Fair value is based on quoted market prices, if available. If listed prices or quotes are not available, fair value is based upon internally developed models that primarily use as inputs market-based or independently sourced market parameters. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the availability of prices and inputs may be reduced for certain financial instruments. This condition could result in a financial instrument being reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Counterparty Credit Valuation Adjustments – Adjustments are required when the market price (or parameter) is not indicative of the credit quality of the counterparty.

Non-Performance Credit Valuation Adjustments – Adjustments reflect our own non-performance risk when our liabilities are measured at fair value.

Liquidity Valuation Adjustments – Adjustments are necessary when we are unable to observe prices for a financial instrument due to market illiquidity.

For financial instruments measured at fair value, the following section describes the valuation methodologies, key inputs and significant assumptions.

Cash equivalents include money market instruments, debt securities and certificates of deposits, which represent highly liquid investments with maturities of three months or less at purchase and are subject to an insignificant risk of change in value due to interest rate, market price, or penalty on withdrawal. We classify cash equivalents within Level 1 of the valuation hierarchy.

The marketable securities portfolio consists of debt and equity securities. We use the quoted prices of identical securities for all U.S. government securities and actively exchange-traded equity mutual funds. We classify these securities in Level 1 of the valuation hierarchy.

If quoted market prices are not available for specific securities, or the investment is not actively traded, then we may estimate the value of such instruments using observed transaction prices, independent pricing services, and either internally or externally developed pricing models or discounted cash flows. If independent pricing services are used, we validate the prices provided with other independent valuation sources. Where there is limited market activity or less transparency around inputs to the valuation model for certain collateralized mortgage and debt obligations, asset-backed securities, and high-yield debt securities, the determination of fair value may require benchmarking yields to that of similar instruments or analyzing default rates. In addition, asset-backed securities may be valued based on external prices or market spreads, using current market assumptions on prepayment speeds and default rates. For certain other asset-backed securities where the external price is not observable, we may incorporate the deal collateral performance and tranche level attributes into our valuation analysis. These securities are classified in Level 2 of the valuation hierarchy.

We hold investments in actively exchange-traded equity mutual funds and private placement fixed income mutual funds. Where the funds produce a daily net asset value that is quoted in an active market, that value is used to value the fund investment and is classified in Level 1 of the fair value hierarchy. Where the funds produce a daily net asset value that is based on a combination of quoted prices from identical and similar securities and/or observable inputs, the funds are classified within Level 2.

As part of our risk management strategy, we enter into derivative transactions to mitigate our interest rate and foreign currency exposures. These derivative transactions are considered over-the-counter for valuation purposes. All of our derivative counterparties to which we had credit exposure at December 31, 2011 were assigned investment grade ratings by a credit rating organization.

We estimate the fair value of our derivatives using industry standard valuation models that require observable market inputs, including market prices, yield curves, credit curves, interest rates, foreign exchange rates, volatilities and the contractual terms of the derivative instruments. For derivatives that trade in liquid markets, such as interest rate swaps, model inputs can generally be verified and do not require significant management judgment. These derivative instruments are classified in Level 2 of the valuation hierarchy.

Certain other derivative transactions trade in less liquid markets with limited pricing information. For such derivatives, key inputs to the valuation process include quotes from counterparties, and other market data used to corroborate and adjust values where appropriate. Other market data includes values obtained from a market participant that serves as a third party pricing agent. In addition, pricing is validated internally using valuation models to assess the reasonableness of changes in factors such as market prices, yield curves, credit curves, interest rates, foreign exchange rates and volatilities. These derivative instruments are classified in Level 3 of the valuation hierarchy.

Our derivative fair value measurements consider assumptions about counterparty credit risk and our own non-performance risk. Generally, we assume that a valuation that uses the London Interbank Offered Rate (“LIBOR”) curve to convert future values to present value is appropriate for derivative assets and liabilities. We consider counterparty credit risk and our own non-performance risk through credit valuation adjustments. In situations in which our net position with a derivative counterparty is an asset, the counterparty credit valuation adjustment calculation uses the credit default probabilities of our derivative counterparties over a particular time period. In situations in which our net position with a derivative counterparty is a liability, we use our own credit default probability to calculate the required non-performance credit valuation adjustment. We use a relative fair value approach to allocate the credit valuation adjustments to our derivatives portfolio.

