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Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Effect of Net Investment Hedges on OCI and the Consolidated Statement of Income

The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:

	Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)								Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
	Three Months Ended March 31,								Three Months Ended March 31,
($ in millions)	2020				2019				2020				2019
Net Investment Hedging Relationships
Foreign exchange contracts	$	(3	)		$	(11	)		$	(8	)		$	(8	)
Euro-denominated notes	(51		)		(30		)		—				—

⁽¹⁾ No amounts were reclassified from AOCI into income related to the sale of a subsidiary.

Summary of Interest Rate Swaps Held

At March 31, 2020, the Company was a party to 14 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table below.

	March 31, 2020
($ in millions)	Par Value of Debt				Number of Interest Rate Swaps Held			Total Swap Notional Amount
3.875% notes due 2021	$	1,150			5			$	1,150
2.40% notes due 2022	1,000				4			1,000
2.35% notes due 2022	1,250				5			1,250

Amounts Recorded on Balance Sheet Related to Fair Value Hedges

The table below presents the location of amounts recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:

	Carrying Amount of Hedged Liabilities								Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions)	March 31, 2020				December 31, 2019				March 31, 2020				December 31, 2019
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt	$	1,160			$	1,249			$	11			$	(1	)
Long-Term Debt	2,315				3,409				69				14

Fair Value of Derivatives on a Gross Basis Segregated between those Derivatives that are Designated as Hedging Instruments and those that are Not Designated as Hedging Instruments

Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:

		March 31, 2020												December 31, 2019
		Fair Value of Derivative								U.S. Dollar Notional				Fair Value of Derivative								U.S. Dollar Notional
($ in millions)	Balance Sheet Caption	Asset				Liability								Asset				Liability
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Other current assets	$	11			$	—			$	1,150			$	—			$	—			$	—
Interest rate swap contracts	Other Assets	70				—				2,250				15				—				3,400
Interest rate swap contracts	Accrued and other current liabilities	—				—				—				—				1				1,250
Foreign exchange contracts	Other current assets	194				—				6,546				152				—				6,117
Foreign exchange contracts	Other Assets	88				—				2,064				55				—				2,160
Foreign exchange contracts	Accrued and other current liabilities	—				7				734				—				22				1,748
Foreign exchange contracts	Other Noncurrent Liabilities	—				1				5				—				1				53
		$	363			$	8			$	12,749			$	222			$	24			$	14,728
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	Other current assets	$	347			$	—			$	10,039			$	66			$	—			$	7,245
Foreign exchange contracts	Accrued and other current liabilities	—				85				4,665				—				73				8,693
		$	347			$	85			$	14,704			$	66			$	73			$	15,938
		$	710			$	93			$	27,453			$	288			$	97			$	30,666

Information on Derivative Positions Subject to Master Netting Arrangements as if they were Presented on a Net Basis

The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes:

	March 31, 2020								December 31, 2019
($ in millions)	Asset				Liability				Asset				Liability
Gross amounts recognized in the condensed consolidated balance sheet	$	710			$	93			$	288			$	97
Gross amounts subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet	(89		)		(89		)		(84		)		(84		)
Cash collateral received	(216		)		—				(34		)		—
Net amounts	$	405			$	4			$	170			$	13

Location and Amount of Pretax (Gains) Losses of Derivatives

The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value or cash flow hedging relationships:

	Sales								Other (income) expense, net (1)								Other comprehensive income (loss)
	Three Months Ended March 31,								Three Months Ended March 31,								Three Months Ended March 31,
($ in millions)	2020				2019				2020				2019				2020				2019
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded	$	12,057			$	10,816			$	71			$	188			$	(198	)		$	199
(Gain) loss on fair value hedging relationships
Interest rate swap contracts
Hedged items	—				—				67				33				—				—
Derivatives designated as hedging instruments	—				—				(67		)		(23		)		—				—
Impact of cash flow hedging relationships
Foreign exchange contracts
Amount of gain (loss) recognized in OCI on derivatives	—				—				—				—				178				(13		)
Increase (decrease) in Sales as a result of AOCI reclassifications	46				44				—				—				(46		)		(44		)
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives	—				—				(1		)		(1		)		—				—
Amount of loss recognized in OCI on derivatives	—				—				—				—				(1		)		(4		)

⁽¹⁾ Interest expense is a component of Other (income) expense, net.

