The Company uses forward foreign exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany products and third-party purchases of materials denominated in a foreign currency. The Company uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges.

Additionally, the Company primarily uses interest rate swaps as an instrument to manage interest rate risk related to fixed rate borrowings. These derivatives are designated as fair value hedges. The Company uses cross currency interest rate swaps and forward foreign exchange contracts designated as net investment hedges. Additionally, the Company uses forward foreign exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward foreign exchange contracts are not designated as hedges and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities.

In the fiscal fourth quarter of 2022, the Company entered into forward starting interest rate swaps with notional amounts totaling $2.4 billion in contemplation of hedging interest rate risk associated with long-term financing for the Consumer Health segment separation. These forward starting interest rate swaps are not designated as hedges and therefore, changes in the fair values of these derivatives are recognized in earnings. At the end of the fiscal year 2022, the changes in fair value was not material and therefore not included in the table below.

The Company does not enter into derivative financial instruments for trading or speculative purposes, or that contain credit risk related contingent features. The Company maintains credit support agreements (CSA) with certain derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. As of January 1, 2023, the total amount of cash collateral paid by the Company under the CSA amounted to $0.8 billion net, related to net investment and cash flow hedges. On an ongoing basis, the Company monitors counter-party credit ratings. The Company considers credit non-performance risk to be low, because the Company primarily enters into agreements with commercial institutions that have at least an investment grade credit rating. Refer to the table on significant financial assets and liabilities measured at fair value contained in this footnote for receivables and payables with these commercial institutions. As of January 1, 2023, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $43.3 billion, $36.2 billion and $12.4 billion, respectively. As of January 2, 2022, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $45.8 billion, $37.4 billion and $10.0 billion, respectively.

All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.

The designation as a cash flow hedge is made at the entrance date of the derivative contract. At inception, all derivatives are expected to be highly effective. Foreign exchange contracts designated as cash flow hedges are accounted for under the forward method and all gains/losses associated with these contracts will be recognized in the income statement when the hedged item impacts earnings. Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction.

Gains and losses associated with interest rate swaps and changes in fair value of hedged debt attributable to changes in interest rates are recorded to interest expense in the period in which they occur. Gains and losses on net investment hedges are accounted through the currency translation account within accumulated other comprehensive income. The portion excluded from effectiveness testing is recorded through interest (income) expense using the spot method. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued.

The Company designated its Euro denominated notes issued in May 2016 with due dates ranging from 2022 to 2035 as a net investment hedge of the Company's investments in certain of its international subsidiaries that use the Euro as their functional currency in order to reduce the volatility caused by changes in exchange rates.

As of January 1, 2023, the balance of deferred net loss on derivatives included in accumulated other comprehensive income was $230 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 13. The Company expects that substantially all of the amounts related to forward foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is 18 months, excluding interest rate contracts and net investment hedges. The amount ultimately realized in earnings may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.

The following table is a summary of the activity related to derivatives and hedges for the fiscal years ended January 1, 2023 and January 2, 2022, net of tax:



	January 1, 2023						January 2, 2022
(Dollars in Millions)	Sales		Cost of Products Sold	R&D Expense	Interest (Income) Expense	Other (Income) Expense	Sales	Cost of Products Sold	R&D Expense	Interest (Income) Expense	Other (Income) Expense


The effects of fair value, net investment and cash flow hedging:
Gain (Loss) on fair value hedging relationship:
Interest rate swaps contracts:
Hedged items	$	—	—	—	(1,098)	—	—	—	—	(109)	—
Derivatives designated as hedging instruments	—		—	—	1,098	—	—	—	—	109	—

Gain (Loss) on net investment hedging relationship:
Cross currency interest rate swaps contracts:
Amount of gain or (loss) recognized in income on derivative amount excluded from effectiveness testing	$	—	—	—	140	—	—	—	—	174	—
Amount of gain or (loss) recognized in AOCI	—		—	—	140	—	—	—	—	174	—

Gain (Loss) on cash flow hedging relationship:
Forward foreign exchange contracts:
Amount of gain or (loss) reclassified from AOCI into income	(72)		(271)	149	—	(23)	17	119	30	—	47



Amount of gain or (loss) recognized in AOCI	5		319	61	—	(113)	(94)	(557)	123	—	146

Cross currency interest rate swaps contracts:
Amount of gain or (loss) reclassified from AOCI into income	—		—	—	425	—	—	—	—	402	—

Amount of gain or (loss) recognized in AOCI	$	—	—	—	42	—	—	—	—	9	—


Line item in the Consolidated Balance Sheet in which the hedged item is included	Carrying Amount of the Hedged Liability				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability

(Dollars in Millions)	January 1, 2023		January 2, 2022		January 1, 2023		January 2, 2022

