SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Nature of Operations

Caterpillar Financial Services Corporation, a Delaware corporation organized in 1981 (together with its subsidiaries, "Cat Financial," "the Company," "we" and "our"), is a wholly-owned finance subsidiary of Caterpillar Inc. (together with its other subsidiaries, "Caterpillar" or "Cat"). Our primary business is to provide retail and wholesale financing alternatives for Caterpillar products to customers and dealers around the world. Retail financing is primarily comprised of financing of Caterpillar equipment, machinery and engines. In addition, we also provide financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. We also provide wholesale financing to Caterpillar dealers and purchase short-term receivables from Caterpillar.

B. Basis of Consolidation

The consolidated financial statements include the accounts of Cat Financial. Investments in companies that are owned 20 percent to 50 percent or are less than 20 percent owned and for which we have significant influence are accounted for by the equity method. Investments in companies that are less than 20 percent owned and for which we do not have significant influence are accounted for by the cost method. All material intercompany balances have been eliminated.

We consolidate all variable-interest entities (VIEs) where we are the primary beneficiary. For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs. The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. Please refer to Note 10 for more information.

Revision of prior period financial statements

In preparing our consolidated financial statements for the quarter ended September 30, 2014, we identified immaterial errors that impacted our previously issued consolidated financial statements for the interim periods ended March 31, 2014 and June 30, 2014 and the interim and annual periods ended December 31, 2013, 2012 and 2011. The prior period errors primarily relate to our Allowance for credit losses and our valuation of debt instruments in fair value hedges. Specifically as relating to our Allowance for credit losses, at one of our international subsidiary locations, an internal audit review during the second quarter 2014 identified certain finance receivables not appropriately evaluated for impairment. As a result, management performed a subsidiary level analysis during the third quarter which discovered one additional international subsidiary that was providing incomplete credit loss reporting. Both errors impacted management’s evaluation of the adequacy of the Allowance for credit losses. With respect to fair value hedges, when debt instruments in fair value hedge transactions matured in 2014, management controls identified carrying value adjustments associated with the matured debt remaining on the balance sheet. Upon investigation, we learned that an incorrect discount rate was being used to value the hedged debt over the term of the hedge relationship.

We evaluated these errors and concluded that they did not, individually or in the aggregate, result in a material misstatement of our previously issued consolidated financial statements. However, if the entire correction was recorded out-of-period in the third quarter of 2014, the cumulative amount would have been material to estimated Profit for the year ending December 31, 2014 and would have impacted comparisons to prior periods. As such, the revisions for these corrections are reflected in the financial information of the applicable prior periods and will be reflected in future filings containing such financial information.

The following tables present the effect of these revisions for the financial statement line items impacted in the affected periods included within this annual financial report.

Revised Consolidated Statements of Profit Amounts



(Millions of dollars)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
	Year Ended December 31, 2013									Year Ended December 31, 2012
Retail finance	$	1,388		$	(1	)	$	1,387		$	1,342		$	—		$	1,342
Operating lease revenue	945			3			948			860			—			860
Total revenues	2,783			2			2,785			2,693			—			2,693
Depreciation on equipment leased to others	768			2			770			688			—			688
Provision for credit losses	94			7			101			161			2			163
Total expenses	2,047			9			2,056			2,095			2			2,097
Other income (expense)	(18		)	(17		)	(35		)	(7		)	(5		)	(12		)
Profit before income taxes	718			(24		)	694			591			(7		)	584
Provision for income taxes	174			(7		)	167			148			(3		)	145
Profit of consolidated companies	544			(17		)	527			443			(4		)	439
Profit	$	530		$	(17	)	$	513		$	432		$	(4	)	$	428



(Millions of dollars)
	As Previously Reported			Adjustment			As Revised
	Year Ended December 31, 2011
Provision for credit losses	$	176		$	1		$	177
Total expenses	2,132			1			2,133
Other income (expense)	(9		)	(5		)	(14		)
Profit before income taxes	504			(6		)	498
Provision for income taxes	111			(2		)	109
Profit of consolidated companies	393			(4		)	389
Profit	$	378		$	(4	)	$	374

