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Financial Instruments, Derivatives and Fair Value Measures | 6 Months Ended
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Jun. 30, 2016
Financial Instruments, Derivatives and Fair Value Measures |
Financial Instruments, Derivatives and Fair Value Measures | Note 9 — Financial Instruments, Derivatives and Fair Value Measures Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, with gross notional amounts totaling $1.9 billion at June 30, 2016 and $2.4 billion at December 31, 2015 are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value. Accumulated gains and losses as of June 30, 2016 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months. The amount of hedge ineffectiveness was not significant in 2016 and 2015. Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity. For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies including the British pound, in exchange for primarily U.S. dollars and other European currencies. For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar and European currencies. At June 30, 2016 and December 31, 2015, Abbott held the gross notional amount of $15.1 billion and $14.0 billion, respectively, of such foreign currency forward exchange contracts. Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $516 million and approximately $439 million as of June 30, 2016 and December 31, 2015, respectively. Accordingly, changes in the reported value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax. Abbott is a party to interest rate hedge contracts totaling approximately $4.0 billion at June 30, 2016 and December 31, 2015 to manage its exposure to changes in the fair value of fixed-rate debt. These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt. Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount. The amount of hedge ineffectiveness was not significant in 2016 and 2015. The following table summarizes the amounts and location of certain derivative financial instruments as of June 30, 2016 and December 31, 2015:
|  | Fair Value - Assets |  | Fair Value - Liabilities |
(in millions) |  | June 30, 2016 |  | Dec. 31, 2015 |  | Balance Sheet Caption |  | June 30, 2016 |  | Dec. 31, 2015 |  | Balance Sheet Caption |
Interest rate swaps designated as fair value hedges |  | $ | 261 |  | $ | 116 |  | Deferred income taxes and other assets |  | $ | — |  | $ | — |  | n/a |
Foreign currency forward exchange contracts: |  |  |  |  |  |  |  |  |  |  |  |  |
Hedging instruments |  | 30 |  | 64 |  | Prepaid expenses and other receivables |  | 85 |  | 18 |  | Other accrued liabilities |
Others not designated as hedges |  | 110 |  | 115 |  | Prepaid expenses and other receivables |  | 76 |  | 84 |  | Other accrued liabilities |
Debt designated as a hedge of net investment in a foreign subsidiary |  | — |  | — |  | n/a |  | 516 |  | 439 |  | Short-term borrowings |
|  | $ | 401 |  | $ | 295 |  |  |  | $ | 677 |  | $ | 541 |  |  |
The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and certain other derivative financial instruments, as well as the amounts and location of income (expense) and gain (loss) reclassified into income for the three months and six months ended June 30, 2016 and 2015. The amount of hedge ineffectiveness was not significant in 2016 and 2015 for these hedges.
|  | Gain (loss) Recognized in Other Comprehensive Income (loss) |  | Income (expense) and Gain (loss) Reclassified into Income |  |  |
|  | Three Months Ended June 30 |  | Six Months Ended June 30 |  | Three Months Ended June 30 |  | Six Months Ended June 30 |  | Income Statement |
(in millions) |  | 2016 |  | 2015 |  | 2016 |  | 2015 |  | 2016 |  | 2015 |  | 2016 |  | 2015 |  | Caption |
Foreign currency forward exchange contracts designated as cash flow hedges |  | $ | 7 |  | $ | 5 |  | $ | (51 | ) | $ | 48 |  | $ | 23 |  | $ | 30 |  | $ | 54 |  | $ | 47 |  | Cost of products sold |
Debt designated as a hedge of net investment in a foreign subsidiary |  | (45 | ) | 11 |  | (77 | ) | 14 |  | n/a |  | n/a |  | n/a |  | n/a |  | n/a |
Interest rate swaps designated as fair value hedges |  | n/a |  | n/a |  | n/a |  | n/a |  | 44 |  | (63 | ) | 145 |  | (14 | ) | Interest expense |
Gains of $20 million and $85 million were recognized in the three months ended June 30, 2016 and 2015, respectively, related to foreign currency forward exchange contracts not designated as a hedge. Gains of $18 million and $101 million were recognized in the six months ended June 30, 2016 and 2015, respectively, related to foreign currency forward exchange contracts not designated as a hedge. These amounts are reported in the Condensed Consolidated Statement of Earnings on the Net foreign exchange loss (gain) line. The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market. The carrying values and fair values of certain financial instruments as of June 30, 2016 and December 31, 2015 are shown in the following table. The carrying values of all other financial instruments approximate their estimated fair values. The counterparties to financial instruments consist of select major international financial institutions. Abbott does not expect any losses from nonperformance by these counterparties.
