SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

12 Months Ended

Oct. 27, 2024

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

The following are significant accounting policies in addition to those included in other notes to the consolidated financial statements.

Use of Estimates in Financial Statements

Certain accounting policies require management to make estimates and assumptions in determining the amounts reflected in the financial statements and related disclosures. Actual results could differ from these estimates.

Cash and Cash Equivalents

We consider investments with purchased maturities of three months or less to be cash equivalents.

Revenue Recognition

Financing revenue, including compensation from John Deere for waived or reduced finance charges, is recorded over the lives of the related receivables using the interest method. Deferred costs on the origination of receivables are recognized as a reduction in finance revenue over the lives of the receivables using the interest method. Operating lease revenue, including compensation from John Deere, and deferred costs on the origination of operating leases are recognized on a straight-line basis over the scheduled lease terms in lease revenue.

Receivables and Allowance for Credit Losses

Receivables are reported on the consolidated balance sheets at outstanding principal and accrued interest, adjusted for any write offs and any unamortized deferred fees or costs on originated Receivables.

We also record an allowance for credit losses and provision for credit losses related to the Receivables. Receivables are written off to the allowance when the account is considered uncollectible.  The allowance for credit losses is an estimate of the credit losses expected over the life of our Receivable portfolio. Non-performing Receivables are included in the estimate of expected credit losses. The allowance is measured on a collective basis for receivables with similar risk characteristics. Receivables that do not share risk characteristics are evaluated on an individual basis. Risk characteristics include:

● product category,

● market,

● geography,

● credit risk, and

● remaining balance.

We utilize the following loss forecast models to estimate expected credit losses:

Customer Receivables:

● Linear regression models are used for large and complex Customer Receivable pools, which represent more than 90 percent of Customer Receivables. These statistical models utilize independent variables, or predictive features, to estimate lifetime default rates, which are subsequently adjusted for expected recoveries to arrive at lifetime credit loss estimates. Independent variables included in the models vary by product, but can include credit quality at time of application, remaining account balance, delinquency status, and various economic factors, such as commodity prices, employment levels, and housing data.  The economic factors include forward-looking conditions over our reasonable and supportable forecast period.  In the fourth quarter of 2024, we transitioned from the use of transition matrix models to linear regression models to estimate expected credit losses. This change in methodology did not have a material impact on our consolidated financial statements.

● Weighted average remaining maturity (WARM) models are used for smaller and less complex Customer Receivable pools, and apply historical average annual loss rates, adjusted for current and forecasted economic conditions, to the projected portfolio runoff.

Wholesale receivables:

● Historical loss rate models are used for wholesale receivables, with consideration of current economic conditions and dealer financial risk. Changes in economic conditions have historically had limited impact on credit losses in this portfolio.

Management reviews each model’s output quarterly, and qualitative adjustments are incorporated as necessary to arrive at management’s best estimate of expected credit losses.

Recoveries from freestanding credit enhancements, such as dealer deposits and certain credit insurance and bank guarantee contracts, are not included in the estimate of expected credit losses. Recoveries from dealer deposits are recognized in “Other income” when the dealer’s deposit account is charged, while recoveries from other freestanding credit enhancements are generally recognized when the associated credit loss is recorded.

Securitization of Receivables

Certain Receivables are periodically transferred to SPEs in securitization transactions (see Note 5). These securitizations qualify as collateral for secured borrowings and no gains or losses are recognized at the time of securitization. The receivables remain on the consolidated balance sheets and are classified as “Retail notes securitized.” We recognize finance income over the lives of these receivables using the interest method.

Depreciation

We estimate residual values of equipment on operating leases at the inception of the lease, and the equipment is depreciated over the lease terms to the estimated residual value using the straight-line method. We review residual value estimates during the lease term and depreciation is adjusted prospectively on a straight-line basis over the remaining lease term if residual estimates are revised.

Impairment of Long-Lived Assets

We evaluate the carrying value of long-lived assets, including equipment on operating leases, when events or circumstances warrant such a review. If the carrying value of the long-lived asset is considered impaired, it is written down to its fair value.

Fees and Interest Paid to John Deere

Fees and interest paid to John Deere include corporate support fees and interest on intercompany borrowings from John Deere based on approximate market rates.

