Accounting Policies

12 Months Ended

Dec. 31, 2021

ACCOUNTING POLICIES

For each accounting topic that is addressed in its own note, the description of the accounting policy may be found in the related note. Other significant remaining accounting policies are described below.

Use of Estimates

The preparation of financial statements requires us to make estimates and assumptions that affect our results. The accounting estimates that are most important to our business involve the allowance for credit losses related to finance receivables, and accumulated depreciation on vehicles subject to operating leases. Estimates are based on assumptions that we believe are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

Foreign Currency

When an entity has monetary assets and liabilities denominated in a currency that is different from its functional currency, we remeasure those assets and liabilities from the transactional currency to the legal entity’s functional currency. The effect of this remeasurement process and the results of our related foreign currency hedging activities are reported in Other income/(loss), net.

Generally, our foreign subsidiaries use the local currency as their functional currency. We translate the assets and liabilities of our foreign subsidiaries from their respective functional currencies to U.S. dollars using end-of-period exchange rates. Changes in the carrying value of these assets and liabilities attributable to fluctuations in exchange rates are recognized in Foreign currency translation, a component of Other comprehensive income/(Ioss), net of tax. Upon sale or upon complete or substantially complete liquidation of an investment in a foreign subsidiary, the amount of accumulated foreign currency translation related to the entity is reclassified to income and recognized as part of the gain or loss on the investment.

NOTE 2. ACCOUNTING POLICIES (Continued)

Fair Value Measurements

Cash equivalents, marketable securities, and derivative financial instruments are remeasured and presented on our financial statements on a recurring basis at fair value, while other assets and liabilities are measured at fair value on a nonrecurring basis.

In measuring fair value, we use various valuation methods 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.

• 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

Transfers into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.

Adoption of New Accounting Standards

Accounting Standards Update (“ASU”) 2019-12 - Income Taxes - Simplifying the Accounting for Income Taxes. Effective January 1, 2021, we adopted the amendments in this ASU to simplify the accounting for income taxes. The only amendment that had a material effect on our financial statements clarified that an entity may elect, but is not required, to reflect an allocation of consolidated current and deferred tax expense for non-taxable legal entities that are treated as disregarded by taxing authorities in their separately issued financial statements.

With the adoption of the amendments, our financial statements no longer reflect an allocation of the Ford Motor Company consolidated United States current and deferred tax expense to us and certain of our United States subsidiaries that are treated as disregarded entities for United States tax purposes. These amendments reduce complexity in accounting for income taxes and better reflect our external obligations to tax authorities. Following the adoption, in April 2021, we entered into a Second Amended and Restated Tax Sharing Agreement with Ford.

NOTE 2. ACCOUNTING POLICIES (Continued)

The effect of the retrospective adoption of this amendment on our consolidated income statement, balance sheet, and statement of cash flows was as follows (in millions):


	For the Period Ended December 31,
	2019						2020
	Previously Reported		Adjustments due to ASU 2019-12		As Revised		Previously Reported		Adjustments due to ASU 2019-12		As Revised
Income Statement
Provision for/(Benefit from) income taxes	$	770	$	(392)	$	378	$	684	$	(414)	$	270
Net income	2,228		392		2,620		1,924		414		2,338


							As of December 31, 2020
							Previously Reported		Adjustments due to ASU 2019-12		As Revised
Balance Sheet
Other assets							$	4,593	$	(888)	$	3,705
Deferred income taxes (a)							2,907		(2,403)		504
Other liabilities and deferred income							2,306		(26)		2,280
Accumulated other comprehensive income/(loss)							(413)		(65)		(478)
Retained earnings							9,212		1,606		10,818

	For the Period Ended December 31, 2019						For the Period Ended December 31, 2020
	Previously Reported		Adjustments due to ASU 2019-12		As Revised		Previously Reported		Adjustments due to ASU 2019-12		As Revised
Statement of Cash Flows
Cash flows from operating activities
Net income	$	2,228	$	392	$	2,620	$	1,924	$	414	$	2,338
Net change in deferred income taxes	37		52		89		379		(318)		61
Net change in other assets	132		(100)		32		(930)		866		(64)
Net change in other liabilities	137		(344)		(207)		(228)		(93)		(321)
All other operating activities	103		—		103		88		6		94
Cash flows from financing activities
Cash distributions to parent	(2,900)		—		(2,900)		(2,415)		(875)		(3,290)

(a)Change reflects a reduction in U.S. deferred tax liabilities of $3.4 billion (primarily leasing transactions of $2.8 billion) and a reduction of U.S. deferred tax assets of $1.0 billion (primarily associated with foreign tax credit carryforwards of $0.7 billion).

NOTE 2. ACCOUNTING POLICIES (Continued)

Adoption of ASU 2019-12 also resulted in a revised impact of the cumulative effect of initially applying ASU 2016-13, Credit Losses – Measurement of Credit Losses on Financial Instruments. The adjustment to the January 1, 2020 opening balance of Retained earnings for the adoption of ASU 2016-13 was previously reported as $202 million, and adjustments due to ASU 2019-12 were $40 million. Accordingly, the revised amount is $242 million.

Accounting Standards Update (“ASU”) 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. On January 1, 2020, we adopted the new credit loss standard and all of the related amendments, which replaced the incurred loss impairment method with a method that reflects lifetime expected credit losses. We adopted the changes in accounting for credit losses by recognizing the cumulative effect of initially applying the new credit loss standard as an adjustment to the opening balance of Retained earnings. The comparative information has not been restated and continues to be reported under the accounting standard in effect for those periods.

The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2020, for the adoption of ASU 2016-13 was as follows (in millions):


	Balance at December 31, 2019		Adjustments due to ASU 2016-13		Balance at January 1, 2020
Assets
Retail installment contracts, dealer financing, and other financing	$	106,131	$	(230)	$	105,901
Finance leases	8,186		(22)		8,164
Other assets	3,398		(8)		3,390
Liabilities
Deferred income taxes	2,593		(58)		2,535
Equity
Retained earnings	9,905		(202)		9,703

We also adopted the following ASU’s during 2021, which did not have a material impact to our consolidated financial statements or financial statement disclosures:


ASU		Effective Date
2020-06	Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity	January 1, 2021
2021-01	Reference Rate Reform	January 1, 2021

Accounting Standards Issued But Not Yet Adopted

The Company considers the applicability and impacts of all ASUs. ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.