Fair value measurements

For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon the reliability of observable and unobservable inputs is used to arrive at fair value. Observable inputs are independent market data, while unobservable inputs reflect our assumptions about valuation. Depending on the inputs, we classify each fair value measurement as follows:

•

Level 1—based upon quoted prices for identical instruments in active markets,


•	Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations all of whose significant inputs are observable, and


•	Level 3—based upon one or more significant unobservable inputs.

The following section describes key inputs and assumptions in our valuation methodologies:

Cash Equivalents and Restricted Cash Equivalents. We classify highly liquid investments, with a maturity of 90 days or less at the date of purchase, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. We use quoted prices where available and use a matrix of observable market-based inputs when quoted prices are unavailable.

Marketable Securities. Our marketable securities portfolios are classified as available-for-sale and primarily include investments in U.S. government and commercial paper with a maturity of greater than 90 days at the date of purchase. We use quoted prices from active markets to determine their fair values.

Derivative Assets and Liabilities. We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active. Measurements based upon these unobservable assumptions are classified within Level 3. For more information regarding derivatives, see Note 11, Financial instruments and commodity contracts.

Retained Interests. We retain certain interests in receivables sold in off-balance sheet securitization transactions. We estimate the fair value of retained interests using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. The fair value of retained interests is estimated based on the present value of monthly collections on the sold finance receivables in excess of amounts accruing to investors and other obligations arising in securitization transactions. In addition to the amount of debt and collateral held by the securitization vehicle, the three key inputs that affect the valuation of the retained interests include credit losses, payment speed, and the discount rate. We classify these assets within Level 3. For more information regarding retained interests, see Note 3, Finance receivables.

The following tables present the financial instruments measured at fair value on a recurring basis:



	As of April 30, 2011
	Level 1		Level 2		Level 3		Total
(in millions)
Assets
Marketable securities:
U.S. treasury bills	$	383	$	—	$	—	$	383
Other U.S. and non-U.S. government bonds	335		—		—		335
Other	20		—		—		20
Derivative financial instruments:
Commodity contracts	—		8		7		15
Foreign currency contracts	—		7		—		7
Total assets	$	738	$	15	$	7	$	760
Liabilities
Derivative financial instruments:
Commodity contracts	—		—		1		1
Total liabilities	$	—	$	—	$	1	$	1



	As of October 31, 2010
	Level 1		Level 2		Level 3		Total
(in millions)
Assets
Marketable securities:
U.S. treasury bills	$	159	$	—	$	—	$	159
Other U.S. and non-U.S. government bonds	407		—		—		407
Other	20		—		—		20
Derivative financial instruments:
Commodity contracts	—		—		2		2
Foreign currency contracts	—		8		—		8
Retained interests	—		—		53		53
Total assets	$	586	$	8	$	55	$	649
Liabilities
Derivative financial instruments:
Commodity contracts	$	—	$	4	$	—	$	4
Total liabilities	$	—	$	4	$	—	$	4

The table below presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:



	2011						2010
	Retained interests			Commodity contracts			Interest rate swap assets and liabilities			Retained interests			Commodity contracts
(in millions)
Three Months Ended April 30
Balance at beginning of period	$	—		$	5		$	—		$	315		$	—
Total gains (realized/unrealized) included in earnings^(A)	—			2			—			5			—
Purchases, issuances and settlements	—			(1		)	—			(97		)	—
Balance at end of period	$	—		$	6		$	—		$	223		$	—
Changes in unrealized gains on assets and liabilities still held	$	—		$	—		$	—		$	5		$	—

Six Months Ended April 30
Balance at beginning of period	$	53		$	2		$	1		$	291		$	—
Total gains (losses) (realized/unrealized) included in earnings^(A)	1			6			(1		)	—			—
Purchases, issuances and settlements	(54		)	(2		)	—			(68		)	—
Balance at end of period	$	—		$	6		$	—		$	223		$	—
Changes in unrealized gains on assets and liabilities still held	$	—		$	3		$	—		$	—		$	—

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(A)	For interest rate swap assets and liabilities, gains (losses) are included in Interest expense. For commodity contracts, gains (losses) are included in Cost of products sold. For retained interests, gains recognized are included in Finance revenues.

The following table presents the financial instruments measured at fair value on a nonrecurring basis:



	Level 2
	April 30, 2011		October 31, 2010
(in millions)
Finance receivables^(A)	$	18	$	27

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(A)

Certain impaired finance receivables are measured at fair value on a nonrecurring basis. An impairment charge is recorded for the amount by which the carrying value of the receivables exceeds the fair value of the underlying collateral, net of remarketing costs. As of April 30, 2011, impaired receivables with a carrying amount of $33 million had specific loss reserves of $15 million and a fair value of $18 million. As of October 31, 2010, impaired receivables with a carrying amount of $50 million had specific loss reserves of $23 million and a fair value of $27 million. Fair values of the underlying collateral are determined by reference to dealer vehicle value publications adjusted for certain market factors.

In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of cash and cash equivalents, restricted cash and cash equivalents, and accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. The carrying amounts of customer receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below. The fair values of our finance receivables are estimated by discounting expected cash flows at estimated current market rates. We also use quoted market prices, when available, or the present value of estimated future cash flows to determine fair values of debt instruments.

The carrying values and estimated fair values of financial instruments are summarized in the table below:



	April 30, 2011				October 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(in millions)
Assets
Finance receivables	$	2,365	$	2,231	$	2,465	$	2,349
Notes receivable	48		48		40		40
Liabilities
Debt:
Manufacturing operations
8.25% Senior Notes, due 2021	966		1,156		965		1,141
3.0% Senior Subordinated Convertible Notes, due 2014^(A)	486		869		476		684
Debt of majority-owned dealerships	93		89		66		63
Financing arrangements	160		160		203		197
Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040	225		225		225		234
Other	33		29		33		29
Financial services operations
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2018	1,769		1,803		1,731		1,773
Bank revolvers, at fixed and variable rates, due dates from 2012 through 2018	942		949		974		984
Commercial paper, at variable rates, due serially through 2012	55		55		67		67
Borrowings secured by operating and finance leases, at various rates, due serially through 2017	88		89		112		113

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(A)	The carrying value represents the financial statement amount of the debt after allocation of the conversion feature to equity, while the fair value is based on quoted market prices for the convertible note which includes the equity feature