Ford 2007 Annual Report Download - page 103

Notes to the Financial Statements
101Ford Motor Company | 2007 Annual Report
NOTE 23. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Our use of derivatives to manage market risk results in the risk of a counterparty defaulting on a derivative contract.
We establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification. We also
enter into master netting agreements with counterparties that usually allow for netting of certain exposures. Many of
these agreements permit netting between derivative and non-derivative exposures and our accounting policy is to not
offset fair value amounts of our derivative assets and liabilities. For Ford Credit, this policy represents a change as of
December 31, 2007 and has been applied retrospectively to the 2006 balance sheet. Substantially all of our
counterparties have long-term debt ratings of single-A or better. The aggregate fair value of derivative instruments in
asset positions on December 31, 2007, is $4.2 billion, and represents the maximum loss that would be recognized at the
reporting date if all counterparties failed to perform as contracted.
Hedge Accounting Designations
We have elected to apply hedge accounting to certain derivatives. Derivatives that receive designated hedge
accounting treatment are documented and evaluated for effectiveness in accordance with our policies. Some derivatives
do not qualify for hedge accounting; for others, we elect not to apply hedge accounting treatment. With the exception of
certain electricity supply contracts, we have elected to apply the normal purchase and normal sales classification to all
physical supply contracts that are entered into for the purpose of procuring commodities to be used in production within a
reasonable time during the normal course of our business. We do not apply normal purchase and normal sales to certain
electricity physical supply contracts which had notional balances of $65 million and $51 million on December 31, 2007 and
2006, respectively. We report changes in the fair value of these derivatives through Automotive cost of sales.
Automotive Sector
Cash Flow Hedges. We use forward and option contracts to manage our exposure to foreign currency exchange and
commodity price risks. We apply the critical terms method of assessing effectiveness for derivatives designated as
hedging forecasted transactions. The effective portion of changes in the fair value of cash flow hedges is deferred in
Accumulated other comprehensive income/(loss) and is recognized in Automotive cost of sales when the hedged item
affects earnings. Our policy is to cease hedge accounting at the time forecasted transactions are recognized as assets or
liabilities on the balance sheet and report subsequent changes in fair value through Automotive cost of sales. An amount
is also reclassified from Accumulated other comprehensive income/(loss) and recognized in earnings if it becomes
probable that the original forecasted transaction will not occur. Our cash flow hedges mature within two years or less. The
exchange of cash associated with cash flow hedges which are de-designated prior to maturity is reported in Net cash
(used in)/provided by investing activities in our statements of cash flows. The exchange of cash associated with cash flow
hedges which are designated through maturity is reported in Net cash flows from operating activities in our statements of
cash flows.
Net Investment Hedges. We have used foreign currency forward exchange contracts to hedge the net assets of
certain foreign entities to offset the translation and economic exposures related to our investment in these entities. We
assessed effectiveness based upon a comparison of the hedge with the beginning balance of the net investment level
hedged, with subsequent quarterly tests based upon changes in spot rates to determine the effective portion of the hedge.
Changes in the value of these derivative instruments, excluding the ineffective portion of the hedge, were included in
Accumulated other comprehensive income/(loss) as a foreign currency translation adjustment. The exchange of cash
associated with these derivative transactions was reported in Net cash flows from operating activities in our statements of
cash flows.
Derivatives not designated as hedging instruments. Some derivatives do not qualify for hedge accounting treatment or
we elect not to apply hedge accounting. We report changes in the fair value of these derivatives through Automotive cost
of sales or Automotive interest income and other non-operating income/(expense), net depending on the underlying
exposure. The earnings impact primarily relates to the revaluation of certain foreign currency derivatives and changes in
fair value of commodity derivatives and warrants. The exchange of cash associated with these derivative transactions is
recorded in Net cash (used in)/provided by investing activities in our statements of cash flows.