FAIR VALUE MEASUREMENTS

Cash equivalents, marketable securities, and derivative financial instruments are presented on our financial statements at fair value. The fair value of finance receivables and debt, together with the related carrying value, is disclosed in Notes 5 and 11, respectively. Certain other assets and liabilities are measured at fair value on a nonrecurring basis and vary based on specific circumstances such as impairments.

Fair Value Measurements

In determining fair value, we use various valuation methodologies and prioritize the use of observable inputs. We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:


•	Level 1 — inputs include quoted prices for identical instruments and are the most observable.


•	Level 2 — inputs include quoted prices for similar assets 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's judgments about the assumptions market participants would use in pricing the asset or liability.

The use of observable and unobservable inputs and their significance in measuring fair value are reflected in our hierarchy assessment.

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)

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 changes in value due to interest rate, market 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 90 days 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. These include $1.8 billion of demand deposits with financial institutions which were classified as Marketable securities prior to 2011, and this amount is reported in Sales and maturities of securities in the 2011 consolidated statement of cash flows. Time deposits, certificates of deposit, and money market accounts that meet the above criteria are classified as Cash and cash equivalents, reported at par value, and excluded from the tables below.

Marketable Securities. Investments in securities with a maturity date greater than 90 days at the date of purchase and other securities for which there is a more than insignificant risk of changes in value because of interest rate, market price, or penalty on withdrawal are classified as Marketable securities. For marketable securities, we generally measure fair value based on a market approach using prices obtained from pricing services. We review all pricing data for reasonability and observability of inputs. 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 dealer stands ready to purchase), and other market information. For securities that are not actively traded, the pricing services obtain quotes for similar fixed-income securities or utilize matrix pricing, benchmark curves, or other factors to determine fair value. In certain cases, when observable pricing data are not available, we estimate the fair value of investment securities based on an income approach using industry standard valuation models and estimates regarding non-performance risk.

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 based on an income approach using industry standard valuation models. 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, 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 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 are not available and we develop assumptions or use models (e.g., Black Scholes) to determine fair value. This includes situations where there is illiquidity for a particular currency or commodity or for longer-dated instruments. Also, for interest rate swaps and cross-currency interest rate swaps used in securitization transactions, the notional amount of the swap is reset based on actual payments on the securitized contracts. We use management judgment to estimate timing and amount of the swap cash flows based on historical pre-payment speeds.

Ford Credit has two asset-backed debt transactions with derivative features, Ford Upgrade Exchange Linked ("FUEL") notes. These features include a mandatory exchange to Ford Credit unsecured notes when Ford Credit's senior unsecured debt receives two investment grade credit ratings among Fitch, Moody's and S&P and a make-whole provision. We estimated the fair value of these features by comparing the market value of the FUEL notes to the value of a hypothetical debt instrument without these features.

Finance Receivables. We generally estimate the fair value of finance receivables based on an income approach 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 a present value based on market inputs and our own assumptions regarding credit losses, pre-payment speed, and the discount rate. Our assumptions regarding pre-payment speed and credit losses are based on historical performance.

Debt. We estimate the fair value of debt based on a market approach using quoted market prices or current market rates for similar debt with approximately the same remaining maturities, where possible. Where market prices or current market rates are not available, we estimate fair value based on an income approach using discounted cash flow models. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, our own credit risk and the contractual terms of the debt instruments. For asset-backed debt issued in securitization transactions, the principal payments are based on projected payments for specific assets securing the underlying debt considering historical prepayment speeds.

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)

Input Hierarchy of Items Measured at Fair Value on a Recurring Basis

The following tables summarize the fair values by input hierarchy of items measured at fair value on a recurring basis on our balance sheet (in millions):