Our finance receivables are not carried at fair value on a recurring basis on the balance sheet. In certain instances, for finance receivables for which there is evidence of impairment, we may measure impairment based on the loan's observable market price, or the fair value of the underlying collateral if the loan is collateral dependent. The fair values of impaired finance receivables based on the collateral value or market prices where available are reported at fair value on a nonrecurring basis. We may consider additional adjustments to reflect current market conditions in estimating fair value.

The following table summarizes our financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2011 and March 31, 2011, by level within the fair value hierarchy. Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

In instances where we meet the accounting guidance for set-off criteria, we elect to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally enforceable master netting agreements exist.

As of December 31, 2011
					Fair value measurements on a recurring basis
										Counterparty
										netting &		Fair
(Dollars in millions)				Level 1		Level 2		Level 3		collateral		value
Cash equivalents				$	7,271	$	-	$	-	$	-	$	7,271
	Available-for-sale securities:
	Debt instruments:
		U.S. government and agency obligations			30		47		-		-		77
		Municipal debt securities			-		19		-		-		19
		Certificates of deposit and commercial paper			-		2,680		-		-		2,680
		Foreign government debt securities			-		3		-		-		3
		Corporate debt securities			-		131		-		-		131
		Mortgage-backed securities:
			U.S. government agency		-		110		-		-		110
			Non-agency residential		-		9		-		-		9
			Non-agency commercial		-		26		-		-		26
		Asset-backed securities			-		16		-		-		16
	Equity instruments:
		Fixed income mutual funds:
			Short-term sector fund		-		38		-		-		38
			U.S. government sector fund		-		241		-		-		241
			Municipal sector fund		-		20		-		-		20
			Investment grade corporate sector fund		-		281		-		-		281
			High-yield sector fund		-		34		-		-		34
			Real return sector fund		-		231		-		-		231
			Mortgage sector fund		-		633		-		-		633
			Asset-backed securities sector fund		-		40		-		-		40
			Emerging market sector fund		-		58		-		-		58
			International sector fund		-		162		-		-		162
		Equity mutual fund			401		-		-		-		401
	Available-for-sale securities total				431		4,779		-		-		5,210
	Derivative assets:
		Foreign currency swaps			-		3,280		197		-		3,477
		Interest rate swaps			-		489		11		-		500
		Counterparty netting and collateral			-		-		-		(3,312)		(3,312)
	Derivative assets total				-		3,769		208		(3,312)		665
Assets at fair value					7,702		8,548		208		(3,312)		13,146
	Derivative liabilities:
		Foreign currency swaps			-		(84)		(16)		-		(100)
		Interest rate swaps			-		(980)		-		-		(980)
		Counterparty netting and collateral			-		-		-		1,042		1,042
	Derivative liabilities total				-		(1,064)		(16)		1,042		(38)
	Embedded derivative liabilities				-		-		(43)		-		(43)
Liabilities at fair value					-		(1,064)		(59)		1,042		(81)
Net assets at fair value				$	7,702	$	7,484	$	149	$	(2,270)	$	13,065

Note 2 – Fair Value Measurements (Continued)

