CNH Industrial N.V. 10-K/A

Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to the following financial risks connected with our operations: • credit risk related to our financing activities; • currency risk; and • interest rate risk. We attempt to actively manage these risks. The quantitative data reported in the following sections does not have any predictive value. In particular, the sensitivity analysis on market risks does not reflect the complexity of the market or the reaction, which may result from any changes that are assumed to take place. Credit Risk Our credit concentration risk differs in relation to the activities carried out by the segments and end markets in which we operate; in all cases, the risk is mitigated by the large number of counterparties and customers. Considered from a global point of view, however, there is a concentration of credit risk in trade receivables and receivables from financing activities, in particular dealer financing in the European Union market and in North America, as well as in South America for Agriculture and Construction. Financial assets are recognized in the statement of financial position net of write-downs for the risk that counterparties may be unable to fulfill their contractual obligations, determined on the basis of the available information as to the creditworthiness of the customer and historical data. 36 The maximum credit risk to which we were theoretically exposed at December 31, 2022 is represented by the carrying amounts stated for financial assets in the statement of financial position and the nominal value of the guarantees provided on debt or commitments of third parties. Dealers and final customers are generally subject to specific assessments of their creditworthiness under a detailed scoring system. In addition to carrying out this evaluation process, we may also obtain financial and non-financial guarantees for risks arising from credit granted for the sale of agricultural equipment, construction equipment and related parts. These guarantees are further secured, where possible, by retention of title clauses or specific guarantees on financed equipment sales to the distribution network and on equipment under finance or leasing agreements. Balances which are objectively uncollectible either in part or for the whole amount are written down on a specific basis if they are individually significant. The amount of the write-down takes into account an estimate of the recoverable cash flows and the date of receipt, the costs of recovery, and the fair value of any guarantees received. Impairment losses are recognized for receivables that are not written down on a specific basis, but rather determined based on historical experience and statistical information. Receivables for financing activities amounted to $19,260 million at December 31, 2022 ($15,376 million at December 31, 2021) containing balances totaling $334 million ($285 million at December 31, 2021) that have been written down. In addition, balances totaling $117 million ($75 million at December 31, 2021) were either past due or in nonaccrual status. In the event of installment payments, even if only one installment is overdue, the whole amount of the receivable is classified as such. Trade receivables totaling $172 million at December 31, 2022 ($192 million at December 31, 2021) contain balances totaling $23 million ($24 million at December 31, 2021) that have been written down. Currency Risk We are exposed to risk resulting from changes in exchange rates, which can affect our earnings and equity. Where one of our subsidiaries incurs costs in a currency different from that of its revenues, any change in exchange rates can affect the net income/(loss) of that company. In 2022, the total net trade flows exposed to currency risk amounted to the equivalent of 19% of our revenue (19% in 2021). The principal exchange rates to which we are exposed are the following: • EUR/USD, in relation to the production/purchases of Agriculture and Construction in the Euro area • USD/BRL and EUR/BRL, in relation to production in Brazil and the respective import/export flows; • AUD/USD, mainly in relation to sales made by Agriculture and Construction in Australia; • EUR/GBP, predominately in relation to sales on the U.K. market. Trade flows exposed to changes in these exchange rates in 2022 made up approximately 73% of the exposure to currency risk from trade transactions. It is our policy to use derivative financial instruments to hedge a certain percentage, on average between 55% and 85%, of the forecasted trading transaction exchange risk exposure for the coming 12 months with additional flexibility to reach 0% or 100% (including forecasted risk exposure beyond that timeframe where it is believed to be appropriate) and to hedge completely the exposure resulting from firm commitments. Certain subsidiaries may hold trade receivables or payables denominated in a currency different from the subsidiary’s functional currency. In addition, in a limited number of cases, subsidiaries may obtain financing or use funds in a currency different from their functional currency. Changes in exchange rates may result in exchange gains or losses arising from these situations. It