Ford 2003 Annual Report Download - page 92

90 FORD MOTOR COMPANY
NOTES TO FINANCIAL STATEMENTS
FINANCIAL SERVICES SECTOR
Ford Credit’s overall risk management objective is to maximize financing income while limiting the effect of changes in foreign
currencies and interest rates. Ford Credit faces exposure to currency exchange rates if a mismatch exists between the currency
of its receivables and the currency of the debt funding those receivables. Ford Credit also executes cross-currency swaps and
foreign currency forwards to convert substantially all of the foreign currency debt obligations to the local currency of the receiv-
ables. Interest rate swaps are used to manage exposure to re-pricing risk, which arises when assets and the debt funding those
assets have different re-pricing periods that consequently respond differently to interest rate changes.
Cash Flow Hedges
Ford Credit designates interest rate swaps as cash flow hedges to manage its exposure to interest rate risks. The impact to
earnings associated with hedge ineffectiveness was recognized in Revenues as a gain of $3 million in 2003 and a gain of
$1 million in 2002. In assessing hedge effectiveness for cash flow hedges related to interest rates, Ford Credit uses the
variability of cash flows method and excludes accrued interest. Net interest settlements and accruals excluded from the
assessment of hedge effectiveness were expenses of $482 million in 2003 and $765 million in 2002 and recorded in Interest
expense. While net interest settlements and accruals are excluded from hedge effectiveness testing, they are included in
evaluating the overall risk management objective.
Ford Credit’s designated cash flow hedges include hedges of revolving commercial paper balances. At December 31, 2003,
thirty months was the maximum length of time that forecasted transactions were hedged.
Fair Value Hedges
Ford Credit uses interest rate swaps to hedge its exposure to interest rate risk. Unrealized gains and losses on designated
fair value hedges, along with the changes in the fair value of the underlying hedged exposure are recognized and recorded in
Revenues. The impact to earnings from hedge ineffectiveness was a gain of $255 million in 2003 and a loss of $193 million in
2002. In assessing hedge effectiveness, we exclude certain components, representing accrued interest on the receive and pay
legs of the swap. Net interest settlements and accrual income of $1.8 billion in 2003 and $1.5 billion in 2002 was recorded as
a reduction in Interest expense. Ford Credit also excludes from the assessment of hedge effectiveness foreign exchange adjust-
ments, representing the portion of the derivative’s fair value attributable to the change in foreign currency exchange rates for the
reporting period, which were favorable adjustments totaling $1.3 billion in 2003 and $1.5 billion in 2002. While net settlements
and foreign currency adjustments are excluded from Ford Credit’s hedge effectiveness testing, they are included in evaluating
the overall risk management objective. The favorable adjustments related to the foreign currency derivatives reported above
were offset by net unfavorable revaluation impacts on debt denominated in a currency other than the location’s functional
currency, which was also recorded in Revenues.
Net Investment Hedges
Ford Credit uses foreign currency forward exchange contracts and options to hedge the net asset of certain foreign entities
to offset the translation and economic exposures related to its investment in foreign entities. Changes in the value of these
derivatives are recorded in OCI as a foreign currency translation adjustment. Ineffectiveness, which is recognized in Revenues,
was a loss of $17 million in 2003 and the amount in 2002 was not significant.
Other Derivative Instruments
In accordance with corporate risk management policies, Ford Credit uses derivative instruments, such as swaps and forward
contracts that economically hedge certain exposures (foreign currency and interest rates). In certain instances, these derivatives
do not qualify for hedge accounting treatment or Ford Credit elects not to apply hedge accounting (non-designated hedges).
For non-designated hedges we recorded a gain of $58 million in 2003 and a loss of $33 million in 2002 related to unrealized
gains and losses resulting from the effect of changes in interest rates. In addition, net interest settlements and accruals related to
derivatives that were non-designated resulted in income of $105 million in 2003 and expense of $251 million in 2002. These net
interest settlement and accrual amounts were included in evaluating Ford Credit’s overall risk management objective. Unrealized
and realized gains and losses related to certain non-designated foreign currency derivatives resulted in favorable adjustments
totaling $1.9 billion in 2003 and $1.6 billion in 2002. The favorable adjustments related to foreign currency derivatives reported
above were offset by net unfavorable revaluation impacts on the related debt denominated in a currency other than the location’s
functional currency. Both the unrealized and realized gains and losses on non-designated derivatives were recorded in Revenues.
NOTE 16. Derivative Financial Instruments (continued)
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