	June 30, 2011
	Level 1		Level 2		Level 3		Total
Automotive Sector
Assets
Cash equivalents – financial instruments (a)
U.S. government	$	3	$	—	$	—	$	3
U.S. government-sponsored enterprises	—		1,885		—		1,885
Government – non-U.S.	—		728		—		728
Foreign government agencies (b)	—		1,255		—		1,255
Corporate debt	—		—		—		—
Total cash equivalents – financial instruments	3		3,868		—		3,871
Marketable securities (c)
U.S. government	1,412		—		—		1,412
U.S. government-sponsored enterprises	—		3,464		—		3,464
Foreign government agencies (b)	—		4,842		—		4,842
Corporate debt	—		933		5		938
Mortgage-backed and other asset-backed	—		43		1		44
Equity	184		—		—		184
Government – non-U.S.	—		1,026		—		1,026
Other liquid investments (d)	—		28		—		28
Total marketable securities	1,596		10,336		6		11,938
Derivative financial instruments
Foreign exchange contracts	—		307		—		307
Commodity contracts	—		22		2		24
Other – warrants	—		—		6		6
Total derivative financial instruments (e)	—		329		8		337
Total assets at fair value	$	1,599	$	14,533	$	14	$	16,146
Liabilities
Derivative financial instruments
Foreign exchange contracts	$	—	$	147	$	3	$	150
Commodity contracts	—		25		21		46
Total derivative financial instruments (e)	—		172		24		196
Total liabilities at fair value	$	—	$	172	$	24	$	196

__________


(a)	"Cash equivalents - financial instruments" in this table excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value totaling $4.2 billion as of June 30, 2011 for the Automotive sector. In addition to these cash equivalents, our Automotive sector also had cash on hand totaling $1.7 billion as of June 30, 2011.


(b)	Includes notes issued by foreign government agencies that include implicit and explicit guarantees, as well as notes issued by supranational institutions.


(c)	Excludes an investment in Ford Credit debt securities held by the Automotive sector with a carrying value of $201 million and an estimated fair value of $200 million as of June 30, 2011; see Note 11 for additional detail.


(d)	"Other liquid investments" in this table includes certificates of deposit and time deposits.


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

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)



	June 30, 2011
	Level 1		Level 2		Level 3		Total
Financial Services Sector
Assets
Cash equivalents – financial instruments (a)
U.S. government	$	—	$	—	$	—	$	—
U.S. government-sponsored enterprises	—		175		—		175
Government – non-U.S.	—		420		—		420
Foreign government agencies (b)	—		—		—		—
Corporate debt	—		—		—		—
Mortgage-backed and other asset-backed	—		6		—		6
Total cash equivalents – financial instruments	—		601		—		601
Marketable securities
U.S. government	827		—		—		827
U.S. government-sponsored enterprises	—		1,056		—		1,056
Foreign government agencies (b)	—		652		—		652
Corporate debt	—		1,197		5		1,202
Mortgage-backed and other asset-backed	—		165		—		165
Government – non-U.S.	—		190		—		190
Other liquid investments (c)	—		19		—		19
Total marketable securities	827		3,279		5		4,111
Derivative financial instruments
Interest rate contracts	—		729		191		920
Foreign exchange contracts	—		64		—		64
Cross currency interest rate swap contracts	—		—		—		—
Other (d)	—		—		75		75
Total derivative financial instruments (e)	—		793		266		1,059
Total assets at fair value	$	827	$	4,673	$	271	$	5,771
Liabilities
Derivative financial instruments
Interest rate contracts	$	—	$	76	$	129	$	205
Foreign exchange contracts	—		66		—		66
Cross-currency interest rate swap contracts	—		—		42		42
Total derivative financial instruments (e)	—		142		171		313
Total liabilities at fair value	$	—	$	142	$	171	$	313

__________

(a)

"Cash equivalents - financial instruments" in this table excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value on our balance sheet totaling $4.6 billion as of June 30, 2011 for the Financial Services sector. In addition to these cash equivalents, our Financial Services sector also had cash on hand totaling $2.5 billion as of June 30, 2011.


(b)	Includes notes issued by foreign government agencies that include implicit and explicit guarantees, as well as notes issues by supranational institutions.


(c)	"Other liquid investments" in this table includes certificates of deposit and time deposits.


(d)	"Other" in this table represents derivative features included in the FUEL notes.