Revised Consolidated Statements of Comprehensive Income Amounts



(Millions of dollars)	As Previously Reported		Adjustment			As Revised		As Previously Reported		Adjustment			As Revised
	Year Ended December 31, 2013							Year Ended December 31, 2012
Profit of consolidated companies	$	544	$	(17	)	$	527	$	443	$	(4	)	$	439
Comprehensive income (loss)	488		(17		)	471		503		(4		)	499
Comprehensive income (loss) attributable to Caterpillar Financial Services Corporation	$	471	$	(17	)	$	454	$	492	$	(4	)	$	488



(Millions of dollars)	As Previously Reported		Adjustment			As Revised
	Year Ended December 31, 2011
Profit of consolidated companies	$	393	$	(4	)	$	389
Comprehensive income (loss)	296		(4		)	292
Comprehensive income (loss) attributable to Caterpillar Financial Services Corporation	$	284	$	(4	)	$	280

Revised Consolidated Statements of Financial Position Amounts



(Millions of dollars)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
	December 31, 2013									December 31, 2012
Retail notes receivable	$	10,863		$	(5	)	$	10,858		$	11,111		$	(121	)	$	10,990
Finance leases and installment sale contracts - Retail	14,582			(31		)	14,551			13,589			106			13,695
Total finance receivables	30,078			(36		)	30,042			29,581			(15		)	29,566
Less: Allowance for credit losses	(378		)	(9		)	(387		)	(426		)	(3		)	(429		)
Total net finance receivables	28,724			(45		)	28,679			28,157			(18		)	28,139
Equipment on operating leases, less accumulated depreciation	3,530			14			3,544			2,959			11			2,970
Deferred and refundable income taxes	160			6			166			115			—			115
Other assets	1,059			1			1,060			1,071			—			1,071
Total assets	$	35,138		$	(24	)	$	35,114		$	34,742		$	(7	)	$	34,735
Payable to Caterpillar - other	$	96		$	(16	)	$	80		$	85		$	(12	)	$	73
Long-term debt	18,720			17			18,737			19,086			12			19,098
Deferred income taxes and other liabilities	517			(5		)	512			552			(4		)	548
Total liabilities	31,127			(4		)	31,123			31,019			(4		)	31,015
Retained earnings	3,024			(20		)	3,004			2,694			(3		)	2,691
Total stockholder's equity	4,011			(20		)	3,991			3,723			(3		)	3,720
Total liabilities and stockholder's equity	$	35,138		$	(24	)	$	35,114		$	34,742		$	(7	)	$	34,735



(Millions of dollars)
	As Previously Reported			Adjustment			As Revised
	December 31, 2011
Retail notes receivable	$	8,840		$	(39	)	$	8,801
Finance leases and installment sale contracts - Retail	12,436			29			12,465
Total finance receivables	26,069			(10		)	26,059
Less: Allowance for credit losses	(369		)	(2		)	(371		)
Total net finance receivables	24,756			(12		)	24,744
Equipment on operating leases, less accumulated depreciation	2,611			7			2,618
Total assets	$	30,112		$	(5	)	$	30,107
Payable to Caterpillar - other	$	67		$	(8	)	$	59
Long-term debt	16,529			3			16,532
Deferred income taxes and other liabilities	597			(1		)	596
Total liabilities	26,642			(6		)	26,636
Retained earnings	2,512			1			2,513
Total stockholder's equity	3,470			1			3,471
Total liabilities and stockholder's equity	$	30,112		$	(5	)	$	30,107

Revised Consolidated Statements of Changes in Stockholder's Equity Amounts



(Millions of dollars)
	As Previously Reported		Adjustment			As Revised			As Previously Reported		Adjustment			As Revised
	December 31, 2013								December 31, 2012
Profit	$	530	$	(17	)	$	513	Profit	$	432	$	(4	)	$	428
Retained Earnings - Balance at December 31, 2013	$	3,024	$	(20	)	$	3,004	Retained Earnings - Balance at December 31, 2012	$	2,694	$	(3	)	$	2,691



