Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 12. FAIR VALUE MEASUREMENTS

Cash equivalents, marketable securities, and derivative financial instruments are presented in our financial statements on a recurring basis at fair value, while other assets and liabilities are measured at fair value on a nonrecurring basis such as when we have an asset impairment.

Fair Value Measurements

In measuring fair value, we use various valuation methodologies and prioritize the use of observable inputs. The use of observable and unobservable inputs and their significance in measuring fair value are reflected in our fair value hierarchy assessment.

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

• Level 2 – inputs include quoted prices for similar instruments 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 judgment about the assumptions market participants would use in pricing the instruments

We review the inputs to the fair value measurements to ensure they are appropriately categorized within the fair value hierarchy. Transfers into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.

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 change 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. Time deposits, certificates of deposit, and money market accounts that meet the above criteria are reported at par value on our balance sheet and are 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 an insignificant risk of change in value due to interest rate, market price, or penalty on withdrawal are classified as Marketable securities. We generally measure fair value using prices obtained from pricing services. 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 buyer stands ready to purchase), and other market information. For fixed income securities that are not actively traded, the pricing services use alternative methods to determine fair value for the securities, including: quotes for similar fixed-income securities, matrix pricing, discounted cash flow using benchmark curves, or other factors to determine fair value. In certain cases, when market data are not available, we use broker quotes to determine fair value.

A review is performed on the security prices received from our pricing services, which includes discussion and analysis of the inputs used by the pricing services to value our securities. We also compare the price of certain securities sold close to the quarter end to the price of the same security at the balance sheet date to ensure the reported fair value is reasonable.

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

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 using industry-standard valuation models such as a discounted cash flow. 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. 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.

Our two FUEL securitization transactions had derivative features which included a mandatory exchange to our unsecured notes when our senior unsecured debt received 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.

In the second quarter of 2012, we received two investment grade credit ratings thereby triggering the mandatory exchange feature and the FUEL derivatives were extinguished.

Finance Receivables. The fair value of finance receivables is measured for purposes of disclosure (see Note 2). We measure the fair value of finance receivables 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 assumptions regarding credit losses, pre-payment speed, and our discount rate. Our assumptions regarding pre-payment speed and credit losses are based on historical performance. The fair value of finance receivables is categorized within Level 3 of the hierarchy.

On a nonrecurring basis, when retail contracts are greater than 120 days past due or deemed to be uncollectible, or if individual dealer loans are probable of foreclosure, we use the fair value of collateral, adjusted for estimated costs to sell, to determine the fair value adjustment to our receivables. The collateral for retail receivables is the vehicle financed, and for dealer loans is real estate or other property.

The fair value measurements for retail receivables are based on the number of contracts multiplied by the loss severity and the probability of default ("POD") percentage, or the outstanding receivable balances multiplied by the average recovery value ("ARV") percentage to determine the fair value adjustment.

The fair value measurements for dealer loans are based on an assessment of the estimated market value of collateral. The assessment is performed by reviewing various appraisals, which include total adjusted appraised value of land and improvements, alternate use appraised value, broker's opinion of value, and purchase offers. The fair value adjustment is determined by comparing the net carrying value of the dealer loan and the estimated market value of collateral.

Debt. We measure debt at fair value for purposes of disclosure (see Note 9) using quoted market prices for our own debt with approximately the same remaining maturities, where possible. Where market prices are not available, we estimate fair value using discounted cash flows and market-based expectations for interest rates, our own credit risk, and the contractual terms of the debt instruments. For certain short-term debt with an original maturity date of one year or less, we assume that book value is a reasonable approximation of debt's fair value. 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 pre-payment speeds. The fair value of debt is categorized within Level 2 of the hierarchy.

