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FAIR VALUE MEASUREMENTS

12 Months Ended

Nov. 03, 2019

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

27. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, the company uses various methods including market and income approaches. The company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs.

The fair values of financial instruments that do not approximate the carrying values at November 3, 2019 and October 28, 2018 in millions of dollars follow:


		2019						2018
		Carrying			Fair			Carrying			Fair
		Value			Value*			Value			Value*
Financing receivables – net:
Equipment operations		$	65		$	61		$	93		$	91
Financial services			29,130			29,106			26,961			26,722
Total		$	29,195		$	29,167		$	27,054		$	26,813
Financing receivables securitized – net:
Equipment operations		$	44		$	43		$	76		$	73
Financial services			4,339			4,362			3,946			3,895
Total		$	4,383		$	4,405		$	4,022		$	3,968
Short-term securitization borrowings:
Equipment operations		$	44		$	45		$	75		$	75
Financial services			4,277			4,302			3,882			3,870
Total		$	4,321		$	4,347		$	3,957		$	3,945
Long-term borrowings due within one year:
Equipment operations		$	642		$	645		$	970		$	979
Financial services			6,786			6,788			5,427			5,411
Total		$	7,428		$	7,433		$	6,397		$	6,390
Long-term borrowings:
Equipment operations		$	5,415		$	6,138		$	4,714		$	4,948
Financial services			24,814			25,122			22,523			22,590
Total		$	30,229		$	31,260		$	27,237		$	27,538

* Fair value measurements above were Level 3 for all financing receivables, Level 3 for equipment operations short-term securitization borrowings, and Level 2 for all other borrowings.

Fair values of the financing receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the company for similar financing receivables. The fair values of the remaining financing receivables approximated the carrying amounts.

Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings included adjustments related to fair value hedges.

Assets and liabilities measured at November 3, 2019 and October 28, 2018 at fair value on a recurring basis in millions of dollars follow*:


		2019			2018
Level 1:
Marketable securities
Equity fund		$	59		$	46
U.S. government debt securities			50			44
Total Level 1 marketable securities			109			90

Level 2:
Marketable securities
U.S. government debt securities			81			67
Municipal debt securities			60			46
Corporate debt securities			165			140
International debt securities			5			2
Mortgage-backed securities**			160			137
Total Level 2 marketable securities			471			392
Other assets
Derivatives:
Interest rate contracts			363			80
Foreign exchange contracts			20			83
Cross-currency interest rate contracts			1			5
Total Level 2 other assets			384			168
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts			65			350
Foreign exchange contracts			71			49
Cross-currency interest rate contracts			3
Total Level 2 accounts payable and accrued expenses			139			399

Level 3:
Marketable securities
International debt securities			1			8

* Excluded from this table were the company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds and time deposits.

** Primarily issued by U.S. government sponsored enterprises.

Fair value, recurring Level 3 measurements from available-for-sale marketable securities at November 3, 2019, October 28, 2018, and October 29, 2017 in millions of dollars follow:


		2019			2018			2017
Beginning of year balance		$	8		$	17		$	28
Principal payments			(8)			(9)			(13)
Change in unrealized gain						1			2
Other			1			(1)
End of year balance		$	1		$	8		$	17

Fair value, nonrecurring measurements from impairments at November 3, 2019 and October 28, 2018 in millions of dollars follow:


		Fair Value*						Losses*
		2019			2018			2019			2018			2017
Equipment on operating leases – net		$	855					$	59
Investments in unconsolidated affiliates														$	40
Other assets		$	142					$	18

* Fair value losses at October 29, 2017 were a Level 1 measurement. See financing receivables with specific allowances in Note 13 that were not significant. See Note 5 for impairments.

The following is a description of the valuation methodologies the company uses to measure certain financial instruments on the balance sheet at fair value:

Marketable Securities – The portfolio of investments, except for the Level 3 measurement international debt securities, is primarily valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds. Funds are primarily valued using the fund’s net asset value, based on the fair value of the underlying securities. The Level 3 measurement international debt securities are primarily valued using an income approach based on discounted cash flows using yield curves derived from limited, observable market data.

Derivatives – The company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency futures, forwards and swaps, and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.

Financing Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values (see Note 13).

Equipment on Operating Leases – Net – The impairments are based on an income approach (discounted cash flow), using the contractual payments, plus an estimate of equipment sale price at lease maturity. Inputs include realized sales values.

Investment in Unconsolidated Affiliates – Other than temporary impairments for investments are measured as the difference between the implied fair value and the carrying value of the investments. The fair value for publicly traded entities is the share price multiplied by the shares owned (see Note 5).

Other Assets – The impairments are measured at the fair value of the matured operating lease inventory. The valuations were based on a market approach. The inputs include sales of comparable assets (see Note 5).

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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