Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

2020 SUPPLEMENTAL INFORMATION

The tables below provide supplemental consolidating financial information and other financial information. Company excluding Ford Credit includes our Automotive and Mobility reportable segments, Corporate Other, Interest on Debt, and Special Items. Eliminations, where presented, primarily represent eliminations of intersegment transactions and deferred tax netting.

Selected Cash Flow Information. The following tables provide supplemental cash flow information (in millions):

						For the Year Ended December 31, 2020
Cash flows from operating activities						Company excluding Ford Credit						Ford Credit						Eliminations						Consolidated
Net income/(loss)						$	(3,200)					$	1,924					$	—					$	(1,276)
Depreciation and tooling amortization						5,482						3,269						—						8,751
Other amortization						95						(1,389)						—						(1,294)
Held-for-sale impairment charges						23						—						—						23
Brazil manufacturing exit non-cash charges (excluding accelerated depreciation of $145)						1,159						—						—						1,159
Provision for credit and insurance losses						19						910						—						929
Pension and OPEB expense/(income)						1,027						—						—						1,027
Equity investment dividends received in excess of (earnings)/losses						136						(6)						—						130
Foreign currency adjustments						(354)						(66)						—						(420)
Net (gain)/loss on changes in investments in affiliates						(3,474)						28						—						(3,446)
Stock compensation						193						6						—						199
Provision for deferred income taxes						(648)						379						—						(269)
Decrease/(Increase) in finance receivables (wholesale and other)						—						12,104						—						12,104
Decrease/(Increase) in intersegment receivables/payables						578						(578)						—						—
Decrease/(Increase) in accounts receivable and other assets						(65)						2						—						(63)
Decrease/(Increase) in inventory						148						—						—						148
Increase/(Decrease) in accounts payable and accrued and other liabilities						6,790						19						—						6,809
Other						(165)						(77)						—						(242)
Interest supplements and residual value support to Ford Credit						(4,192)						4,192						—						—
Net cash provided by/(used in) operating activities						$	3,552					$	20,717					$	—					$	24,269

Cash flows from investing activities
Capital spending						$	(5,702)					$	(40)					$	—					$	(5,742)
Acquisitions of finance receivables and operating leases						—						(55,901)						—						(55,901)
Collections of finance receivables and operating leases						—						48,746						—						48,746
Proceeds from sale of business						—						1,340						—						1,340
Purchases of marketable securities and other investments						(28,648)						(10,976)						—						(39,624)
Sales and maturities of marketable securities and other investments						22,959						9,436						—						32,395
Settlements of derivatives						(171)						(152)						—						(323)
Other						494						—						—						494
Investing activity (to)/from other segments						2,415						110						(2,525)						—
Net cash provided by/(used in) investing activities						$	(8,653)					$	(7,437)					$	(2,525)					$	(18,615)

Cash flows from financing activities
Cash payments for dividends and dividend equivalents						$	(596)					$	—					$	—					$	(596)
Purchases of common stock						—						—						—						—
Net changes in short-term debt						204						(2,495)						—						(2,291)
Proceeds from issuance of long-term debt						24,157						41,743						—						65,900
Principal payments on long-term debt						(15,956)						(44,558)						—						(60,514)
Other						(78)						(106)						—						(184)
Financing activity to/(from) other segments						(110)						(2,415)						2,525						—
Net cash provided by/(used in) financing activities						$	7,621					$	(7,831)					$	2,525					$	2,315
Effect of exchange rate changes on cash, cash equivalents, and restricted cash						$	(54)					$	279					$	—					$	225

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Selected Income Statement Information. The following table provides supplemental income statement information (in millions):

						For the Year Ended December 31, 2020
						Company excluding Ford Credit
						Automotive						Mobility						Other (a)						Subtotal						Ford Credit						Consolidated
Revenues						$	115,885					$	56					$	—					$	115,941					$	11,203					$	127,144
Total costs and expenses						117,122						1,329						4,494						122,945						8,607						131,552
Operating income/(loss)						(1,237)						(1,273)						(4,494)						(7,004)						2,596						(4,408)
Interest expense on Automotive debt						—						—						1,603						1,603						—						1,603
Interest expense on Other debt						—						—						46						46						—						46
Other income/(loss), net						2,570						131						2,206						4,907						(8)						4,899
Equity in net income/(loss) of affiliated companies						300						(132)						(146)						22						20						42
Income/(Loss) before income taxes						1,633						(1,274)						(4,083)						(3,724)						2,608						(1,116)
Provision for/(Benefit from) income taxes						(448)						(306)						230						(524)						684						160
Net income/(loss)						2,081						(968)						(4,313)						(3,200)						1,924						(1,276)
Less: Income attributable to noncontrolling interests						3						—						—						3						—						3
Net income/(loss) attributable to Ford Motor Company						$	2,078					$	(968)					$	(4,313)					$	(3,203)					$	1,924					$	(1,279)