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

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

The following table categorizes the fair values of items measured at fair value on a recurring basis on our balance sheet (in millions):

	September 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash equivalents -- financial instruments
U.S. government	$	1	$	—	$	—	$	1	$	1	$	—	$	—	$	1
U.S. government-sponsored enterprises	—		167		—		167		—		75		—		75
Non-U.S. government agencies (a)	—		5		—		5		—		150		—		150
Corporate debt	—		18		—		18		—		—		—		—
Non-U.S. government	—		16		—		16		—		15		—		15
Total cash equivalents-financial instruments(b)	1		206		—		207		1		240		—		241
Marketable securities
U.S. government	2,071		—		—		2,071		619		—		—		619
U.S. government-sponsored enterprises	—		449		—		449		—		713		—		713
Non-U.S. government agencies (a)	—		175		—		175		—		778		—		778
Corporate debt	—		1,206		—		1,206		—		1,186		—		1,186
Mortgage-backed and other asset-backed	—		73		—		73		—		88		—		88
Non-U.S. government	—		121		—		121		—		444		—		444
Other liquid investments (c)	—		16		—		16		—		7		—		7
Total marketable securities	2,071		2,040		—		4,111		619		3,216		—		3,835
Derivative financial instruments
Interest rate contracts	—		1,453		—		1,453		—		1,163		—		1,163
Foreign currency exchange contracts	—		22		—		22		—		53		—		53
Cross-currency interest rate swap contracts	—		—		—		—		—		12		—		12
Other (d)	—		—		—		—		—		—		137		137
Total derivative financial instruments	—		1,475		—		1,475		—		1,228		137		1,365
Total assets at fair value	$	2,072	$	3,721	$	—	$	5,793	$	620	$	4,684	$	137	$	5,441
Liabilities
Derivative financial instruments
Interest rate contracts	$	—	$	284	$	—	$	284	$	—	$	237	$	—	$	237
Foreign currency exchange contracts	—		33		—		33		—		37		—		37
Cross-currency interest rate swap contracts	—		83		—		83		—		12		—		12
Total derivative financial instruments	—		400		—		400		—		286		—		286
Total liabilities at fair value	$	—	$	400	$	—	$	400	$	—	$	286	$	—	$	286

__________

(a) Includes notes issued by non-U.S. government agencies, as well as notes issued by supranational institutions.

(b) Excludes time deposits, certificates of deposit, and money market accounts reported at par value on our balance sheet totaling $4.8 billion and $5.7 billion at September 30, 2012 and December 31, 2011, respectively. In addition to these cash equivalents, we also had cash on hand totaling $2.1 billion and $2.8 billion at September 30, 2012 and December 31, 2011, respectively.

(c) Includes certificates of deposit and time deposits subject to changes in value.

(d) Represents derivative features included in the FUEL notes.

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

Reconciliation of Changes in Level 3 Balances

The following tables summarize the changes recorded through income in Level 3 items measured at fair value on a recurring basis and reported on our balance sheet for the periods ended September 30 (in millions):

	Third Quarter
	2012						2011
	Marketable Securities		Derivative Financial Instruments, Net (a)		Total Level 3 Fair Value		Marketable Securities			Derivative Financial Instruments, Net (a)		Total Level 3 Fair Value
Beginning balance	$	—	$	—	$	—	$	5		$	80	$	85
Realized/unrealized gains/(losses)
Other income, net	—		—		—		—			397		397
Other comprehensive income/(loss) (b)	—		—		—		—			2		2
Interest income/(expense) (c)	—		—		—		—			40		40
Total realized/unrealized gains/(losses)	—		—		—		—			439		439
Purchases, issues, sales, and settlements
Purchases	—		—		—		—			—		—
Issues	—		—		—		—			—		—
Sales	—		—		—		—			—		—
Settlements	—		—		—		—			6		6
Total purchases, issues, sales, and settlements	—		—		—		—			6		6
Transfers into Level 3	—		—		—		—			—		—
Transfers out of Level 3 (d)	—		—		—		(5		)	—		(5		)
Ending balance	$	—	$	—	$	—	$	—		$	525	$	525
Unrealized gains/(losses) on instruments still held	$	—	$	—	$	—	$	—		$	436	$	436

__________

(a) See Note 7 for detail on financial statement presentation by hedge designation.