As of March 31, 2011
					Fair value measurements on a recurring basis
										Counterparty		Fair
(Dollars in millions)				Level 1		Level 2		Level 3		netting & collateral		value
Cash equivalents				$	6,771	$	-	$	-	$	-	$	6,771
	Available-for-sale securities:
	Debt instruments:
		U.S. government and agency obligations			37		58		-		-		95
		Municipal debt securities			-		15		-		-		15
		Certificates of deposit and commercial paper			-		2,206		-		-		2,206
		Foreign government debt securities			-		5		-		-		5
		Corporate debt securities			-		126		-		-		126
		Mortgage-backed securities:
			U.S. government agency		-		78		-		-		78
			Non-agency residential		-		8		-		-		8
			Non-agency commercial		-		17		-		-		17
		Asset-backed securities			-		22		-		-		22
	Equity instruments:
		Fixed income mutual funds:
			Short-term sector fund		-		39		-		-		39
			U.S. government sector fund		-		478		-		-		478
			Municipal sector fund		-		18		-		-		18
			Investment grade corporate sector fund		-		317		-		-		317
			High-yield sector fund		-		35		-		-		35
			Real return sector fund		-		76		-		-		76
			Mortgage sector fund		-		639		-		-		639
			Asset-backed securities sector fund		-		39		-		-		39
			Emerging market sector fund		-		58		-		-		58
			International sector fund		-		136		-		-		136
		Equity mutual fund			415		-		-		-		415
	Available-for-sale securities total				452		4,370		-		-		4,822
	Derivative assets:
		Foreign currency swaps			-		3,947		113		-		4,060
		Interest rate swaps			-		270		20		-		290
		Counterparty netting and collateral			-		-		-		(3,449)		(3,449)
	Derivative assets total				-		4,217		133		(3,449)		901
	Embedded derivative assets				-		-		1		-		1
Assets at fair value					7,223		8,587		134		(3,449)		12,495
	Derivative liabilities:
		Foreign currency swaps			-		(106)		(4)		-		(110)
		Interest rate caps			-		(1)		-		-		(1)
		Interest rate swaps			-		(923)		(3)		-		(926)
		Counterparty netting and collateral			-		-		-		886		886
	Derivative liabilities total				-		(1,030)		(7)		886		(151)
	Embedded derivative liabilities				-		-		(52)		-		(52)
Liabilities at fair value					-		(1,030)		(59)		886		(203)
Net assets at fair value				$	7,223	$	7,557	$	75	$	(2,563)	$	12,292

As of December 31, 2011, derivative assets were reduced by a counterparty credit valuation adjustment of $27 million and derivative liabilities were reduced by a non-performance credit valuation adjustment of $1 million. As of March 31, 2011, derivative assets were reduced by a counterparty credit valuation adjustment of $12 million and derivative liabilities were reduced by a non-performance credit valuation adjustment of $1 million.

The determination in classifying a financial instrument within Level 3 of the fair value hierarchy is based upon the significance of unobservable factors to the overall fair value measurement. Transfers in and out of Level 3 for the three and nine months ended December 31, 2011 and 2010 are recognized at the end of their respective reporting periods. There were no transfers between Level 1 and Level 2 securities during the three and nine months ended December 31, 2011 and 2010.

The following tables summarize the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs for the three and nine months ended December 31, 2011 and 2010:

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

			Derivative instruments, net
								Total
		Interest		Foreign				derivative
		rate		currency		Embedded		assets
(Dollars in millions)		swaps		swaps		derivatives		(liabilities)
Fair value, October 1, 2011		$	11	$	180	$	(46)	$	145
Total gains/(losses)
	Included in earnings		1		13		3		17
	Included in other comprehensive income		-		-		-		-
Purchases, issuances, sales, and settlements
	Purchases		-		-		-		-
	Issuances		-		-		-		-
	Sales		-		-		-		-
	Settlements		(1)		(12)		-		(13)
Transfers in to Level 3			-		-		-		-
Transfers out of Level 3			-		-		-		-
Fair value, December 31, 2011		$	11	$	181	$	(43)	$	149
The amount of total gains or
(losses) for the period included
in earnings attributable to the
change in unrealized gains or
losses related to assets still held
at the reporting date		$	1	$	13	$	(5)	$	9

Note 2 – Fair Value Measurements (Continued)

Three Months Ended December 31, 2010

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
															Total net
		Available-for-sale													assets
		securities					Derivative instruments, net								(liabilities)
		Non-agency
		commercial		Available-									Total
		mortgage-		for-sale		Interest		Foreign					derivative
		backed		securities		rate		currency		Embedded			assets
(Dollars in millions)		securities		total		swaps		swaps		derivatives			(liabilities)
Fair value, October 1, 2010		$	-	$	-	$	20	$	125		$	(49)	$	96	$	96
Total gains/(losses)
	Included in earnings		-		-		(5)		12			(6)		1		1
	Included in other comprehensive income		-		-		-		-			-		-		-
Purchases, issuances, sales, and settlements
	Purchases		1		1		-		-			-		-		1
	Issuances		-		-		-		-			-		-		-
	Sales		-		-		-		-			-		-		-
	Settlements		-		-		(3)		(15)			-		(18)		(18)
Transfers in to Level 3			-		-		-		-			-		-		-
Transfers out of Level 3			-		-		-		(11)			-		(11)		(11)
Fair value, December 31, 2010		$	1	$	1	$	12	$	111		$	(55)	$	68	$	69
The amount of total gains or
(losses) for the period included
in earnings attributable to the
change in unrealized gains or
losses related to assets still held
at the reporting date						$	(5)	$	14		$	(6)	$	3	$	3

