the risk of changes in the fair value of the hedged debt attributable to changes in the benchmark interest rate. If the hedge relationship is deemed to be highly effective, we record the changes in the fair value of the hedged debt related to the risk being hedged in Financial Services debt with the offset in Financial Services other income/(loss), net.The change in fair value of the related derivative (excluding accrued interest) also is recorded in Financial Services other income/(loss), net. Net interest settlements and accruals on fair value hedges are excluded from the assessment of hedge effectiveness and are reported in Financial Services interest, operating, and other expenses. The cash flows associated with fair value hedges are reported in Net cash provided by/(used in) operating activities on our statement of cash flows. 

When a fair value hedge is de-designated, or when the derivative is terminated before maturity, the fair value adjustment to the hedged debt continues to be reported as part of the carrying value of the debt and is amortized over its remaining life.

Derivatives Not Designated as Hedging Instruments. Our Automotive segment reports changes in the fair value of derivatives not designated as hedging instruments through Cost of sales. Cash flows associated with non-designated or de-designated derivatives are reported in Net cash provided by/(used in) investing activities on our statements of cash flows.

Our Financial Services segment reports net interest settlements and accruals and changes in the fair value of interest rate swaps not designated as hedging instruments in Financial Services other income/(loss), net. Foreign currency revaluation on accrued interest along with gains and losses on foreign exchange contracts and cross currency interest rate swaps are reported in Financial Services other income/(loss), net. Cash flows associated with non-designated or de­designated derivatives are reported in Net cash provided by/(used in) investing activities on our statements of cash flows.

NOTE 17.DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES(Continued)

Normal Purchases and Normal Sales Classification. We have elected to apply the normal purchases and normal sales classification for physical supply contracts that are entered into for the purpose of procuring commodities to be used in production over a reasonable period in the normal course of our business.

Income Effect of Derivative Financial Instruments

The gains/(losses), by hedge designation, recorded in income for the years ended December 31 were as follows (in millions):

	2014			2015			2016
Cash flow hedges (a)
Reclassified from AOCI to net income	$	78		$	(239	)	$	537
Fair value hedges
Interest rate contracts
Net interest settlements and accruals excluded from the assessment of hedge effectiveness	304			370			367
Ineffectiveness (b)	20			3			4
Derivatives not designated as hedging instruments
Foreign currency exchange contracts	261			425			257
Cross-currency interest rate swap contracts	161			100			398
Interest rate contracts	(41		)	(58		)	(9		)
Commodity contracts	(47		)	(64		)	7
Total	$	736		$	537		$	1,561

__________

(a) For 2014, 2015, and 2016 a $271 millionloss, a $123 milliongain, and a $770 milliongain, respectively, were recorded in Other comprehensive income/(loss), net of tax.

(b) For 2014, 2015, and 2016, hedge ineffectiveness reflects the net change in fair value on derivatives of $407 milliongain, $72 milliongain, and $120 millionloss, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $387 millionloss, $69 millionloss, and $124 milliongain, respectively.

NOTE 17.DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are recorded on the balance sheet at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement.

The fair value of our derivative instruments and the associated notional amounts, presented gross, at December 31 were as follows (in millions):

	2015						2016
	Notional		Fair Value of Assets		Fair Value of Liabilities		Notional		Fair Value of Assets		Fair Value of Liabilities
Cash flow hedges
Foreign currency exchange and commodity contracts	$	12,593	$	522	$	366	$	19,091	$	620	$	257
Fair value hedges
Interest rate contracts	28,964		670		16		33,175		487		80
Derivatives not designated as hedging instruments
Foreign currency exchange contracts	21,108		426		242		17,227		379		194
Cross-currency interest rate swap contracts	3,137		73		111		3,201		242		8
Interest rate contracts	62,638		159		112		61,689		156		74
Commodity contracts	643		2		26		531		11		6
Total derivative financial instruments, gross (a) (b)	$	129,083	$	1,852	$	873	$	134,914	$	1,895	$	619
Current portion			$	1,209	$	692			$	1,108	$	371
Non-current portion			643		181				787		248
Total derivative financial instruments, gross			$	1,852	$	873			$	1,895	$	619

__________

(a) At December 31, 2015, and 2016, the net obligation to return cash collateral was $0 and $3 million, respectively.

(b) At December 31, 2015, and 2016, the fair value of assets and liabilities available for counterparty netting was $733 million and $554 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.