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Derivative Financial Instruments and Hedging Activities (Notes)
 12 Months Ended
Dec. 31, 2019
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 reported on our consolidated 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.

NOTE 21.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

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.

Changes in the fair value of cash flow hedges are deferred in Accumulated other comprehensive income/(loss) and are recognized in Cost of sales when the hedged item affects earnings. 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 cash flows associated with hedges designated until maturity are reported in Net cash provided by/(used in) operating activities on our consolidated statement of cash flows. Our cash flow hedges mature within three years.

Fair Value Hedges. Our Ford Credit segment uses 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 report the changes in the fair value of the hedged debt related to the risk being hedged in Ford Credit debt and Ford Credit interest, operating, and other expenses. Net interest settlements and accruals, and the fair value changes on hedging instruments are reported in Ford Credit 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 consolidated 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 recognized in Ford Credit interest, operating, and other expenses over its remaining life.

Derivatives Not Designated as Hedging Instruments. Automotive 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 consolidated statement of cash flows.

Our Ford Credit segment reports the gains/(losses) on derivatives not designated as hedging instruments in Other income/(loss), net. Cash flows associated with non-designated or de-designated derivatives are reported in Net cash provided by/(used in) investing activities on our consolidated statement of cash flows.

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.

NOTE 21.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Income Effect of Derivative Financial Instruments

The gains/(losses), by hedge designation, reported in income for the years ended December 31 were as follows (in millions):
 
2017
 
2018
 
2019
Cash flow hedges (a)
 
 
 
 
 
Reclassified from AOCI to Cost of sales
 
 
 
 
 
Foreign currency exchange contracts
$
456

 
$
50

 
$
29

Commodity contracts
—

 
—

 
(32
)
Fair value hedges
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
Net interest settlements and accruals on hedging instruments
217

 
10

 
(16
)
Fair value changes on hedging instruments (b)
(268
)
 
(155
)
 
706

Fair value changes on hedged debt (b)
267

 
153

 
(694
)
Derivatives not designated as hedging instruments
 
 
 
 
 
Foreign currency exchange contracts (c)
(662
)
 
398

 
84

Cross-currency interest rate swap contracts
103

 
(244
)
 
(229
)
Interest rate contracts
58

 
(84
)
 
(13
)
Commodity contracts
74

 
(96
)
 
—

Total
$
245

 
$
32

 
$
(165
)
__________
(a)
For 2017, 2018, and 2019, a $134 million gain, a $288 million gain, and a $839 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax related to foreign currency contracts. For 2019, a $36 million loss was reported in Other comprehensive income/(loss), net of tax related to commodity contracts.
(b)
For 2017, the fair value changes on hedging instruments and on hedged debt were reported in Other income/(loss), net; effective 2018, these amounts were reported in Ford Credit interest, operating, and other expenses.
(c)
For 2017, 2018, and 2019, a $512 million loss, a $235 million gain, and a $32 million gain were reported in Cost of sales and a $150 million loss, a $163 million gain, and a $52 million gain were reported in Other income/(loss), net, respectively.
NOTE 21.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are reported on our consolidated 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):
 
2018
 
2019
 
Notional
 
Fair Value of
Assets
 
Fair Value of
Liabilities
 
Notional
 
Fair Value of
Assets
 
Fair Value of
Liabilities
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
15,972

 
$
391

 
$
110

 
$
15,349

 
$
47

 
$
493

Commodity contracts
327

 
—

 
20

 
673

 
5

 
29

Fair value hedges
 

 
 

 
 

 
 
 
 
 
 
Interest rate contracts
22,989

 
158

 
208

 
26,577

 
702

 
19

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
20,695

 
202

 
99

 
19,350

 
58

 
270

Cross-currency interest rate swap contracts
5,235

 
232

 
157

 
5,849

 
134

 
67

Interest rate contracts
76,904

 
235

 
274

 
68,914

 
275

 
191

Commodity contracts
638

 
3

 
45

 
467

 
9

 
9

Total derivative financial instruments, gross (a) (b)
$
142,760

 
$
1,221

 
$
913

 
$
137,179

 
$
1,230

 
$
1,078

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
 
 
$
681

 
$
601

 
 
 
$
390

 
$
772

Non-current portion
 
 
540

 
312

 
 
 
840

 
306

Total derivative financial instruments, gross
 
 
$
1,221

 
$
913

 
 
 
$
1,230

 
$
1,078

__________
(a)
At December 31, 2018 and 2019, we held collateral of $19 million and $18 million, and we posted collateral of $59 million and $78 million, respectively.
(b)
At December 31, 2018 and 2019, the fair value of assets and liabilities available for counterparty netting was $434 million and $269 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.