(Millions of dollars)
	As Previously Reported		Adjustment			As Revised
	December 31, 2011
Profit	$	378	$	(4	)	$	374
Retained Earnings - Balance at December 31, 2011	$	2,512	$	1		$	2,513

Revised Consolidated Statements of Cash Flows Amounts



(Millions of dollars)
	As Previously Reported			Adjustment			As Revised
	Year Ended December 31, 2013
Profit of consolidated companies	$	544		$	(17	)	$	527
Depreciation and amortization	788			2			790
Provision for credit losses	94			7			101
Other, net	60			17			77
Receivables from others	26			(1		)	25
Other receivables/payables with Caterpillar	5			(4		)	1
Accrued expenses and other liabilities, net	3			(7		)	(4		)
Net cash provided by operating activities	1,099			(3		)	1,096
Expenditures for equipment on operating leases and for non-leased equipment	(1,806		)	(16		)	(1,822		)
Additions to finance receivables	(14,095		)	20			(14,075		)
Collections of finance receivables	12,257			(1		)	12,256
Net cash provided by (used for) investing activities	$	(2,534	)	$	3		$	(2,531	)



(Millions of dollars)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
	Year Ended December 31, 2012									Year Ended December 31, 2011
Profit of consolidated companies	$	443		$	(4	)	$	439		$	393		$	(4	)	$	389
Provision for credit losses	161			2			163			176			1			177
Other, net	(4		)	5			1			(66		)	5			(61		)
Other receivables/payables with Caterpillar	15			(4		)	11			(8		)	(5		)	(13		)
Accrued expenses and other liabilities, net	(15		)	(3		)	(18		)	(49		)	(2		)	(51		)
Net cash provided by operating activities	1,038			(4		)	1,034			973			(5		)	968
Additions to finance receivables	(18,754		)	4			(18,750		)	(17,058		)	5			(17,053		)
Net cash provided by (used for) investing activities	$	(4,351	)	$	4		$	(4,347	)	$	(2,804	)	$	5		$	(2,799	)

The Notes to the Consolidated Financial Statements have been revised to reflect the above revisions for all periods presented.

C. Recognition of Earned Income


•	Retail finance revenue on finance leases and installment sale contracts is recognized over the term of the contract at a constant rate of return on the scheduled outstanding principal balance. Revenue on retail notes is recognized based on the daily balance of retail receivables outstanding and the applicable effective interest rate.


•	Operating lease revenue is recorded on a straight-line basis in the period earned over the life of the contract.

•

Wholesale finance revenue on installment sale contracts and finance leases related to financing dealer inventory and rental fleets is recognized over the term of the contract at a constant rate of return on the scheduled outstanding principal balance. Revenue on wholesale notes is recognized based on the daily balance of wholesale receivables outstanding and the applicable effective interest rate.


•	Loan origination and commitment fees are deferred and amortized to revenue using the interest method over the life of the finance receivables.

Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status). Accrual is resumed, and previously suspended income is recognized, when the receivable becomes contractually current and/or collection doubts are removed. Cash receipts on impaired finance receivables are first recorded against the receivable and then to any unrecognized income. A finance receivable is considered impaired, based on current information and events, if it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan or finance lease. We consider a loan or finance lease past due if any portion of a contractual payment is due and unpaid for more than 30 days.

Revenues are presented net of sales and other related taxes.

D. Depreciation

Depreciation for equipment on operating leases is recognized using the straight-line method over the lease term, typically one to seven years. The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term.

E. Residual Values

The residuals for leases classified as operating leases are included in Equipment on operating leases. The residuals for leases classified as capital leases, in accordance with lease accounting, are included in finance leases and installment sale contracts.

During the term of the leases, residual amounts are monitored. If estimated market values reflect a non-temporary impairment due to economic factors, obsolescence or other adverse circumstances, the residuals are adjusted to the lower estimated values by a charge to earnings. For equipment on operating leases, the charge is recognized through depreciation expense. For finance leases, it is recognized through a reduction of finance revenue.

F. Debt Issuance Costs

Debt issuance costs are capitalized and amortized to Interest expense over the term of the debt issue.

G. Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. Our Risk Management Policy allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate exposures and not for the purpose of creating speculative positions. Derivatives that we use are primarily foreign currency forward and option contracts, cross currency contracts and interest rate swaps. All derivatives are recorded at fair value. See Note 9 for additional information.