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

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)



	December 31, 2010
	Level 1		Level 2		Level 3		Total
Automotive Sector
Assets
Cash equivalents – financial instruments (a)
U.S. government	$	—	$	—	$	—	$	—
U.S. government-sponsored enterprises	—		224		—		224
Government – non-U.S.	—		133		—		133
Foreign government agencies (b)	—		1,619		—		1,619
Corporate debt	—		199		—		199
Total cash equivalents – financial instruments	—		2,175		—		2,175
Marketable securities (c)
U.S. government	2,718		—		—		2,718
U.S. government-sponsored enterprises	—		4,809		—		4,809
Foreign government agencies (b)	—		3,215		1		3,216
Corporate debt	—		517		—		517
Mortgage-backed and other asset-backed	—		20		—		20
Equity	203		—		—		203
Government – non-U.S.	—		818		1		819
Other liquid investments (d)	—		1,704		—		1,704
Total marketable securities	2,921		11,083		2		14,006
Derivative financial instruments
Foreign exchange contracts	—		58		—		58
Commodity contracts	—		36		33		69
Other – warrants	—		—		5		5
Total derivative financial instruments (e)	—		94		38		132
Total assets at fair value	$	2,921	$	13,352	$	40	$	16,313
Liabilities
Derivative financial instruments
Foreign exchange contracts	$	—	$	93	$	—	$	93
Commodity contracts	—		6		—		6
Total derivative financial instruments (e)	—		99		—		99
Total liabilities at fair value	$	—	$	99	$	—	$	99

__________


(a)	"Cash equivalents - financial instruments" in this table excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value totaling $2.2 billion as of December 31, 2010 for the Automotive sector. In addition to these cash equivalents, our Automotive sector also had cash on hand totaling $1.9 billion as of December 31, 2010.


(b)	Includes notes issued by foreign government agencies that include implicit and explicit guarantees, as well as notes issued by supranational institutions.


(c)	Excludes an investment in Ford Credit debt securities held by the Automotive sector with a carrying value of $201 million and an estimated fair value of $203 million as of December 31, 2010; see Note 11 for additional detail.


(d)	"Other liquid investments" in this table includes certificates of deposit and time deposits.


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

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)



	December 31, 2010
	Level 1		Level 2		Level 3		Total
Financial Services Sector
Assets
Cash equivalents – financial instruments (a)
U.S. government	$	9	$	—	$	—	$	9
U.S. government-sponsored enterprises	—		150		—		150
Government – non-U.S.	—		323		—		323
Foreign government agencies (b)	—		100		—		100
Corporate debt	—		200		—		200
Total cash equivalents – financial instruments	9		773		—		782
Marketable securities
U.S. government	1,671		—		—		1,671
U.S. government-sponsored enterprises	—		2,905		—		2,905
Foreign government agencies (b)	—		821		1		822
Corporate debt	—		732		—		732
Mortgage-backed and other asset-backed	—		177		—		177
Government – non-U.S.	—		364		—		364
Other liquid investments (c)	—		88		—		88
Total marketable securities	1,671		5,087		1		6,759
Derivative financial instruments
Interest rate contracts	—		1,035		177		1,212
Foreign exchange contracts	—		24		—		24
Cross currency interest rate swap contracts	—		25		—		25
Total derivative financial instruments (d)	—		1,084		177		1,261
Total assets at fair value	$	1,680	$	6,944	$	178	$	8,802
Liabilities
Derivative financial instruments
Interest rate contracts	$	—	$	134	$	195	$	329
Foreign exchange contracts	—		73		—		73
Cross-currency interest rate swap contracts	—		118		71		189
Total derivative financial instruments (d)	—		325		266		591
Total liabilities at fair value	$	—	$	325	$	266	$	591

__________

(a)

"Cash equivalents - financial instruments" in this table excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value on our balance sheet totaling $5.7 billion as of December 31, 2010 for the Financial Services sector. In addition to these cash equivalents, our Financial Services sector also had cash on hand totaling $2.0 billion as of December 31, 2010.


(b)	Includes notes issued by foreign government agencies that include implicit and explicit guarantees, as well as notes issues by supranational institutions.


(c)	"Other liquid investments" in this table includes certificates of deposit and time deposits.


