Fair Value Measurements

3 Months Ended

Jan. 31, 2012

Fair Value Disclosures [Abstract]

Fair value measurements

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 observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. 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. The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents approximate fair value because of the short-term maturity and highly liquid nature of these instruments.

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 fair value.

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 inputs 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 prior to November 1, 2010. 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. 

Guarantees—We provide certain guarantees of payments and residual values to specific counterparties.  Fair value of these guarantees is based upon internally developed models that utilize current market-based assumptions and historical data.  We classify these liabilities within Level 3.  For more information regarding guarantees, see Note 12, Commitments and contingencies.

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

	January 31, 2012
	Level 1		Level 2		Level 3		Total
(in millions)
Assets
Marketable securities
U.S. Treasury bills	$	199	$	—	$	—	$	199
Other U.S. and non-U.S. government bonds	220		—		—		220
Other	20		—		—		20
Derivative financial instruments
Foreign currency contracts	—		—		—		—
Commodity contracts	—		1		—		1
Total assets	$	439	$	1	$	—	$	440
Liabilities
Derivative financial instruments
Foreign currency contracts	$	—	$	1	$	—	$	1
Commodity contracts	—		4		—		4
Guarantees	—		—		7		7
Total liabilities	$	—	$	5	$	7	$	12

	As of October 31, 2011
	Level 1		Level 2		Level 3		Total
(in millions)
Assets
Marketable securities
U.S. Treasury bills	$	283	$	—	$	—	$	283
Other U.S and non-U.S. government bonds	415		—		—		415
Other	20		—		—		20
Derivative financial instruments
Commodity contracts	—		—		1		1
Foreign currency contracts	—		3		—		3
Total assets	$	718	$	3	$	1	$	722
Liabilities
Derivative financial instruments
Commodity contracts	$	—	$	3	$	3	$	6
Cross currency swaps	—		4		—		4
Guarantees	—		—		6		6
Total liabilities	$	—	$	7	$	9	$	16

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

	Three Months Ended January 31,
	2012							2011
	Guarantees		Retained interests		Commodity contracts			Guarantees		Retained interests			Commodity contracts
(in millions)
Balance at November 1	$	6	$	—	$	(2	)	$	—	$	53		$	2
Total gains (losses) (realized/unrealized) included in earnings(A)	—		—		(1		)	—		1			4
Transfers into Level 3	—		—		—			—		—			—
Transfers out of Level 3	—		—		2			—		—			—
Purchases	—		—		—			—		—			—
Sales	—		—		—			—		—			—
Issuances	1		—		—			—		—			—
Settlements	—		—		1			—		(54		)	(1		)
Balance at January 31	$	7	$	—	$	—		$	—	$	—		$	5
Change in unrealized gains on assets and liabilities still held	$	—	$	—	$	—		$	—	$	—		$	3

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(A) For commodity contracts, gains (losses) are included in Costs 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
	January 31, 2012		October 31, 2011
(in millions)
Finance receivables(A)	$	7	$	5

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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 January 31, 2012, impaired receivables with a carrying amount of $17 million had specific loss reserves of $10 million and a fair value of $7 million. As of October 31, 2011, impaired receivables with a carrying amount of $15 million had specific loss reserves of $10 million and a fair value of $5 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. Finance receivables generally consist of retail and wholesale accounts and retail and wholesale notes. The carrying amounts of trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short term nature of the receivables. Fair values of wholesale notes approximate amortized cost as a result of the short-term nature and variable interest rate terms charged on wholesale notes. 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 retail notes 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:

	January 31, 2012				October 31, 2011
	Carrying Value		Estimated Fair  Value		Carrying Value		Estimated Fair  Value
(in millions)
Assets
Retail notes	$	856	$	805	$	958	$	902
Notes receivable	43		42		47		47
Liabilities
Debt:
Manufacturing operations
8.25% Senior Notes, due 2021	871		995		967		1,131
3.0% Senior Subordinated Convertible Notes, due 2014(A)	502		665		497		633
Debt of majority-owned dealerships	92		88		94		88
Financing arrangements	137		125		114		112
Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040	225		246		225		234
Promissory Note	38		38		40		39
Asset-Based Credit Facility	100		100		—		—
Other	42		39		39		26
Financial services operations
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2018	1,371		1,395		1,664		1,695
Bank revolvers, at fixed and variable rates, due dates from 2013 through 2017	997		985		1,072		1,091
Commercial paper, at variable rates, due serially through 2012	63		63		70		70
Borrowings secured by operating and finance leases, at various rates, due serially through 2017	72		71		70		70

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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.