---

(a)Other includes Corporate Other, Interest on Debt, and Special Items

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Selected Balance Sheet Information. The following tables provide supplemental balance sheet information (in millions):

						December 31, 2020
Assets						Company excluding Ford Credit						Ford Credit						Eliminations						Consolidated
Cash and cash equivalents						$	10,894					$	14,349					$	—					$	25,243
Marketable securities						19,858						4,860						—						24,718
Ford Credit finance receivables, net						—						42,401						—						42,401
Trade and other receivables, net						3,422						6,571						—						9,993
Inventories						10,808						—						—						10,808
Assets held for sale						11						36						—						47
Other assets						1,987						1,547						—						3,534
Receivable from other segments						—						2,718						(2,718)						—
Total current assets						46,980						72,482						(2,718)						116,744
Ford Credit finance receivables, net						—						55,277						—						55,277
Net investment in operating leases						1,304						26,647						—						27,951
Net property						36,864						219						—						37,083
Equity in net assets of affiliated companies						4,778						123						—						4,901
Deferred income taxes						14,757						165						(2,499)						12,423
Other assets						9,293						3,589						—						12,882
Receivable from other segments						10						22						(32)						—
Total assets						$	113,986					$	158,524					$	(5,249)					$	267,261

Liabilities
Payables						$	21,125					$	1,079					$	—					$	22,204
Other liabilities and deferred revenue						21,942						1,703						—						23,645
Automotive debt payable within one year						1,194						—						—						1,194
Ford Credit debt payable within one year						—						49,969						—						49,969
Other debt payable within one year						180						—						—						180
Liabilities held for sale						—						—						—						—
Payable to other segments						2,718						—						(2,718)						—
Total current liabilities						47,159						52,751						(2,718)						97,192
Other liabilities and deferred revenue						27,246						1,133						—						28,379
Automotive long-term debt						22,342						—						—						22,342
Ford Credit long-term debt						—						87,708						—						87,708
Other long-term debt						291						—						—						291
Deferred income taxes						130						2,907						(2,499)						538
Payable to other segments						32						—						(32)						—
Total liabilities						$	97,200					$	144,499					$	(5,249)					$	236,450

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Selected Other Information.

Equity. At December 31, 2019, total equity attributable to Ford was $33.2 billion, a decrease of $2.7 billion compared with December 31, 2018. At December 31, 2020, total equity attributable to Ford was $30.7 billion, a decrease of $2.5 billion compared with December 31, 2019. The detail for the changes is shown below (in billions):

			2019 vs 2018 Increase/ (Decrease)						2020 vs 2019 Increase/ (Decrease)
Net income/(loss)			$	—					$	(1.3)
Shareholder distributions			(2.6)						(0.6)
Other comprehensive income/(loss)			(0.3)						(0.5)
Adoption of accounting standards			—						(0.2)
Common stock issued (including share-based compensation impacts)			0.2						0.1
Total			$	(2.7)					$	(2.5)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

CRITICAL ACCOUNTING ESTIMATES

We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.

Warranties and Field Service Actions

Nature of Estimates Required. We provide base warranties on the products we sell for specific periods of time and/or mileage, which vary depending upon the type of product and the geographic location of its sale. Separately, we also periodically perform field service actions related to safety recalls, emission recalls, and other product campaigns. Pursuant to these warranties and field service actions, we will repair, replace, or adjust all parts on a vehicle that are defective in factory-supplied materials or workmanship. We accrue the estimated cost of both base warranty coverages and field service actions at the time of sale. In addition, from time to time, we issue extended warranties at our expense, the estimated cost of which is accrued at the time of issuance.

Assumptions and Approach Used. We establish our estimate of base warranty obligations using a patterned estimation model. We use historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. We reevaluate our estimate of base warranty obligations on a regular basis. Experience has shown that initial data for any given model year may be volatile; therefore, our process relies on long-term historical averages until sufficient data are available. As actual experience becomes available, we use the data to update the historical averages. We then compare the resulting accruals with present spending rates to assess whether the balances are adequate to meet expected future obligations. Based on this data, we update our estimates as necessary.

Field service actions are distinguishable from warranties in that they may occur in periods beyond the base warranty coverage period. We establish our estimates of field service action obligations using a patterned estimation model. We use historical information regarding the nature, frequency, severity, and average cost of claims for each model year. We assess our obligation for field service actions on a regular basis using actual claims experience and update our estimates as necessary.

Due to the uncertainty and potential volatility of the factors used in establishing our estimates, changes in our assumptions could materially affect our financial condition and results of operations. See Note 25 of the Notes to the Financial Statements for information regarding warranty and field service action costs.