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

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)

Reconciliation of Changes in Level 3 Balances

The following tables summarize the changes in Level 3 items measured at fair value on a recurring basis on our balance sheet for the periods ending June 30 (in millions):



	First Half 2011
	Marketable Securities
	Foreign Government Agencies			Corporate Debt		Mortgage- Backed and Other Asset- Backed		Government Non-U.S.			Total Marketable Securities			Derivative Financial Instruments, Net			Total Level 3 Fair Value
Automotive Sector
Beginning balance	$	1		$	—	$	—	$	1		$	2		$	38		$	40
Realized/unrealized gains/(losses)
Cost of sales	—			—		—		—			—			(23		)	(23		)
Interest income and other non-operating income/(loss), net	—			—		—		(1		)	(1		)	1			—
Other comprehensive income/(loss) (a)	—			—		—		—			—			—			—
Total realized/unrealized gains/(losses)	—			—		—		(1		)	(1		)	(22		)	(23		)
Purchases, issues, sales, settlements
Purchases	—			5		1		1			7			—			7
Issues	—			—		—		—			—			—			—
Sales	—			—		—		(1		)	(1		)	—			(1		)
Settlements	—			—		—		—			—			(32		)	(32		)
Total purchases, issues, sales, settlements	—			5		1		—			6			(32		)	(26		)
Transfers into Level 3	—			—		—		—			—			—			—
Transfers out of Level 3 (b)	(1		)	—		—		—			(1		)	—			(1		)
Ending balance	$	—		$	5	$	1	$	—		$	6		$	(16	)	$	(10	)
Change in unrealized gains/ (losses) on instruments still held	$	—		$	—	$	—	$	—		$	—		$	(20	)	$	(20	)

Financial Services Sector
Beginning balance	$	1		$	—	$	—	$	—		$	1		$	(89	)	$	(88	)
Realized/unrealized gains/(losses)
Other income/(loss), net	—			—		—		—			—			(13		)	(13		)
Other comprehensive income/(loss) (a)	—			—		—		—			—			(2		)	(2		)
Interest income/(expense)	—			—		—		—			—			26			26
Total realized/unrealized gains/(losses)	—			—		—		—			—			11			11
Purchases, issues, sales, settlements
Purchases	—			5		—		—			5			—			5
Issues (c)	—			—		—		—			—			73			73
Sales	—			—		—		—			—			—			—
Settlements	—			—		—		—			—			103			103
Total purchases, issues, sales, settlements	—			5		—		—			5			176			181
Transfers into Level 3	—			—		—		—			—			—			—
Transfers out of Level 3 (b)	(1		)	—		—		—			(1		)	(3		)	(4		)
Ending balance	$	—		$	5	$	—	$	—		$	5		$	95		$	100
Change in unrealized gains/ (losses) on instruments still held	$	—		$	—	$	—	$	—		$	—		$	80		$	80

__________


(a)	"Other comprehensive income/(loss)" represents foreign currency translation on derivative asset and liability balances held by non-U.S. dollar foreign affiliates.


(b)	Represents transfers due to the availability of observable data for $2 million of marketable securities as a result of increased market activity for these securities and transfers for $3 million due to shorter duration of derivative financial instruments. Transfers in and transfers out represent the value at the end of the reporting period.


(c)	Reflects $73 million in Level 3 under Derivative financial instruments, net for derivative features included in the FUEL notes.

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)



	First Half 2010
	Marketable Securities
	Foreign Government Agencies		Corporate Debt			Mortgage-Backed and Other Asset- Backed			Government Non-U.S.		Total Marketable Securities			Derivative Financial Instruments, Net			Retained Interest in Securitized Assets			Total Level 3 Fair Value
Automotive Sector
Beginning balance	$	—	$	8		$	17		$	—	$	25		$	9		$	—		$	34
Realized/unrealized gains/(losses)
Cost of sales	—		—			—			—		—			—			—			—
Interest income and other non-operating income/(loss), net	—		—			(1		)	—		(1		)	1			—			—
Other comprehensive income/(loss) (a)	—		—			—			—		—			—			—			—
Total realized/unrealized gains/(losses)	—		—			(1		)	—		(1		)	1			—			—
Purchases, issues, sales, settlements
Purchases	—		—			—			—		—			—			—			—
Issues	—		—			—			—		—			—			—			—
Sales	—		(8		)	(15		)	—		(23		)	—			—			(23		)
Settlements	—		—			—			—		—			(5		)	—			(5		)
Total purchases, issues, sales, settlements	—		(8		)	(15		)	—		(23		)	(5		)	—			(28		)
Transfers into Level 3	—		—			—			—		—			—			—			—
Transfers out of Level 3 (b)	—		—			—			—		—			—			—			—
Ending balance	$	—	$	—		$	1		$	—	$	1		$	5		$	—		$	6
Change in unrealized gains/ (losses) on instruments still held	$	—	$	—		$	—		$	—	$	—		$	(1	)	$	—		$	(1	)