Derivative Financial Instruments

It is our policy to use derivative transactions only to manage exposures from the normal course of business. We do not execute derivative transactions for the purpose of creating speculative positions or trading. We have interest rate and foreign currency fluctuation risk between the types and amounts of our Receivable and Lease portfolios and how these portfolios are funded. We also have foreign currency exposures at some of our foreign and domestic operations related to financing in currencies other than the functional currencies.

All derivatives are recorded at fair value on the consolidated balance sheets. Cash collateral received or paid is not offset against the derivative fair values on the consolidated balance sheets. The cash flows from the derivative contracts are recorded in operating activities in the statements of consolidated cash flows. Each derivative is designated as a cash flow hedge, fair value hedge, or remains undesignated.

Changes in the fair value of derivatives are recorded as follows:

● Cash flow hedges are recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense in the same periods during which the effects of the hedged item (borrowings) impact earnings. These amounts offset the effects of interest rate changes on the related borrowings in interest expense.

● Fair value hedges are recorded in interest expense, and the gains or losses are generally offset by the fair value gains or losses on the hedged items (fixed-rate borrowings), which are also recorded in interest expense.

● Derivatives not designated as hedging instruments are recorded in interest expense (interest rate contracts) or administrative and operating expenses (foreign currency exchange contracts).

All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis, the hedging instrument is assessed for its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued (see Note 20).

Financing Incentives

We provide incentive funds to John Deere dealers that meet certain performance metrics, which include minimum finance volume and finance market share with us over a defined period. At the end of the qualification period, dealers are granted incentive funds, which can be applied to certain predefined uses, including interest rate reductions on future loan and lease originations. In addition, certain dealers may elect to receive cash for a portion of their earned funds. We accrue for the incentive costs over the qualification period, which are reported as “Administrative and operating expenses” in the consolidated income statements and “Accounts payable and accrued expenses” in the consolidated balance sheets. The accrued liability is released as dealers utilize the funds.

International Support Agreement

We have an international support agreement with Deere & Company, pursuant to which we and Deere & Company have agreed to make periodic support payments to each other if and to the extent necessary to ensure our businesses in certain international markets, including Mexico, Argentina, and Chile, earn a specified target return on equity. Deere & Company’s obligations to make payments under this agreement are expressly stated not to be a guarantee of any specific indebtedness, obligation, or liability of ours.  Payments made under the international support agreement are reported in “Fees and interest paid to John Deere”, while payments received from Deere & Company are reported in “Other income.”  Refer to Note 15 for additional information.

Foreign Currency Translation

The functional currencies for most of our foreign operations are their respective local currencies. The assets and liabilities of these operations are translated into U.S. dollars using the exchange rates at the end of the period. The revenues and expenses are translated at weighted average rates for the period. The gains or losses from these translations are recorded in OCI. Gains or losses from transactions denominated in a currency other than the functional currency of the subsidiary involved and foreign currency exchange components of derivative contracts are included in net income. The pretax net losses for foreign currency exchange in 2024, 2023, and 2022 were $8.8, $20.4, and $25.6 respectively, which are reported in “Administrative and operating expenses” and primarily related to our Argentina operations (see Note 1).

New Accounting Pronouncements Adopted

We closely monitor all Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) and other authoritative guidance.

In the first quarter of 2024, we adopted ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for troubled debt restructurings, enhances disclosures for certain receivable modifications related to borrowers experiencing financial difficulty, and requires disclosure of current period gross write-offs by year of origination. The adoption did not have a material effect on our consolidated financial statements.

We also adopted the following standards in 2024, none of which had a material effect on our consolidated financial statements:

2022-01 — Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method

2021-08 — Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

Accounting Pronouncements to be Adopted

In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which expands disclosures about specific expense categories presented on the face of the income statement. The effective date of the ASU is fiscal year 2028. We are assessing the effect of this update on our related disclosures. 

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and cash income taxes paid both in the U.S. and foreign jurisdictions. The effective date of the ASU is fiscal year 2026. We are assessing the effect of this update on our related disclosures.

We will also adopt the following standards in future periods, none of which are expected to have a material effect on our consolidated financial statements:

2024-04 — Debt – Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments

2023-07 — Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures

2023-06 — Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative

2023-05 — Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement