General Motors 2011 Annual Report Download - page 94

GENERAL MOTORS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We record uncertain tax positions on the basis of a two-step process whereby: (1) we determine whether it is more likely than not
that the tax positions will be sustained based on the technical merits of the position; and (2) for those tax positions that meet the more
likely than not recognition, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate
settlement with the related tax authority.
We record interest and penalties on uncertain tax positions in Income tax expense (benefit). Old GM recorded interest income on
uncertain tax positions in Interest income and other non-operating income, net, interest expense in Automotive interest expense and
penalties in Automotive selling, general and administrative expense.
Derivative Instruments
We are party to a variety of foreign currency exchange rate, commodity, interest rate swap and interest rate cap derivative contracts
entered into in connection with the management of exposure to fluctuations in certain foreign currency exchange rates, commodity
prices and interest rates.
In connection with certain long-term supply contracts that we have entered into, we have identified embedded derivatives which we
have bifurcated for valuation and accounting purposes.
GM Financial is exposed to market risks arising from adverse changes in interest rates due to floating interest rate exposure on its
credit facilities and on certain securitization notes payable. GM Financial’s special purpose entities (SPEs) are contractually required
to purchase derivative instruments as credit enhancements in connection with securitization transactions and credit facilities. These
financial exposures and contractual requirements are managed in accordance with corporate policies and procedures and a risk
management control system is used to assist in monitoring hedging programs, derivative positions and hedging strategies. Hedging
documentation includes hedging objectives, practices and procedures and the related accounting treatment.
The accounting for changes in the fair value of each derivative financial instrument depends on whether it has been designated and
qualifies as an accounting hedge, as well as the type of hedging relationship identified. Derivative financial instruments entered into
by our automotive operations are not designated in hedging relationships. Certain of the derivatives entered into by GM Financial
have been designated in cash flow hedging relationships. Derivatives that receive hedge accounting treatment are evaluated for
effectiveness at the time they are designated as well as throughout the hedging period. We do not hold derivative financial instruments
for speculative purposes.
All derivatives are recorded at fair value and presented gross in the consolidated balance sheets. Internal models are used to value a
majority of derivatives. The models use, as their basis, readily observable market inputs, such as time value, forward interest rates,
volatility factors and current and forward market prices for foreign currency exchange rates and commodities. Derivative contracts
that are valued based upon models with significant unobservable market inputs, primarily price, are classified in Level 3.
The valuation of derivative liabilities takes into account our nonperformance risk. At December 31, 2011 and 2010 our
nonperformance risk was not observable through a liquid credit default swap market. Our nonperformance risk was estimated using
internal analysis to develop conclusions on our implied unsecured credit rating, which we used to determine the appropriate credit
spread, which would be applied to us by market participants. Prior to receiving published credit ratings we developed our credit rating
conclusions using an analysis of comparable industrial companies. At December 31, 2011 and 2010 we incorporated our published
credit agency ratings into our credit rating conclusions. Beginning in December 2010 we determined that our non-performance risk no
longer represents a significant input in the determination of the fair value of our foreign currency exchange derivatives. Consequently,
all automotive operations foreign currency exchange derivative liabilities were reclassified to Level 2.
We record the earnings effect resulting from the change in fair value of automotive operations derivative instruments in Interest
income and other non-operating income, net. We record the earnings effect resulting from the change in fair value of derivative
instruments entered into by GM Financial in GM Financial operating and other expenses.
92 General Motors Company 2011 Annual Report