Note 2 – Fair Value Measurements (Continued)

Nine Months Ended December 31, 2011

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

		Derivative instruments, net

								Total
		Interest		Foreign				derivative
		rate		currency		Embedded		assets
(Dollars in millions)		swaps		swaps		derivatives		(liabilities)
Fair value, April 1, 2011		$	17	$	109	$	(51)	$	75
Total gains/(losses)
	Included in earnings		8		89		9		106
	Included in other comprehensive income		-		-		-		-
Purchases, issuances, sales, and settlements
	Purchases		-		-		-		-
	Issuances		-		-		-		-
	Sales		-		-		-		-
	Settlements		(15)		(17)		-		(32)
Transfers in to Level 3			-		-		-		-
Transfers out of Level 3			1		-		(1)		-
Fair value, December 31, 2011		$	11	$	181	$	(43)	$	149
The amount of total gains or
(losses) for the period included
in earnings attributable to the
change in unrealized gains or
losses related to assets still held
at the reporting date		$	5	$	88	$	(13)	$	80

Note 2 – Fair Value Measurements (Continued)

Nine Months Ended December 31, 2010

			Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
																	Total net
			Available-for-sale														assets
			securities							Derivative instruments, net							(liabilities)
			Non-agency
			commercial				Available-								Total
			mortgage-		Asset-		for-sale		Interest		Foreign				derivative
			backed		backed		securities		rate		currency		Embedded		assets
(Dollars in millions)			securities		securities		total		swaps		swaps		derivatives		(liabilities)
Fair value, April 1, 2010			$	-	$	3	$	3	$	16	$	69	$	(30)	$	55	$	58
Total gains/(losses)
		Included in earnings		-		-		-		67		315		(25)		357		357
		Included in other
		comprehensive income		-		-		-		-		-		-		-		-
Purchases, issuances, sales, and
	settlements
		Purchases		1		-		1		-		-		-		-		1
		Issuances		-		-		-		-		-		-		-		-
		Sales		-		-		-		-		-		-		-		-
		Settlements		-		-		-		(36)		(59)		-		(95)		(95)
Transfers in to Level 3				-		-		-		-		-		-		-		-
Transfers out of Level 3				-		(3)		(3)		(35)		(214)		-		(249)		(252)
Fair value, December 31, 2010			$	1	$	-	$	1	$	12	$	111	$	(55)	$	68	$	69
The amount of total gains or
(losses) for the period included
in earnings attributable to the
change in unrealized gains or
losses related to assets still held
at the reporting date									$	13	$	148	$	(27)	$	134	$	134

Level 3 net assets, reported at fair value on a recurring basis increased $74 million and $4 million for the first nine months and third quarter of fiscal 2012. The increase is primarily attributable to an increase in the fair value of derivative assets, specifically foreign currency derivatives, due to the strengthening of the Japanese yen against the U.S. dollar during the first nine months of the fiscal year ending March 31, 2012.

Certain assets are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances, for example, when there is evidence of impairment. For these assets, we disclose the fair value on a nonrecurring basis and any changes in fair value during the reporting period. Fair value measurements on a nonrecurring basis consisted of Level 3 net finance receivables within the dealer products portfolio segment individually evaluated for impairment of $155 million and $191 million as of December 31, 2011 and March 31, 2011, respectively. The methods used to estimate the fair value of the underlying collateral depends on the specific class of finance receivable. For finance receivables within the wholesale class of finance receivables, the collateral value is generally based on wholesale market value or liquidation value for new and used vehicles. For finance receivables within the real estate class of finance receivables, the collateral value is generally based on appraisals from internal or external valuation sources. For finance receivables within the working capital class of finance receivables, the collateral value is generally based on the expected liquidation value of the underlying dealership assets.

The total change in fair value of financial instruments measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Consolidated Statement of Income consisted of a gain on net finance receivables within the dealer products portfolio segment individually evaluated for impairment of $19 million and $4 million for the first nine months and third quarter of fiscal 2012 and $22 million for the first nine months of fiscal 2011. There was no corresponding gain or loss for the third quarter of fiscal 2011.