H. Allowance for Credit Losses

The Allowance for credit losses is an estimate of the losses inherent in our finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified. In identifying and measuring impairment, management takes into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions. In estimating probable credit losses, we review accounts that are past due, non-performing, in bankruptcy or otherwise identified as at-risk for potential credit loss including accounts which have been modified. Accounts are identified as at-risk for potential credit loss using information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which our customers operate.

The Allowance for credit losses attributable to specific accounts is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. We also consider credit enhancements such as additional collateral and contractual third-party guarantees. The Allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated utilizing probabilities of default and the estimated loss given default. In addition, qualitative factors not able to be fully captured in previous analysis including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the Allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment.

Uncollectible receivable balances, including accrued interest, are written off against the Allowance for credit losses when the underlying collateral is repossessed or when we determine that it is probable that the receivable balance is uncollectible. Subsequent recoveries, if any, are credited to the Allowance for credit losses when received.

I. Income Taxes

The Provision for income taxes is determined using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items are reflected in the financial statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

When appropriate, we combine certain income tax filings with those of Caterpillar. In such instances, in accordance with our tax sharing agreement with Caterpillar, we generally pay to or receive from Caterpillar our allocated share of income taxes or credits based on our relative share of taxable income or loss.

J. Foreign Currency Translation

Assets and liabilities of foreign subsidiaries (the majority of which use the local currency as their functional currency) are translated at current exchange rates. The effects of translation adjustments are reported as a separate component of Accumulated other comprehensive income entitled "Foreign currency translation." Gains and losses resulting from the remeasurement of foreign currency amounts to functional currency are included in Other income (expense) on the Consolidated Statements of Profit.

K. Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the reported amounts. Significant estimates include the Allowance for credit losses, residual values for leased assets, income taxes and the assumptions used to determine the fair value of derivatives. Actual results may differ from these estimates.

L. New Accounting Pronouncements

Presentation of comprehensive income – In June 2011, the FASB issued accounting guidance on the presentation of comprehensive income. The guidance provides two options for presenting net income and other comprehensive income. The total of comprehensive income, the components of net income, and the components of other comprehensive income may be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. We elected to present two separate statements. This guidance was effective January 1, 2012.

Disclosures about offsetting assets and liabilities – In December 2011, the FASB issued accounting guidance on disclosures about offsetting assets and liabilities. The guidance requires entities to disclose both gross and net information about instruments and transactions that are offset in the statement of financial position, as well as instruments and transactions that are subject to an enforceable master netting arrangement or similar agreement. In January 2013, the FASB issued guidance clarifying the scope of the disclosures to apply only to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements, and securities lending and securities borrowing transactions. This guidance was effective January 1, 2013, with retrospective application required. The guidance did not have a material impact on our financial statements. See Note 9 for additional information.

Reporting of amounts reclassified out of accumulated other comprehensive income – In February 2013, the FASB issued accounting guidance on the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount is reclassified to net income in its entirety in the same reporting period. For other amounts not required to be reclassified in their entirety to net income in the same reporting period, a cross reference to other disclosures that provide additional detail about the reclassification amounts is required. This guidance was effective January 1, 2013 and did not have a material impact on our financial statements. See Note 2 for additional information.

Joint and several liability arrangements – In February 2013, the FASB issued accounting guidance on the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The entity is also required to disclose the nature and amount of the obligation as well as any other information about those obligations. This guidance is effective January 1, 2014, with retrospective application required. We do not expect the adoption to have a material impact on our financial statements.

Parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity – In March 2013, the FASB issued accounting guidance on the parent's accounting for the cumulative translation adjustment (CTA) upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The new standard clarifies existing guidance regarding when the CTA should be released into earnings upon various deconsolidation and consolidation transactions. This guidance is effective January 1, 2014. We do not expect the adoption to have a material impact on our financial statements.

Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists – In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward in the financial statements if available under the applicable tax jurisdiction. The guidance is effective January 1, 2014. We do not expect the adoption to have a material impact on our financial statements.