Pensions and Other Postretirement Employee Benefits

Nature of Estimates Required. The estimation of our defined benefit pension and OPEB plan obligations and expenses requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events, such as demographic experience and health care cost increases. Plan obligations and expenses are based on existing retirement plan provisions. No assumption is made regarding any potential future changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor contracts).

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Assumptions and Approach Used. The assumptions used in developing the required estimates include the following key factors:

• Discount rates. Our discount rate assumptions are based primarily on the results of cash flow matching analyses, which match the future cash outflows for each major plan to a yield curve based on high-quality bonds specific to the country of the plan. Benefit payments are discounted at the rates on the curve to determine the year-end obligations.

• Expected long-term rate of return on plan assets. Our expected long-term rate of return considers inputs from a range of advisors for capital market returns, inflation, bond yields, and other variables, adjusted for specific aspects of our investment strategy by plan. Historical returns also are considered when appropriate. The assumption is based on consideration of all inputs, with a focus on long-term trends to avoid short-term market influences.

• Salary growth. Our salary growth assumption reflects our actual experience, long-term outlook, and assumed inflation.

• Inflation. Our inflation assumption is based on an evaluation of external market indicators, including real gross domestic product growth and central bank inflation targets.

*•*Expected contributions. Our expected amount and timing of contributions are based on an assessment of minimum requirements, cash availability, and other considerations (e.g., funded status, avoidance of regulatory premiums and levies, and tax efficiency).

• Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.

• Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.

• Health care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends.

Assumptions are set at each year-end and are generally not changed during the year unless there is a major plan event, such as a curtailment or settlement that would trigger a plan remeasurement.

See Note 17 of the Notes to the Financial Statements for more information regarding pension and OPEB costs and assumptions.

Pension Plans

Effect of Actual Results. The year-end 2020 weighted average discount rate was 2.56% for U.S. plans and 1.23% for non-U.S. plans, reflecting decreases of 76 and 51 basis points, respectively, compared with year-end 2019. In 2020, the U.S. actual return on assets was 16.44%, which was higher than the expected long-term rate of return of 6.50%. Non-U.S. actual return on assets was 10.96%, which was higher than the expected long-term rate of return of 3.67%. In total, these differences, in addition to demographic and other updates, resulted in a net remeasurement loss of $876 million, which has been recognized within net periodic benefit cost and reported as a special item.

For 2021, the expected long-term rate of return on assets is 6.00% for U.S. plans, down 50 basis points from 2020, and 3.42% for non-U.S. plans, down 25 basis points compared with a year ago, reflecting a lower consensus on capital market return expectations from advisors.

De-risking Strategy. We employ a broad de-risking strategy for our global funded plans that increases the matching characteristics of our assets relative to our obligation as funded status improves. Changes in interest rates, which directly influence changes in discount rates, in addition to other factors have a significant impact on the value of our pension obligation and fixed income asset portfolio. Our de-risking strategy has increased the allocation to fixed income investments and reduced our funded status sensitivity to changes in interest rates. Changes in interest rates should result in offsetting effects in the value of our pension obligation and the value of the fixed income asset portfolio.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Sensitivity Analysis. The December 31, 2020 pension funded status and 2021 expense are affected by year-end 2020 assumptions. Sensitivities to these assumptions may be asymmetric and are specific to the time periods noted. The effects of changes in the factors that generally have the largest impact on year-end funded status and pension expense are discussed below.

Discount rates and interest rates have the largest impact on our obligations and fixed income assets. The table below estimates the effect on our funded status of an increase/decrease in discount rates and interest rates (in millions):

						Basis Point Change						Increase/(Decrease) in December 31, 2020 Funded Status
Factor									U.S. Plans						Non-U.S. Plans
Discount rate - obligation						+/- 100 bps						$5,200/$(6,400)						$6,100/$(8,000)
Interest rate - fixed income assets						+/- 100						(5,000)/6,100						(4,400)/5,700
Net impact on funded status												$200/$(300)						$1,700/$(2,300)

The fixed income asset sensitivity shown excludes other fixed income return components (e.g., changes in credit spreads, bond coupon and active management excess returns), and growth asset returns. Other factors that affect net funded status (e.g., contributions) are not reflected.

Interest rates and the expected long-term rate of return on assets have the largest effect on pension expense. These assumptions are generally set at each year-end for expense recorded throughout the following year. The table below estimates the effect on pension expense of a higher/lower assumption for these factors (in millions):

						Basis Point Change						Increase/(Decrease) in December 31, 2020 Pension Expense
Factor									U.S. Plans						Non-U.S. Plans
Interest rate - service cost and interest cost						+/- 25 bps						$60/$(60)						$40/$(40)
Expected long-term rate of return on assets						+/- 25						(120)/120						(80)/80

The effect of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities. The sensitivity of pension expense to an increase in discount rates assumptions may not be linear.

