Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

A. Fair Value Measurements

The guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques.  Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.  In accordance with this guidance, fair value measurements are classified under the following hierarchy:

• Level 1 – Quoted prices for identical instruments in active markets.

• Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

• Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

When available, we use quoted market prices to determine fair value, and we classify such measurements within Level 1. In some cases where market prices are not available, we make use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2.  If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates.  These measurements are classified within Level 3.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation.  A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

Fair value measurement includes the consideration of nonperformance risk.  Nonperformance risk refers to the risk that an obligation (either by a counterparty or us) will not be fulfilled.  For financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price.  For certain other financial assets and liabilities (Level 2 and 3), our fair value calculations have been adjusted accordingly.

Derivative financial instruments

The fair value of interest rate swap derivatives is primarily based on standard industry accepted models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows.  The fair value of foreign currency forward and cross currency contracts is based on a standard industry accepted valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.

Guarantees

The fair value of guarantees is based on our estimate of the premium a market participant would require to issue the same guarantee in a stand-alone, arms-length transaction with an unrelated party.  If quoted or observable market prices are not available, fair value is based upon internally developed models that utilize current market-based assumptions.

Assets and liabilities measured on a recurring basis at fair value included in our Consolidated Statements of Financial Position as of June 30, 2013 and December 31, 2012 are summarized below:

(Millions of dollars)
	June 30, 2013
	Level 1		Level 2		Level 3		Total Assets/Liabilities, at Fair Value
Assets
Derivative financial instruments, net	$	—	$	161	$	—	$	161
Total Assets	$	—	$	161	$	—	$	161
Liabilities
Guarantees	$	—	$	—	$	2	$	2
Total Liabilities	$	—	$	—	$	2	$	2
	December 31, 2012
	Level 1		Level 2		Level 3		Total Assets/Liabilities, at Fair Value
Assets
Derivative financial instruments, net	$	—	$	223	$	—	$	223
Total Assets	$	—	$	223	$	—	$	223
Liabilities
Guarantees	$	—	$	—	$	2	$	2
Total Liabilities	$	—	$	—	$	2	$	2

Below are roll-forwards of assets and liabilities measured at fair value using Level 3 inputs for the six months ended June 30, 2013 and 2012. These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions of a marketplace participant.

(Millions of dollars)	Guarantees
Balance as of December 31, 2012	$	2
Issuance of guarantees	2
Expiration of guarantees	(2		)
Balance as of June 30, 2013	$	2

(Millions of dollars)	Guarantees
Balance as of December 31, 2011	$	2
Issuance of guarantees	1
Expiration of guarantees	(1		)
Balance as of June 30, 2012	$	2

Impaired loans

In addition to the amounts above, our impaired loans are subject to measurement at fair value on a nonrecurring basis. A loan is considered impaired when management determines that collection of contractual amounts due is not probable. In these cases, an Allowance for credit losses may be established based primarily on the fair value of associated collateral. As the collateral's fair value is based on observable market prices and/or current appraised values, the impaired loans are classified as Level 2 measurements. We had impaired loans carried at the fair value of the underlying collateral value of $131 million and $117 million as of June 30, 2013 and December 31, 2012, respectively.

B. Fair Values of Financial Instruments

In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair Value Measurements section above, we used the following methods and assumptions to estimate the fair value of our financial instruments.

Cash and cash equivalents – carrying amount approximated fair value. 

Finance receivables, net – fair value was estimated by discounting the future cash flows using current rates representative of receivables with similar remaining maturities. 

Restricted cash and cash equivalents – carrying amount approximated fair value. 

Short-term borrowings – carrying amount approximated fair value. 

Long-term debt – fair value for fixed and floating-rate debt was estimated based on quoted market prices.

Please refer to the table below for the fair values of our financial instruments.

(Millions of dollars)	June 30, 2013						December 31, 2012
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Fair Value Levels	Reference
Cash and cash equivalents	$	2,004		$	2,004		$	2,080		$	2,080		1
Foreign currency contracts:
In a receivable position	$	10		$	10		$	10		$	10		2	Note 5
In a payable position	$	(3	)	$	(3	)	$	(5	)	$	(5	)	2	Note 5
Cross currency contracts
In a receivable position	$	6		$	6		$	—		$	—		2	Note 5
In a payable position	$	—		$	—		$	(1	)	$	(1	)	2	Note 5
Finance receivables, net (excluding finance leases(1))	$	20,393		$	20,262		$	20,189		$	20,079		2	Note 4
Restricted cash and cash equivalents(2)	$	42		$	42		$	19		$	19		1
Short-term borrowings	$	(5,119	)	$	(5,119	)	$	(4,651	)	$	(4,651	)	1
Long-term debt	$	(24,979	)	$	(25,607	)	$	(25,077	)	$	(26,063	)	2
Interest rate swaps:
In a net receivable position	$	154		$	154		$	228		$	228		2	Note 5
In a net payable position	$	(6	)	$	(6	)	$	(9	)	$	(9	)	2	Note 5
Guarantees	$	(2	)	$	(2	)	$	(2	)	$	(2	)	3	Note 7

⁽¹⁾As of June 30, 2013 and December 31, 2012, represents finance leases with a net carrying value of $8,064 million and $7,968 million, respectively.

⁽²⁾ Included in Other assets in the Consolidated Statements of Financial Position.