(15)   The fair values of financial instruments that do not approximate the carrying values in millions of dollars follow:

 

		January 31, 2015						October 31, 2014						January 31, 2014
		Carrying Value			Fair Value *			Carrying Value			Fair Value *			Carrying Value			Fair Value *
Financing receivables - net		$	25,806		$	25,733		$	27,422		$	27,337		$	25,242		$	25,129
Financing receivables securitized - net		3,893			3,868			4,602			4,573			3,491			3,463
Short-term securitization borrowings		3,888			3,891			4,559			4,562			3,491			3,492
Long-term borrowings due within one year:
Equipment operations		$	216		$	207		$	243		$	233		$	815		$	821
Financial services		4,660			4,669			4,730			4,743			4,501			4,511
Total		$	4,876		$	4,876		$	4,973		$	4,976		$	5,316		$	5,332
Long-term borrowings:
Equipment operations		$	4,622		$	5,344		$	4,643		$	5,095		$	4,828		$	5,102
Financial services		19,485			19,687			19,738			19,886			17,437			17,619
Total		$	24,107		$	25,031		$	24,381		$	24,981		$	22,265		$	22,721

 

*           Fair value measurements above were Level 3 for all financing receivables and Level 2 for all borrowings.

 

Fair values of 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 fair value on a recurring basis in millions of dollars follow:

 

		January 31 2015 *			October 31 2014 *			January 31 2014 *
Marketable securities
Equity fund		$	45		$	45		$	20
Fixed income fund					10
U.S. government debt securities		179			808			1,113
Municipal debt securities		29			34			36
Corporate debt securities		134			172			147
Mortgage-backed securities **		107			146			122
Total marketable securities		494			1,215			1,438
Other assets
Derivatives:
Interest rate contracts		478			319			329
Foreign exchange contracts		125			18			70
Cross-currency interest rate contracts		22			16			19
Total assets ***		$	1,119		$	1,568		$	1,856
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts		$	80		$	81		$	144
Foreign exchange contracts		49			29			24
Total liabilities		$	129		$	110		$	168

 

*	All measurements above were Level 2 measurements except for Level 1 measurements of U.S. government debt securities of $129 million, $741 million and $1,046 million at January 31, 2015, October 31, 2014 and January 31, 2014, respectively, and the equity fund of $45 million, $45 million and $20 million at January 31, 2015, October 31, 2014 and January 31, 2014, respectively, and the fixed income fund of $10 million at October 31, 2014. There were no transfers between Level 1 and Level 2 during the first three months of 2015 or 2014.
**	Primarily issued by U.S. government sponsored enterprises.
***	Excluded from this table are the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds that were Level 1 measurements.

 

The contractual maturities of debt securities at January 31, 2015 in millions of dollars are shown below.  Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.

 

		Amortized Cost			Fair Value
Due in one year or less		$	113		$	113
Due after one through five years		70			73
Due after five through 10 years		110			117
Due after 10 years		34			39
Mortgage-backed securities		103			107
Debt securities		$	430		$	449

 

Fair value, nonrecurring, Level 3 measurements from impairments in millions of dollars follow:

 

		Fair Value *							Losses
									Three Months Ended
		January 31		October 31			January 31		January 31
		2015		2014			2014		2015		2014
Property and equipment - net				$	53						$	26
Other assets				$	15

 

*                See financing receivables with specific allowances in Note 10 that were not significant.

 

The fair value measurement and impairment losses shown above were the result of changes in circumstances that indicate it was probable the future cash flows would not cover the carrying amounts of certain long-lived assets.  The non-cash charge of $26 million pretax and after-tax was recognized in the first quarter of 2014 in cost of sales.  The impairment was associated with the Company’s John Deere Water operations, which were included in the agriculture and turf operating segment.  The impairment was due to a decline in forecasted financial performance and a review of strategic options for the business, which was sold in May 2014.

 

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.

 

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.  In determining 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.

 

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 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.

 

Derivatives – The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency 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 collateral, which is measured using a market approach (appraisal values or realizable values).  Inputs include a selection of realizable values.

 

Property and Equipment – Net – The impairments are measured at the lower of the carrying amount, or fair value.  The valuations were based on an income approach using probability weighted cash flows of potential outcomes of the ongoing strategic option review.  The inputs include estimates of the cash flow related to each of the alternatives being considered and management’s estimate of the likelihood of each alternative.

 

Other Assets – The impairments are measured at the lower of the carrying amount, or fair value.  The valuations were based on a market approach.  The inputs include sales of comparable assets.