Other Postretirement Employee Benefits

Effect of Actual Results. The weighted average discount rate used to determine the benefit obligation for worldwide OPEB plans at December 31, 2020 was 2.62%, compared with 3.30% at December 31, 2019, resulting in a worldwide net remeasurement loss of $556 million, which has been recognized within net periodic benefit cost and reported as a special item.

Sensitivity Analysis. Discount rates and interest rates have the largest effect on our OPEB obligation and expense. The table below estimates the effect on 2021 OPEB expense of higher/lower assumptions for these factors (in millions):

												Worldwide OPEB
						Basis Point Change						(Increase)/Decrease 2020 YE Obligation						Increase/(Decrease) 2020 Expense
Factor
Discount rate - obligation						+/- 100 bps						$750/$(950)						N/A
Interest rate - service cost and interest cost						+/- 25						N/A						$10/$(10)

Income Taxes

Nature of Estimates Required. We must make estimates and apply judgment in determining the provision for income taxes for financial reporting purposes. We make these estimates and judgments primarily in the following areas: (i) the calculation of tax credits, (ii) the calculation of differences in the timing of recognition of revenue and expense for tax reporting and financial statement purposes, as well as (iii) the calculation of interest and penalties related to uncertain tax positions. Changes in these estimates and judgments may result in a material increase or decrease to our tax provision, which would be recorded in the period in which the change occurs.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Assumptions and Approach Used. We are subject to the income tax laws and regulations of the many jurisdictions in which we operate. These tax laws and regulations are complex and involve uncertainties in the application to our facts and circumstances that may be open to interpretation. We recognize benefits for these uncertain tax positions based upon a process that requires judgment regarding the technical application of the laws, regulations, and various related judicial opinions. If, in our judgment, it is more likely than not (defined as a likelihood of more than 50%) that the uncertain tax position will be settled favorably for us, we estimate an amount that ultimately will be realized. This process is inherently subjective since it requires our assessment of the probability of future outcomes. We evaluate these uncertain tax positions on a quarterly basis, including consideration of changes in facts and circumstances, such as new regulations or recent judicial opinions, as well as the status of audit activities by taxing authorities. Changes to our estimate of the amount to be realized are recorded in our provision for income taxes during the period in which the change occurred.

We must also assess the likelihood that we will be able to recover our deferred tax assets against future sources of taxable income and reduce the carrying amount of deferred tax assets by recording a valuation allowance if, based on all available evidence, it is more likely than not that all or a portion of such assets will not be realized.

This assessment, which is completed on a taxing jurisdiction basis, takes into account various types of evidence, including the following:

• Nature, frequency, and severity of current and cumulative financial reporting losses. A pattern of objectively measured recent financial reporting losses is heavily weighted as a source of negative evidence. We generally consider cumulative pre-tax losses in the three-year period ending with the current quarter to be significant negative evidence regarding future profitability. We also consider the strength and trend of earnings, as well as other relevant factors. In certain circumstances, historical information may not be as relevant due to changes in our business operations;

• Sources of future taxable income. Future reversals of existing temporary differences are heavily weighted sources of objectively verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profits and can be reasonably estimated. Otherwise, these projections are considered inherently subjective and generally will not be sufficient to overcome negative evidence that includes relevant cumulative losses in recent years, particularly if the projected future taxable income is dependent on an anticipated turnaround to profitability that has not yet been achieved. In such cases, we generally give these projections of future taxable income no weight for the purposes of our valuation allowance assessment; and

• Tax planning strategies. If necessary and available, tax planning strategies would be implemented to accelerate taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence and, depending on their nature, could be heavily weighted.

During 2020, based on all available evidence, we established U.S. valuation allowances of $1.3 billion primarily against tax credits, as it is more likely than not that these deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, we consider the trade-offs between cash preservation and cash outlays to preserve tax credits. We presently believe that global valuation allowances of $2 billion are required. We believe that we ultimately will recover the remaining $11.9 billion of deferred tax assets. However, the ultimate realization of our deferred tax assets is subject to a number of variables, including our future profitability within relevant tax jurisdictions, and future tax planning and the related effects on our cash and liquidity position. Accordingly, our valuation allowances may increase or decrease in future periods.

For additional information regarding income taxes, see Note 7 of the Notes to the Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Impairment of Long-Lived Assets

Nature of Estimates Required - Held-and-Used Long-Lived Assets. We test our long-lived asset groups when changes in circumstances indicate their carrying value may not be recoverable. Events that trigger a test for recoverability include material adverse changes in projected revenues and expenses, present cash flow losses combined with a history of cash flow losses and a forecast that demonstrates significant continuing losses, significant negative industry or economic trends, a current expectation that a long-lived asset group will be disposed of significantly before the end of its useful life, a significant adverse change in the manner in which an asset group is used or in its physical condition, or when there is a change in the asset grouping. When a triggering event occurs, a test for recoverability is performed, comparing projected undiscounted future cash flows to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the asset group’s fair value is measured relying primarily on a discounted cash flow method. To the extent available, we will also consider third-party valuations of our long-lived assets that were prepared for other business purposes. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amounts of those assets are depreciated over their remaining useful life.