Income Statement Effects of Derivatives Not Designated as Hedging Instruments

The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:

			Amount of Derivative Pretax (Gain) Loss Recognized in Income
			Three Months Ended March 31,
($ in millions)	Income Statement Caption		2020				2019
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts (1)	Other (income) expense, net		$	(180	)		$	118
Foreign exchange contracts (2)	Sales		(7		)		10

⁽¹⁾ These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.

⁽²⁾ These derivative contracts serve as economic hedges of forecasted transactions.

Information on Investments in Debt and Equity Securities

Information on investments in debt and equity securities is as follows:

	March 31, 2020																December 31, 2019
	Amortized Cost				Gross Unrealized								Fair Value				Amortized Cost				Gross Unrealized								Fair Value
($ in millions)					Gains				Losses												Gains				Losses
U.S. government and agency securities	$	62			$	—			$	—			$	62			$	266			$	3			$	—			$	269
Foreign government bonds	2				—				—				2				—				—				—				—
Commercial paper	—				—				—				—				668				—				—				668
Corporate notes and bonds	—				—				—				—				608				13				—				621
Asset-backed securities	—				—				—				—				226				1				—				227
Total debt securities	$	64			$	—			$	—			$	64			$	1,768			$	17			$	—			$	1,785
Publicly traded equity securities (1)													779																838
Total debt and publicly traded equity securities													$	843															$	2,623

⁽¹⁾ Unrealized net losses recognized in Other (income) expense, net on equity securities still held at March 31, 2020 were $4 million in the first quarter of 2020. Unrealized net gains recognized in Other (income) expense, net on equity securities still held at March 31, 2019 were $114 million in the first quarter of 2019.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements Using																Fair Value Measurements Using
	Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
($ in millions)	March 31, 2020																December 31, 2019
Assets
Investments
Foreign government bonds	$	—			$	2			$	—			$	2			$	—			$	—			$	—			$	—
Commercial paper	—				—				—				—				—				668				—				668
Corporate notes and bonds	—				—				—				—				—				621				—				621
Asset-backed securities (1)	—				—				—				—				—				227				—				227
U.S. government and agency securities	—				—				—				—				—				209				—				209
Publicly traded equity securities	560				—				—				560				518				—				—				518
	560				2				—				562				518				1,725				—				2,243
Other assets (2)
U.S. government and agency securities	62				—				—				62				60				—				—				60
Publicly traded equity securities	219				—				—				219				320				—				—				320
	281				—				—				281				380				—				—				380
Derivative assets (3)
Forward exchange contracts	—				455				—				455				—				169				—				169
Purchased currency options	—				174				—				174				—				104				—				104
Interest rate swaps	—				81				—				81				—				15				—				15
	—				710				—				710				—				288				—				288
Total assets	$	841			$	712			$	—			$	1,553			$	898			$	2,013			$	—			$	2,911
Liabilities
Other liabilities
Contingent consideration	$	—			$	—			$	694			$	694			$	—			$	—			$	767			$	767
Derivative liabilities (3)
Forward exchange contracts	—				90				—				90				—				95				—				95
Written currency options	—				3				—				3				—				1				—				1
Interest rate swaps	—				—				—				—				—				1				—				1
	—				93				—				93				—				97				—				97
Total liabilities	$	—			$	93			$	694			$	787			$	—			$	97			$	767			$	864

⁽¹⁾  Primarily all of the asset-backed securities were highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card and student loan receivables, with weighted-average lives of primarily 5 years or less.

⁽²⁾  Investments included in other assets are restricted as to use, including for the payment of benefits under employee benefit plans.

⁽³⁾ 

The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.

Information About the Changes in Liabilities for Contingent Consideration

Summarized information about the changes in liabilities for contingent consideration associated with business acquisitions is as follows:

	Three Months Ended March 31,
($ in millions)	2020				2019
Fair value January 1	$	767			$	788
Changes in estimated fair value (1)	33				(36		)
Payments	(106		)		(85		)
Fair value March 31 (2)(3)	$	694			$	667

⁽¹⁾ Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net. Includes cumulative translation adjustments.

⁽²⁾ Balance at March 31, 2020 includes $119 million recorded as a current liability for amounts expected to be paid within the next 12 months.

⁽³⁾ At March 31, 2020 and December 31, 2019, $520 million and $625 million, respectively, of the liabilities relate to the termination of the Sanofi-Pasteur MSD joint venture in 2016. As part of the termination, Merck recorded a liability for contingent future royalty payments of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024. The fair value of this liability is determined utilizing the estimated amount and timing of projected cash flows using a risk-adjusted discount rate of 8% to present value the cash flows.

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