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Fair Value Measurements

9 Months Ended

Jul. 31, 2020

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—Cash equivalents are highly liquid investments, with an original maturity of 90 days or less, which may include U.S. government and federal agency securities, commercial paper, and other highly liquid investments. 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 may include investments in U.S. government and federal agency securities, commercial paper and other investments with an original maturity greater than 90 days. 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.

Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific counterparties. The fair value of these guarantees includes a contingent component and a non-contingent component that are based upon internally developed models using unobservable inputs. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 12, Commitments and Contingencies.

Impaired Finance Receivables and Impaired Assets Under Operating Leases—Fair values of the underlying collateral are determined by current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. For more information regarding impaired finance receivables, see Note 5, Allowance for Doubtful Accounts.

Impaired Property, Plant and Equipment—We generally measure the fair value by discounting future cash flows expected to be received from the operation of, or disposition of, the asset or asset group that has been determined to be impaired. When appropriate, we utilize alternative methods for the measurement of fair value such as market and cost approaches. For more information regarding the impairment of property, plant and equipment, see Note 3, Restructuring, Impairments and Divestitures.

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



	As of July 31, 2020								As of October 31, 2019
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments:
Foreign currency contracts^(A)	$	—	$	12	$	—	$	12	$	—	$	1	$	—	$	1
Total assets	$	—	$	12	$	—	$	12	$	—	$	1	$	—	$	1
Liabilities
Derivative financial instruments:
Commodity forward contracts^(B)	$	—	$	4	$	—	$	4	$	—	$	1	$	—	$	1
Foreign currency contracts^(C)	—		2		—		2		—		2		—		2
Guarantees	—		—		29		29		—		—		27		27
Total liabilities	$	—	$	6	$	29	$	35	$	—	$	3	$	27	$	30

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(A)	The asset value of foreign currency contracts is primarily included in Other current assets and an immaterial portion is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.


(B)	The liability values of commodity forward contracts are included in Other current liabilities in the accompanying Consolidated Balance Sheets.


(C)	The liability values of foreign currency contracts are primarily included in Other noncurrent liabilities and an immaterial portion is included in Other current liabilities in the accompanying Consolidated Balance Sheets.

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



	Three Months Ended July 31,						Nine Months Ended July 31,
(in millions)	2020			2019			2020			2019
Guarantees, at beginning of period	$	(28	)	$	(22	)	$	(27	)	$	(24	)
Net issuances	(2		)	(4		)	(7		)	(3		)
Settlements	1			—			5			1
Guarantees, at end of period	$	(29	)	$	(26	)	$	(29	)	$	(26	)

There were no transfers of Level 3 financial instruments.

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, net generally consist of retail and wholesale accounts and notes.

The carrying amounts of Trade and other receivables, net and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. 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. The fair values of our retail notes are classified as Level 3 financial instruments.

The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.75% Tax Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax Exempt Bonds is classified as Level 2. Trading in our 6.625% Senior Notes and 9.5% Senior Secured Notes is limited to qualified institutional buyers; therefore the notes are classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.

The following tables present the carrying values and estimated fair values of financial instruments:



	As of July 31, 2020
	Estimated Fair Value								Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total
Assets
Retail notes	$	—	$	—	$	209	$	209	$	207
Liabilities
Debt:
Manufacturing operations
Senior Secured Term Loan Credit Agreement, due 2025	—		—		1,517		1,517		1,547
9.5% Senior Secured Notes, due 2025	—		685		—		685		589
6.625% Senior Notes, due 2026	—		1,125		—		1,125		1,087
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040	—		226		—		226		220
Financed lease obligations	—		—		48		48		48
Other^(A)	—		—		40		40		40
Financial Services operations
Asset-backed debt issued by consolidated SPEs, due serially through 2022	—		—		1,011		1,011		1,008
Bank credit facilities, due dates from 2020 through 2025	—		—		881		881		914
Borrowings secured by operating and finance leases, due serially through 2024	—		—		105		105		105



	As of October 31, 2019
	Estimated Fair Value								Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total
Assets
Retail notes	$	—	$	—	$	205	$	205	$	208
Liabilities
Debt:
Manufacturing operations
Senior Secured Term Loan Credit Agreement, due 2025	—		—		1,552		1,552		1,556
6.625% Senior Notes, due 2026	—		1,122		—		1,122		1,085
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040	—		234		—		234		220
Financed lease obligations	—		—		60		60		60
Other^(A)	—		—		9		9		9
Financial Services operations
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2022	—		—		995		995		991
Bank credit facilities, due dates from 2020 through 2025	—		—		1,038		1,038		1,059
Commercial paper, at variable rates, program matures in 2022	84		—		—		84		84
Borrowings secured by operating and finance leases, due serially through 2024	—		—		122		122		122

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(A)

Excludes non-financial instrument debt of $1 million and $2 million as of July 31, 2020 and October 31, 2019, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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