Nature of Estimates Required - Held-for-Sale Operations. We perform an impairment test on a disposal group to be discontinued, held for sale, or otherwise disposed of when we have committed to an action and the action is expected to be completed within one year. We estimate fair value to approximate the expected proceeds to be received less cost to sell and compare it to the carrying value of the disposal group. An impairment charge is recognized when the carrying value exceeds the estimated fair value. We also assess fair value if circumstances arise that were considered unlikely and, as a result, we decide not to sell a disposal group previously classified as held for sale upon reclassification as held and used. When there is a change to a plan of sale, and the assets are reclassified from held for sale to held and used, the long-lived assets should be reported at the lower of (i) the carrying amount before held for sale designation, adjusted for depreciation that would have been recognized if the assets had not been classified as held for sale or (ii) the fair value at the date the assets no longer satisfy the criteria for classification as held for sale.

Assumptions and Approach Used - Held-and-Used Long-Lived Assets. We measure the fair value of an asset group based on market prices (i.e., the amount for which the asset could be sold to a third party) when available. When market prices are not available, we generally estimate the fair value of the asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, business plan forecasts, expected growth rates, and cost of capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about future economic conditions and other data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods.

Changes in assumptions or estimates can materially affect the fair value measurement of an asset group and, therefore, can affect the test results. The following are key assumptions we use in making cash flow projections:

*•*Business projections. We make assumptions about the demand for our products in the marketplace. These

assumptions drive our planning assumptions for volume, mix, and pricing. We also make assumptions about our cost levels (e.g., capacity utilization, cost performance). These projections are derived using our internal business plan forecasts that are updated at least annually and reviewed by our Board of Directors.

*•*Long-term growth rate. A growth rate is used to calculate the terminal value of the business and is added to the present value of the debt-free interim cash flows. The growth rate is the expected rate at which a business unit’s earnings stream is projected to grow beyond the planning period.

*•*Discount rate. When measuring possible impairment, future cash flows are discounted at a rate that is consistent with a weighted-average cost of capital that we anticipate a potential market participant would use. Weighted-average cost of capital is an estimate of the overall risk-adjusted pre-tax rate of return expected by equity and debt holders of a business enterprise.

*•*Economic projections. Assumptions regarding general economic conditions are included in and affect our assumptions regarding industry sales and pricing estimates for our vehicles. These macroeconomic assumptions include, but are not limited to, industry sales volumes, inflation, interest rates, prices of raw materials (e.g., commodities), and foreign currency exchange rates.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

During 2020, we experienced triggering events in all of our Automotive asset groups related to the COVID-19 pandemic and in certain asset groups due to our ongoing global redesign. The impact of COVID-19, including changes in consumer behavior, pandemic fears, market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. In addition, we have continued to progress our global redesign, which began in 2018, by reassessing our operations and reducing structural costs.

In each situation in which we experienced a triggering event during the year, we tested our long-lived assets for impairment using our internal economic and business projections, as well as third-party valuations of certain long-lived assets, and determined that the carrying value of the long-lived assets in these business units was recoverable. If in future quarters our economic or business projections were to change as a result of our plans or changes in the economic or business environment, there was a significant adverse change in the extent or manner in which a long-lived asset is being used, or there was a current expectation that a long-lived asset group will be disposed of significantly before the end of its useful life, we would undertake additional testing, as appropriate, which could result in an impairment of long-lived assets.

Assumptions and Approach Used - Held-for-Sale Operations. In the third quarter of 2019, we committed to a plan to sell specific net assets in our India Automotive operations. We entered into a definitive agreement to form a joint venture with Mahindra & Mahindra Limited (“Mahindra”), with Mahindra owning a 51 percent controlling stake and Ford owning a 49 percent stake. As a result of fundamental changes in global economic and business conditions in 2020, caused in part by the global pandemic, on December 31, 2020, we and Mahindra determined that we will not complete the joint venture. Accordingly, at December 31, 2020, the assets and liabilities of our India Automotive operations were reclassified and reported as held and used. Because the carrying value of the net assets approximated fair value at December 31, 2020, the pre-tax impairment charges of $804 million and $23 million recorded in 2019 and 2020, respectively, which were reported in Cost of sales, were not adjusted as a result of the reclassification to held and used. See Note 22 of the Notes to the Financial Statements for more information regarding held-for-sale operations.