is our policy to hedge fully, whenever possible, the exposure resulting from receivables, payables, and securities denominated in currencies different from the subsidiary’s functional currency. Certain of our subsidiaries’ functional currency is different than the U.S. dollar, which is the Company’s reporting currency. The income statements of those subsidiaries are converted into U.S. dollars using the average exchange rate for the period, and while revenues and margins are unchanged in local currency, changes in exchange rates may lead to effects on the converted balances of revenues, costs, and the results reported in U.S. dollars. The assets and liabilities of consolidated companies whose functional currency is different from the U.S. dollar may acquire converted values in U.S. dollars which differ as a function of the fluctuation in exchange rates. We monitor our principal exposure to conversion exchange risk, although there was no specific hedging in place at December 31, 2022. There were no substantial changes in 2022 in the nature or structure of exposure to currency risk or in our hedging policies. Sensitivity Analysis The potential loss in fair value of derivative financial instruments held for currency risk management (currency swaps/forwards, currency options, interest rate and currency swaps) at December 31, 2022 resulting from a hypothetical change of 10% in the exchange 37 rates amounted to approximately $276 million ($344 million at December 31, 2021). The valuation model for currency options assumes that market volatility at year-end remains unchanged. Receivables, payables, and future trade flows whose hedging transactions have been analyzed were not considered in this analysis. It is reasonable to assume that changes in exchange rates will produce the opposite effect, of an equal or greater amount, on the underlying transactions that have been hedged. Interest Rate Risk Our Industrial Activities make use of external funds obtained in the form of financing and invest in monetary and financial market instruments. In addition, we sell receivables. Changes in market interest rates can affect the cost of financing, including the sale of receivables, or the return on investments of funds, causing an impact on the level of net financial expenses incurred by us. In addition, Financial Services provides loans (mainly to customers and dealers), financed primarily using various forms of external borrowings or asset-backed financing (e.g., securitization of receivables). Where the characteristics of the variability of the interest rate applied to loans granted differ from those of the variability of the cost of the financing/funding obtained, changes in the current level of interest rates can affect our net income/(loss). In order to mitigate these risks, we use interest rate derivative financial instruments, mainly interest rate swaps and forward rate agreements. Sensitivity Analysis In assessing the potential impact of changes in interest rates, we separate fixed rate financial instruments (for which the impact is assessed in terms of fair value) from floating rate financial instruments (for which the impact is assessed in terms of cash flows). The fixed rate financial instruments used by us consist of retail receivables, debt, ABS, and other instruments. The potential loss in fair value of fixed rate financial instruments (including the effect of interest rate derivative financial instruments) held at December 31, 2022, resulting from a hypothetical, unfavorable and instantaneous change of 10% in market interest rates, would have been approximately $29 million (approximately $20 million at December 31, 2021). Floating rate financial instruments consist principally of cash and cash equivalents, wholesale receivables, debt, and ABS securities. The effect of the sale of receivables is also considered in the sensitivity analysis as well as the effect of hedging derivative instruments. A hypothetical change of 10% in short-term interest rates at December 31, 2022, applied to floating rate financial assets and liabilities, operations for the sale of receivables and derivative financial instruments, would have caused increased net expenses before taxes, on an annual basis, of approximately $15 million (approximately $3 million at December 31, 2021). This analysis is based on the assumption that there is a hypothetical change of 10% in interest rates across homogeneous categories. A homogeneous category is defined on the basis of the currency in which the financial assets and liabilities are denominated. Other Risks in Connection with Derivative Financial Instruments We have entered derivative contracts linked to commodity prices to hedge specific exposures on supply contracts. Sensitivity Analysis In the event of a hypothetical change of 10% in the underlying raw materials prices, the potential loss in fair value of outstanding derivative financial instruments at December 31, 2022 linked to commodity prices would not have been significant (not significant at December 31, 2021). Item 8. Financial Statements and Supplementary Data See the Consolidated Financial Statements and notes thereto and supplementary data. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 38