NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is 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 (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The fair value hierarchy prioritizes the inputs used to measure fair value giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). At December 31, 2013, we did not have any Level 3 financial assets or liabilities, other than those in our pension plan (see NOTE 12, "PENSION AND OTHER POSTRETIREMENT BENEFITS").
The majority of the assets and liabilities we carry at fair value are AFS securities and derivatives. The fair value of AFS securities are derived from Level 1 or Level 2 inputs. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value measurement of derivatives are valued primarily using Level 2 inputs. Many of our derivative contracts are valued utilizing publicly available pricing data of contracts with similar terms. In other cases, the contracts are valued using current spot market data adjusted for the appropriate current forward curves provided by external financial institutions. We participate in commodity swap contracts, commodity zero-cost collar contracts, currency forward contracts and interest rate swaps. When material, we adjust the values of our derivative contracts for counter-party or our credit risk. There were no transfers into or out of Levels 2 or 3 during 2013.
The following table summarizes our financial instruments recorded at fair value in our Consolidated Balance Sheets at December 31, 2013:
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Fair Value Measurements Using |
In millions |
Quoted prices in
active markets for
identical assets
(Level 1)
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Significant other
observable inputs
(Level 2)
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Significant
unobservable inputs
(Level 3)
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Total |
Available-for-sale debt securities |
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Debt mutual funds |
$ |
72 |
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$ |
29 |
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$ |
— |
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$ |
101 |
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Bank debentures |
— |
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|
2 |
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|
— |
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2 |
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Certificates of deposit |
— |
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22 |
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— |
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22 |
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Government debt securities-non-U.S. |
— |
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2 |
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— |
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|
2 |
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Available-for-sale equity securities |
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Information technology industry |
23 |
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— |
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— |
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23 |
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Derivative assets |
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Interest rate contracts |
— |
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49 |
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— |
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49 |
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Foreign currency forward contracts |
— |
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11 |
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— |
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11 |
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Total assets |
$ |
95 |
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$ |
115 |
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$ |
— |
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$ |
210 |
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Derivative liabilities |
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Commodity swap contracts |
— |
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5 |
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— |
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5 |
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Foreign currency forward contracts |
— |
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5 |
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— |
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5 |
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Total liabilities |
$ |
— |
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$ |
10 |
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$ |
— |
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$ |
10 |
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The substantial majority of our assets were valued utilizing a market approach. A description of the valuation techniques and inputs used for our level 2 fair value measures was as follows:
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• |
Debt mutual funds— Assets in Level 2 consist of exchange traded mutual funds that lack sufficient trading volume to be classified at Level 1. The fair value measure for these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
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• |
Bank debentures and Certificates of deposit— These investments provide us with a fixed rate of return and generally range in maturity from six months to three years. The counter-parties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.
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• |
Government debt securities-non-U.S. and Corporate debt securities— The fair value measure for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.
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• |
Foreign currency forward contracts— The fair value measure for these contracts are determined based on forward foreign exchange rates received from third-party pricing services. These rates are based upon market transactions and are periodically corroborated by comparing to third-party broker quotes.
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• |
Commodity swap contracts— The fair value measure for these contracts are current spot market data adjusted for the appropriate current forward curves provided by external financial institutions. The current spot price is the most significant component of this valuation and is based upon market transactions. We use third-party pricing services for the spot price component of this valuation which is periodically corroborated by market data from broker quotes.
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• |
Commodity zero cost collar contracts— We utilize the month-end statement from the issuing financial institution as our fair value measure for this investment. We corroborate this valuation through the use of a third-party pricing service for similar assets and liabilities.
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• |
Interest rate contracts— We currently have only one interest rate contract. We utilize the month-end statement from the issuing financial institution as our fair value measure for this investment. We corroborate this valuation through the use of a third-party pricing service for similar assets and liabilities.
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The following tables summarize our financial instruments recorded at fair value in our Consolidated Balance Sheets at December 31, 2012:
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Fair Value Measurements Using |
In millions |
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Quoted prices in
active markets
for identical
assets
(Level 1)
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Significant other
observable
inputs
(Level 2)
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Significant
unobservable
inputs
(Level 3)
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Total |
Available-for-sale debt securities |
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Debt mutual funds |
|
$ |
100 |
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|
$ |
42 |
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|
$ |
— |
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$ |
142 |
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Bank debentures |
|
— |
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45 |
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— |
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45 |
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Certificates of deposit |
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— |
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47 |
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— |
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47 |
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Government debt securities-non-U.S. |
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— |
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3 |
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— |
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3 |
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Corporate debt securities |
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— |
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|
1 |
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— |
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1 |
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Available-for-sale equity securities |
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Financial services industry |
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9 |
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— |
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— |
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9 |
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Derivative assets |
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Interest rate contracts |
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— |
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|
88 |
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— |
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|
88 |
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Foreign currency forward contracts |
|
— |
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3 |
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— |
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|
3 |
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Commodity swap contracts |
|
— |
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|
1 |
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— |
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|
1 |
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Commodity zero cost collar contracts |
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— |
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|
1 |
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— |
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|
1 |
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Total assets |
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$ |
109 |
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$ |
231 |
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$ |
— |
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$ |
340 |
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Derivative liabilities |
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Commodity swap contracts |
|
— |
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|
2 |
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— |
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|
2 |
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Commodity zero cost collar contracts |
|
— |
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|
1 |
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— |
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|
1 |
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Total liabilities |
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$ |
— |
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$ |
3 |
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$ |
— |
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$ |
3 |
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Fair Value of Other Financial Instruments
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:
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December 31, |
In millions |
2013 |
|
2012 |
Fair value of total debt |
$ |
1,877 |
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$ |
926 |
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Carrying value of total debt |
1,740 |
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|
775 |
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The carrying values of all other receivables and liabilities approximated fair values (derived from Level 2 inputs).