Allowance for Credit Losses

The allowance for credit losses represents Ford Credit’s estimate of the expected lifetime credit losses inherent in finance receivables as of the balance sheet date. The adequacy of Ford Credit’s allowance for credit losses is assessed quarterly, and the assumptions and models used in establishing the allowance are evaluated regularly. Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain. Changes in assumptions affect Ford Credit interest, operating, and other expenses on our consolidated income statements and the allowance for credit losses contained within Ford Credit finance receivables, net on our consolidated balance sheets. See Note 10 of the Notes to the Financial Statements for more information regarding allowance for credit losses.

Nature of Estimates Required. Ford Credit estimates the allowance for credit losses for receivables that share similar risk characteristics based on a collective assessment using a combination of measurement models and management judgment. The models consider factors such as historical trends in credit losses, recent portfolio performance, and forward-looking macroeconomic conditions. The models vary by portfolio and receivable type including consumer finance receivables, wholesale loans, and dealer loans. If Ford Credit does not believe the models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding qualitative factors including economic uncertainty, observable changes in portfolio performance, and other relevant factors.

Assumptions Used. Ford Credit’s allowance for credit losses is based on its assumptions regarding:

• Probability of default. The expected probability of payment and time to default, which include assumptions about macroeconomic factors and recent performance; and

• Loss given default. The percentage of the expected balance due at default that is not recoverable. The loss given default takes into account expected collateral value and future recoveries.

Macroeconomic factors used in Ford Credit’s models are country specific and include variables such as unemployment rates, housing prices, and gross domestic product.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Sensitivity Analysis. Changes in the probability of default and loss given default assumptions would affect the allowance for credit losses. The effect of the indicated increase/decrease in the assumptions for Ford Credit’s U.S. Ford and Lincoln retail financing is as follows (in millions):

Assumption						Basis Point Change						Increase/(Decrease)
Probability of default (lifetime)						+/- 100 bps						$200/$(200)
Loss given default						+/- 100						15/(15)

Accumulated Depreciation on Vehicles Subject to Operating Leases

Accumulated depreciation on vehicles subject to operating leases reduces the value of the leased vehicles in Ford Credit’s operating lease portfolio from their original acquisition value to their expected residual value at the end of the lease term.

Ford Credit monitors residual values each month, and it reviews the adequacy of accumulated depreciation on a quarterly basis. If Ford Credit believes that the expected residual values for its vehicles have changed, it revises depreciation to ensure that net investment in operating leases (equal to the acquisition value of the vehicles less accumulated depreciation) will be adjusted to reflect Ford Credit’s revised estimate of the expected residual value at the end of the lease term. Adjustments to depreciation expense result in a change in the depreciation rates of the vehicles subject to operating leases and are recorded prospectively on a straight-line basis.

Each lease customer has the option to buy the leased vehicle at the end of the lease or to return the vehicle to the dealer.

Nature of Estimates Required. Each operating lease in Ford Credit’s portfolio represents a vehicle it owns that has been leased to a customer. At the time Ford Credit purchases a lease, it establishes an expected residual value for the vehicle. Ford Credit estimates the expected residual value by evaluating recent auction values, return volumes for its leased vehicles, industrywide used vehicle prices, marketing incentive plans, and vehicle quality data.

Assumptions Used. Ford Credit’s accumulated depreciation on vehicles subject to operating leases is based on assumptions regarding:

• Auction value. Ford Credit’s projection of the market value of the vehicles when sold at the end of the lease; and

• Return volume. Ford Credit’s projection of the number of vehicles that will be returned at lease-end.

See Note 12 of the Notes to the Financial Statements for more information regarding accumulated depreciation on vehicles subject to operating leases.

Sensitivity Analysis. For returned vehicles, Ford Credit faces a risk that the amount it obtains from the vehicle sold at auction will be less than its estimate of the expected residual value for the vehicle. The impact of the change in assumptions on future auction values and return volumes would increase or decrease accumulated supplemental depreciation and depreciation expense over the remaining terms of the operating leases. The effect of the indicated increase/decrease in the assumptions for Ford Credit’s U.S. Ford and Lincoln operating lease portfolio is as follows (in millions):

Assumption						Basis Point Change						Increase/(Decrease)
Future auction values						+/- 100 bps						$(124)/$124
Return volumes						+/- 100						13/(13)

Adjustments to the amount of accumulated supplemental depreciation on operating leases are reflected on our balance sheets as Net investment in operating leases and on our income statements in Ford Credit interest, operating, and other expenses.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

The Financial Accounting Standards Board (“FASB”) has issued the following Accounting Standards Updates (“ASU”) which are not expected to have a material impact to our financial statements or financial statement disclosures.