Financial Services Sector
Beginning balance	$	—	$	4		$	—		$	—	$	4		$	(155	)	$	26		$	(125	)
Realized/unrealized gains/(losses)
Other income/(loss), net	—		(4		)	—			—		(4		)	(23		)	(3		)	(30		)
Other comprehensive income/(loss) (a)	—		—			—			—		—			2			2			4
Interest income/(expense)	—		—			—			—		—			—			—			—
Total realized/unrealized gains/(losses)	—		(4		)	—			—		(4		)	(21		)	(1		)	(26		)
Purchases, issues, sales, settlements
Purchases	—		—			—			—		—			—			—			—
Issues	—		—			—			—		—			—			—			—
Sales	—		—			—			—		—			—			—			—
Settlements	—		—			—			—		—			82			(21		)	61
Total purchases, issues, sales, settlements	—		—			—			—		—			82			(21		)	61
Transfers into Level 3	—		—			—			—		—			—			—			—
Transfers out of Level 3 (b)	—		—			—			—		—			—			—			—
Ending balance	$	—	$	—		$	—		$	—	$	—		$	(94	)	$	4		$	(90	)
Change in unrealized gains/(losses) on instruments still held	$	—	$	—		$	—		$	—	$	—		$	59		$	—		$	59

__________


(a)	"Other comprehensive income/(loss)" represents foreign currency translation on derivative asset and liability balances held by non-U.S. dollar foreign affiliates.


(b)	Transfers in and transfers out represent the value at the end of the reporting period.

NOTE 3. FAIR VALUE MEASUREMENTS (Continued)

Input Hierarchy of Items Measured at Fair Value on a Nonrecurring Basis

The following tables summarize the items measured at fair value subsequent to initial recognition on a nonrecurring basis by input hierarchy for the quarter and year ended June 30, 2011 and December 31, 2010, respectively, that were still held on our balance sheet at those dates (in millions):



	June 30, 2011 (a)								December 31, 2010 (a)
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Services Sector
North America
Retail receivables (b)	$	—	$	—	$	76	$	76	$	—	$	—	$	82	$	82
Dealer loans, net (b)	—		3		10		13		—		—		22		22
Total North America	—		3		86		89		—		—		104		104
International
Retail receivables (b)	—		—		46		46		—		—		45		45
Total International	—		—		46		46		—		—		45		45
Total Financial Services sector	$	—	$	3	$	132	$	135	$	—	$	—	$	149	$	149

__________


(a)	There were no Automotive sector nonrecurring fair value measurements subsequent to initial recognition recorded.

(b)

Finance receivables, including retail accounts that have been charged off and individual dealer loans where foreclosure is probable, are measured based on the fair value of the collateral adjusted for estimated costs to sell. The collateral for retail receivables is the vehicle being financed and for dealer loans is real estate or other property. See Note 6 for additional information related to the development of Ford Credit's allowance for credit losses.

Nonrecurring Fair Value Changes

The following table summarizes the total change in value of items for which a nonrecurring fair value adjustment has been included in our consolidated statement of operations for the periods ended June 30, 2011 and 2010, related to items still held on our balance sheet at those dates (in millions):



	Total Gains / (Losses)
	Second Quarter						First Half
	2011			2010			2011			2010
Financial Services Sector
North America
Retail receivables *	$	(6	)	$	(8	)	$	(16	)	$	(19	)
Dealer loans, net *	(1		)	(1		)	(1		)	(4		)
Total North America	(7		)	(9		)	(17		)	(23		)
International
Retail receivables *	(5		)	(9		)	(10		)	(20		)
Total International	(5		)	(9		)	(10		)	(20		)
Total Financial Services sector	$	(12	)	$	(18	)	$	(27	)	$	(43	)

__________

* Fair value changes related to retail finance receivables that have been charged off or dealer loans that have been impaired based on the fair value of the collateral adjusted for estimated costs to sell are recorded in Financial Services provision for credit and insurance losses.