Long-term Debt	$	8,665	$	9,793	$	(1,435)	$	(142)

The following table is the effect of derivatives not designated as hedging instrument for the fiscal years ended January 1, 2023 and January 2, 2022:

(Dollars in Millions)

Location of Gain /(Loss) Recognized in Income on Derivative

Gain/(Loss)
Recognized In
Income on Derivative

Derivatives Not Designated as Hedging Instruments

January 1, 2023

January 2, 2022

Foreign Exchange Contracts

Other (income) expense

(70)

The following table is the effect of net investment hedges for the fiscal years ended January 1, 2023 and January 2, 2022:


	Gain/(Loss) Recognized In Accumulated OCI			Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income Into Income	Gain/(Loss) Reclassified From Accumulated OCI Into Income
(Dollars in Millions)	January 1, 2023		January 2, 2022		January 1, 2023	January 2, 2022
Debt	$	197	387	Interest (income) expense	—	—
Cross Currency interest rate swaps	$	766	548	Interest (income) expense	—	—

The Company holds equity investments with readily determinable fair values and equity investments without readily determinable fair values. The Company measures equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

The following table is a summary of the activity related to equity investments for the fiscal years ended January 1, 2023 and January 2, 2022:


	January 2, 2022				January 1, 2023
(Dollars in Millions)	Carrying Value		Changes in Fair Value Reflected in Net Income (1)	Sales/ Purchases/Other(2)	Carrying Value	Non Current Other Assets
Equity Investments with readily determinable value	$	1,884	(538)	(770)	576	576

Equity Investments without readily determinable value	$	500	91	107	698	698


	January 3, 2021				January 2, 2022
(Dollars in Millions)	Carrying Value		Changes in Fair Value Reflected in Net Income (1)	Sales/ Purchases/Other(2)	Carrying Value	Non Current Other Assets
Equity Investments with readily determinable value	$	1,481	198	205	1,884	1,884

Equity Investments without readily determinable value	$	738	394	(632)	500	500

For the fiscal years ended January 1, 2023 and January 2, 2022 for equity investments without readily determinable market values, $51 million and $28 million, respectively, of the changes in fair value reflected in net income were the result of impairments. There were offsetting impacts of $142 million and $422 million, respectively, of changes in the fair value reflected in net income due to changes in observable prices and gains on the disposal of investments. The impact in fiscal year 2021, was driven by the gain on disposal of the Grail investment. In fiscal year 2022, the Company sold all of its equity investments in argenx SE for proceeds of $0.6 billion.

Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement determined using assumptions that market participants would use in pricing an asset or liability. In accordance with ASC 820, a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.

The fair value of a derivative financial instrument (i.e., forward foreign exchange contracts, interest rate contracts) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. Dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position. The Company also holds equity investments which are classified as Level 1 and debt securities which are classified as Level 2. The Company holds acquisition related contingent liabilities based upon certain regulatory and commercial events, which are classified as Level 3, whose values are determined using discounted cash flow methodologies or similar techniques for which the determination of fair value requires significant judgment or estimations.

The Company’s significant financial assets and liabilities measured at fair value as of the fiscal year ended January 1, 2023 and January 2, 2022 were as follows:


	2022					2021
(Dollars in Millions)	Level 1		Level 2	Level 3	Total	Total (1)
Derivatives designated as hedging instruments:
Assets:
Forward foreign exchange contracts	$	—	629	—	629	540
Interest rate contracts (2)	—		1,534	—	1,534	796

Total	$	—	2,163	—	2,163	1,336
Liabilities:
Forward foreign exchange contracts	—		511	—	511	881
Interest rate contracts (2)	—		2,778	—	2,778	979


Total	$	—	3,289	—	3,289	1,860
Derivatives not designated as hedging instruments:
Assets:
Forward foreign exchange contracts	$	—	38	—	38	24
Liabilities:
Forward foreign exchange contracts	—		68	—	68	28
Available For Sale Other Investments:
Equity investments(3)	576		—	—	576	1,884
Debt securities(4)	—		10,487	—	10,487	19,727
Other Liabilities
Contingent Consideration(5)	$			1,120	1,120	533

(5)Includes $1,116 million, $520 million and $594 million, classified as non-current other liabilities as of January 1, 2023, January 2, 2022 and January 3, 2021, respectively. Includes $4 million, $13 million and $39 million classified as current liabilities as of January 1, 2023, January 2, 2022 and January 3, 2021, respectively.

(6)Ongoing fair value adjustment amounts are recorded primarily in Research and Development expense. The Company recorded a contingent consideration reversal of $1,148 million in 2020 related to the timing of certain developmental milestones associated with the Auris Health acquisition. The reversal of the contingent consideration was recorded in Other income and expense.