ASU									Effective Date (a)
2019-12			Simplifying the Accounting for Income Taxes						January 1, 2021
2020-06			Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity						January 1, 2022
2018-12			Targeted Improvements to the Accounting for Long Duration Contracts						January 1, 2023

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(a)Early adoption for each of the standards is permitted.

AGGREGATE CONTRACTUAL OBLIGATIONS

We are party to many contractual obligations involving commitments to make payments to third parties. Most of these are debt obligations incurred by our Ford Credit segment. Long-term debt may have fixed or variable interest rates. For long-term debt with variable-rate interest, we estimate the future interest payments based on projected market interest rates for various floating-rate benchmarks received from third parties. In addition, as part of our normal business practices, we enter into contracts with suppliers for purchases of certain raw materials, components, and services to facilitate adequate supply of these materials and services. These arrangements may contain fixed or minimum quantity purchase requirements. “Purchase obligations” are defined as off-balance sheet agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms.

The table below summarizes our contractual obligations as of December 31, 2020 (in millions):

			Payments Due by Period
			2021						2022 - 2023						2024 - 2025						Thereafter						Total
Company excluding Ford Credit
On-balance sheet
Long-term debt (a)			$	716					$	6,396					$	4,590					$	11,709					$	23,411
Interest payments relating to long-term debt			1,482						2,693						2,017						9,916						16,108
Finance leases (b)			60						97						64						303						524
Operating leases			348						460						247						334						1,389
Pension funding (c)			185						375						370						—						930
Off-balance sheet
Purchase obligations			1,626						1,429						682						370						4,107
Total Company excluding Ford Credit			4,417						11,450						7,970						22,632						46,469
Ford Credit
On-balance sheet
Long-term debt (a)			38,530						47,087						28,747						10,639						125,003
Interest payments relating to long-term debt			2,946						3,815						1,980						1,053						9,794
Operating leases			18						29						26						18						91
Off-balance sheet
Purchase obligations			29						40						4						—						73
Total Ford Credit			41,523						50,971						30,757						11,710						134,961
Total Company			$	45,940					$	62,421					$	38,727					$	34,342					$	181,430

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(a)Excludes unamortized debt discounts/premiums, unamortized debt issuance costs, and fair value adjustments.

(b)Includes interest payments of $110 million.

(c)Amounts represent our estimate of contractually obligated contributions to the Ford-Werke plan. See Note 17 of the Notes to the Financial Statements for further information regarding our expected 2020 pension contributions and funded status.

The amount of unrecognized tax benefits for 2020 of $1.9 billion (see Note 7 of the Notes to the Financial Statements for additional discussion) is excluded from the table above. Final settlement of a significant portion of these obligations will require bilateral tax agreements among us and various countries, the timing of which cannot reasonably be estimated.

For additional information regarding pension and OPEB obligations, operating lease obligations, long-term debt, and agreed future funding for Argo AI, see Notes 17, 18, 19, and 22, respectively, of the Notes to the Financial Statements.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

OVERVIEW

We are exposed to a variety of market and other risks, including the effects of changes in foreign currency exchange rates, commodity prices, and interest rates, as well as risks to availability of funding sources, hazard events, and specific asset risks.

These risks affect our Automotive and Ford Credit segments differently. We monitor and manage these exposures as an integral part of our overall risk management program, which includes regular reports to a central management committee, the Global Risk Management Committee (“GRMC”). The GRMC is chaired by our Chief Financial Officer, and the committee includes our Controller, Treasurer, and other members of senior management.

Our Automotive and Ford Credit segments are exposed to liquidity risk, including the possibility of having to curtail business or being unable to meet financial obligations as they come due because funding sources may be reduced or become unavailable. Our plan is to maintain funding sources to ensure liquidity through a variety of economic or business cycles. As discussed in greater detail in Item 7, our funding sources include sales of receivables in securitizations and other structured financings, unsecured debt issuances, equity and equity-linked issuances, and bank borrowings.

We are exposed to a variety of insurable risks, such as loss or damage to property, liability claims, and employee injury. We protect against these risks through the purchase of commercial insurance that is designed to protect us above our self-insured retentions against events that could generate significant losses.

Direct responsibility for the execution of our market risk management strategies resides with our Treasurer’s Office and is governed by written policies and procedures. Separation of duties is maintained between the development and authorization of derivative trades, the transaction of derivatives, and the settlement of cash flows. Regular audits are conducted to ensure that appropriate controls are in place and that they remain effective. In addition, our market risk exposures and our use of derivatives to manage these exposures are approved by the GRMC, and reviewed by the Audit Committee of our Board of Directors.

In accordance with our corporate risk management policies, we use derivative instruments, when available, such as forward contracts, swaps, and options that economically hedge certain exposures (foreign currency, commodity, and interest rates). We do not use derivative contracts for trading, market-making, or speculative purposes. In certain instances, we forgo hedge accounting, and in certain other instances, our derivatives do not qualify for hedge accounting. Either situation results in unrealized gains and losses that are recognized in income. For additional information on our derivatives, see Note 20 of the Notes to the Financial Statements.

