NOTES TO THE FINANCIAL STATEMENTS Financial Services Sector NOTE 19. Derivative Financial Instruments (Continued) Net Investment Hedges. We use foreign currency contracts to hedge the net assets of certain foreign entities to offset the  translation and economic exposures related to our investment in these entities. The change in the value of these derivatives is  recorded in OCI as a foreign currency translation adjustment. The ineffectiveness related to net investment hedges is recorded  in  Cost of sales.  Losses of $2 million and gains of $95 million were recorded in 2004 and 2003, respectively. Other Derivative Instruments. As previously stated, some derivatives do not qualify for hedge accounting treatment or we elect  not to apply hedge accounting. We refer to these as non-designated hedges. In such cases, both the unrealized and realized  gains and losses are reported in  Cost of sales.  The impact to earnings associated with non-designated hedges were gains of  $338 million and $268 million in 2004 and 2003, respectively. These earnings include gains of $257 million and $128 million  for 2004 and 2003, respectively, related to the revaluation of foreign currency derivatives that were offset by revaluation losses  on foreign denominated debt, also reported in  Cost of sales. Ford Credit’s overall risk management objective is to maximize financing income while limiting the effect of changes in foreign  currencies and interest rates. Ford Credit faces exposure to currency exchange rates if a mismatch exists between the currency  of its receivables and the currency of the debt funding those receivables. Ford Credit also executes cross-currency swaps  and foreign currency forwards to convert substantially all of the foreign currency debt obligations to the local currency of the  receivables. Interest rate swaps are used to manage exposure to re-pricing risk, which arises when assets and the debt funding  those assets have different re-pricing periods that consequently respond differently to interest rate changes. Cash Flow Hedges. Ford Credit designates interest rate swaps as cash flow hedges to manage its exposure to interest rate  risks. The impact to earnings associated with hedge ineffectiveness was recognized in  Revenues  as gains of $12 million and  $3 million in 2004 and 2003, respectively. In assessing hedge effectiveness for cash flow hedges related to interest rates, Ford  Credit uses the variability of cash flows method and excludes accrued interest. Net interest settlements and accruals excluded  from the assessment of hedge effectiveness were expenses of $354 million and $482 million in 2004 and 2003, respectively,  and recorded in  Interest expense . Ford Credit also excludes from the assessment of hedge effectiveness foreign exchange  adjustments, representing the portion of the derivative’s fair value attributable to the change in foreign currency exchange  rates for the reporting period; these adjustments in 2004 and 2003 were amounts that were not significant. While net interest  settlements and accruals and foreign currency adjustments are excluded from hedge effectiveness testing, they are included in  evaluating the overall risk management objective. Ford Credit’s designated cash flow hedges include hedges of revolving commercial paper balances. At December 31, 2004,  the maximum term of these hedges is 37 months. Fair Value Hedges. Ford Credit uses interest rate swaps to hedge its exposure to interest rate risk. Unrealized gains and  losses related to derivatives in fair value hedges, along with changes in the fair value of the underlying hedged exposure are  recognized and recorded in  Revenues . The impact to earnings from hedge ineffectiveness were gains of $10 million and $255 million in 2004 and 2003, respectively. In assessing hedge effectiveness, we exclude accrued interest on the receive  and pay legs of the swaps. Net interest settlements and accrual income of $2.1 billion and $1.8 billion in 2004 and 2003,  respectively, were recorded as a reduction in  Interest expense . Ford Credit also excludes from the assessment of hedge  effectiveness foreign exchange adjustments, representing the portion of the derivative’s fair value attributable to the change  in foreign currency exchange rates for the reporting period, which were favorable adjustments totaling $0.4 billion in 2004  and $1.3 billion in 2003. While net settlements and foreign currency adjustments are excluded from Ford Credit’s hedge  effectiveness testing, they are included in evaluating the overall risk management objective. The adjustments related to the  foreign currency derivatives reported above were offset by revaluation impacts on debt denominated in a currency other than  the location’s functional currency, which was also recorded in  Revenues . Net Investment Hedges. Ford Credit uses foreign currency forward exchange contracts and options to hedge the net assets of  certain foreign entities to offset the translation and economic exposures related to its investment in foreign entities. Changes in  the value of these derivatives are recorded in OCI as a foreign currency translation adjustment.  Ineffectiveness, which is recognized in  Revenues , were losses of $29 million and $17 million in 2004 and 2003, respectively.  8 0