(b) Represents foreign currency translation on derivative asset and liability balances held by non-U.S. dollar foreign affiliates.

(c) Recorded in Interest expense.

(d) Represents transfers out due to the increase in availability of observable data.

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

	First Nine Months
	2012								2011
	Marketable Securities		Derivative Financial Instruments, Net (a)			Total Level 3 Fair Value			Marketable Securities			Derivative Financial Instruments, Net (a)			Total Level 3 Fair Value
Beginning balance	$	—	$	137		$	137		$	1		$	(109	)	$	(108	)
Realized/unrealized gains/(losses)
Other income, net	—		(81		)	(81		)	—			385			385
Other comprehensive income/(loss) (b)	—		—			—			—			(1		)	(1		)
Interest income/(expense) (c)	—		—			—			—			65			65
Total realized/unrealized gains/(losses)	—		(81		)	(81		)	—			449			449
Purchases, issues, sales, and settlements
Purchases	—		—			—			5			—			5
Issues (d)	—		—			—			—			73			73
Sales	—		—			—			—			—			—
Settlements (e)	—		(56		)	(56		)	—			112			112
Total purchases, issues, sales, and settlements	—		(56		)	(56		)	5			185			190
Transfers into Level 3	—		—			—			—			—			—
Transfers out of Level 3 (f)	—		—			—			(6		)	—			(6		)
Ending balance	$	—	$	—		$	—		$	—		$	525		$	525
Unrealized gains/(losses) on instruments still held	$	—	$	—		$	—		$	—		$	475		$	475

__________

(a) See Note 7 for detail on financial statement presentation by hedge designation.

(b) Represents foreign currency translation on derivative asset and liability balances held by non-U.S. dollar foreign affiliates.

(c) Recorded in Interest expense.

(d) Represents derivative features included in the FUEL notes.

(e) Reflects $56 million due to the extinguishment of the derivative features included in the FUEL notes as a result of the mandatory exchange of the FUEL notes to unsecured notes in the second quarter of 2012.

(f) Represents transfers out due to the increase in availability of observable data.

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

The following table summarizes the items measured at fair value subsequent to initial recognition on a nonrecurring basis by input hierarchy for the periods ended September 30, 2012 and December 31, 2011 that were still held on our balance sheet at those dates (in millions):

	September 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
North America
Retail receivables	$	—	$	—	$	55	$	55	$	—	$	—	$	70	$	70
Dealer loans	—		—		2		2		—		—		6		6
Total North America	$	—	$	—	$	57	$	57	$	—	$	—	$	76	$	76
International
Retail receivables	$	—	$	—	$	27	$	27	$	—	$	—	$	39	$	39

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

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 statement of operations for the periods ended September 30, related to items still held on our balance sheet at those dates (in millions):

	Total Gains/(Losses)
	Third Quarter						First Nine Months
	2012			2011			2012			2011
North America
Retail receivables	$	(6	)	$	(8	)	$	(14	)	$	(19	)
Dealer loans	—			—			—			—
Total North America	$	(6	)	$	(8	)	$	(14	)	$	(19	)
International
Retail receivables	$	(6	)	$	(3	)	$	(11	)	$	(11	)

Fair value changes related to retail and dealer loan finance receivables that have been written down based on the fair value of collateral adjusted for estimated costs to sell are recorded in Provision for credit losses.

Information About Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

The following table summarizes significant unobservable inputs and the variability of those inputs to alternate methodologies for the period ended September 30, 2012 (in millions):

	Fair Value	Valuation Technique	Unobservable Input	Fair Value Range
Nonrecurring basis
Retail receivables
North America	$55	Income Approach	POD percentage	$44 - $55
International	$27	Income Approach	ARV percentage	$22 - $33
Dealer loans	$2	Income Approach	Estimated market value	$2 - $4