The market and counterparty risks of our Automotive and Ford Credit segments are discussed and quantified below.

AUTOMOTIVE MARKET RISK

Our Automotive segment frequently has expenditures and receipts denominated in foreign currencies, including the following: purchases and sales of finished vehicles and production parts, debt and other payables, subsidiary dividends, and investments in foreign operations. These expenditures and receipts create exposures to changes in exchange rates. We also are exposed to changes in prices of commodities used in the production of our vehicles and changes in interest rates.

Foreign currency risk, commodity risk, and interest rate risk are measured and quantified using a model to evaluate the sensitivity of market value to instantaneous, parallel shifts in rates and/or prices.

Foreign Currency Risk. Foreign currency risk is the possibility that our financial results could be worse than planned because of changes in currency exchange rates. Accordingly, our practice is to use derivative instruments to hedge our economic exposure with respect to forecasted revenues and costs, assets, liabilities, and firm commitments denominated in certain foreign currencies consistent with our overall risk management strategy. In our hedging actions, we use derivative instruments commonly used by corporations to reduce foreign exchange risk (e.g., forward contracts).

Item 7A. Quantitative and Qualitative Disclosures About Market Risk (Continued)

The net fair value of foreign exchange forward contracts (including adjustments for credit risk) as of December 31, 2020, was a liability of $487 million, compared with a liability of $596 million as of December 31, 2019. The potential decrease in fair value from a 10% adverse change in the underlying exchange rates, in U.S. dollar terms, would have been $2.5 billion at December 31, 2020, compared with $2.3 billion at December 31, 2019. The sensitivity analysis presented is hypothetical and assumes foreign exchange rate changes are instantaneous and adverse across all currencies. In reality, some of our exposures offset and foreign exchange rates move in different magnitudes and at different times, and any changes in fair value would generally be offset by changes in the underlying exposure. See Note 20 of the Notes to the Financial Statements for more information regarding our foreign currency exchange contracts.

Commodity Price Risk. Commodity price risk is the possibility that our financial results could be worse than planned because of changes in the prices of commodities used in the production of motor vehicles, such as base metals (e.g., steel, copper, and aluminum), precious metals (e.g., palladium), energy (e.g., natural gas and electricity), and plastics/resins (e.g., polypropylene). Accordingly, our practice is to use derivative instruments to hedge the price risk with respect to forecasted purchases of certain commodities that we can economically hedge (primarily base metals and precious metals) and consistent with our overall risk management strategy. In our hedging actions, we use derivative instruments commonly used by corporations to reduce commodity price risk (e.g., financially settled forward contracts). The extent to which we hedge is also impacted by our ability to achieve designated hedge accounting.

The net fair value of commodity forward contracts (including adjustments for credit risk) as of December 31, 2020, was an asset of $105 million, compared with a liability of $24 million as of December 31, 2019. The potential decrease in fair value from a 10% adverse change in the underlying commodity prices would be $141 million at December 31, 2020, compared with $112 million at December 31, 2019. The sensitivity analysis presented is hypothetical and assumes commodity price changes are instantaneous and adverse across all commodities. In reality, commodity prices move in different magnitudes and at different times, and any changes in fair value would generally be offset by changes in the underlying exposure.

In addition, our purchasing organization (with guidance from the GRMC, as appropriate) negotiates contracts for the continuous supply of raw materials. In some cases, these contracts stipulate minimum purchase amounts and specific prices, and, therefore, play a role in managing commodity price risk.

Interest Rate Risk. Interest rate risk relates to the loss we could incur in our Company cash investment portfolios due to a change in interest rates. Our interest rate sensitivity analysis on the investment portfolios includes cash and cash equivalents and net marketable securities. At December 31, 2020, we had $30.8 billion in our Company cash investment portfolios, compared to $22.3 billion at December 31, 2019. We invest the portfolios in securities of various types and maturities, the value of which are subject to fluctuations in interest rates. The investment strategy is based on clearly defined risk and liquidity guidelines to maintain liquidity, minimize risk, and earn a reasonable return on the short-term investments. In investing our Company cash, safety of principal is the primary objective and risk-adjusted return is the secondary objective.

At any time, a rise in interest rates could have a material adverse impact on the fair value of our portfolios. Assuming a hypothetical increase in interest rates of one percentage point, the value of our portfolios would be reduced by $250 million, as calculated as of December 31, 2020. This compares to $173 million, as calculated as of December 31, 2019. While these are our best estimates of the impact of the specified interest rate scenario, actual results could differ from those projected. The sensitivity analysis presented assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, interest rate changes of this magnitude are rarely instantaneous or parallel.