|  | June 30, 2016 |  | December 31, 2015 |
(in millions) |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value |
Investment Securities: |  |  |  |  |  |  |  |  |
Equity securities |  | $ | 3,288 |  | $ | 3,288 |  | $ | 4,014 |  | $ | 4,014 |
Other |  | 51 |  | 54 |  | 27 |  | 30 |
Total Long-term Debt |  | (6,020 | ) | (6,712 | ) | (5,874 | ) | (6,337 | )
Foreign Currency Forward Exchange Contracts: |  |  |  |  |  |  |  |  |
Receivable position |  | 140 |  | 140 |  | 179 |  | 179 |
(Payable) position |  | (161 | ) | (161 | ) | (102 | ) | (102 | )
Interest Rate Hedge Contracts: |  |  |  |  |  |  |  |  |
Receivable position |  | 261 |  | 261 |  | 116 |  | 116 |
The fair value of the debt was determined based on significant other observable inputs, including current interest rates. The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:
|  |  |  | Basis of Fair Value Measurement |
(in millions) |  | Outstanding Balances |  | Quoted Prices in Active Markets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs |
June 30, 2016: |  |  |  |  |  |  |  |  |
Equity securities |  | $ | 3,030 |  | $ | 3,030 |  | $ | — |  | $ | — |
Interest rate swap derivative financial instruments |  | 261 |  | — |  | 261 |  | — |
Foreign currency forward exchange contracts |  | 140 |  | — |  | 140 |  | — |
Total Assets |  | $ | 3,431 |  | $ | 3,030 |  | $ | 401 |  | $ | — |
Fair value of hedged long-term debt |  | $ | 4,280 |  | $ | — |  | $ | 4,280 |  | $ | — |
Foreign currency forward exchange contracts |  | 161 |  | — |  | 161 |  | — |
Contingent consideration related to business combinations |  | 162 |  | — |  | — |  | 162 |
Total Liabilities |  | $ | 4,603 |  | $ | — |  | $ | 4,441 |  | $ | 162 |
December 31, 2015: |  |  |  |  |  |  |  |  |
Equity securities |  | $ | 3,780 |  | $ | 3,780 |  | $ | — |  | $ | — |
Interest rate swap derivative financial instruments |  | 116 |  | — |  | 116 |  | — |
Foreign currency forward exchange contracts |  | 179 |  | — |  | 179 |  | — |
Total Assets |  | $ | 4,075 |  | $ | 3,780 |  | $ | 295 |  | $ | — |
Fair value of hedged long-term debt |  | $ | 4,135 |  | $ | — |  | $ | 4,135 |  | $ | — |
Foreign currency forward exchange contracts |  | 102 |  | — |  | 102 |  | — |
Contingent consideration related to business combinations |  | 173 |  | — |  | — |  | 173 |
Total Liabilities |  | $ | 4,410 |  | $ | — |  | $ | 4,237 |  | $ | 173 |
Equity securities are principally comprised of Mylan N.V. ordinary shares. The fair value of the Mylan equity securities was determined based on the value of the publicly-traded ordinary shares. The fair value of debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis. The fair value of foreign currency forward exchange contracts is determined using a market approach, which utilizes values for comparable derivative instruments. The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money and other changes in fair value primarily resulting from changes in regulatory timelines. The following table summarizes the available-for-sale equity securities in an unrealized loss position:
(in millions) |  | June 30, 2016 |  | December 31, 2015 |
Fair value of securities in an unrealized loss position |  | $ | 3,016 |  | $ | — |
Unrealized gross losses |  | 589 |  | — |
Available-for-sale securities are periodically assessed for other-than-temporary impairment losses. The unrealized losses relate to the holding of Mylan N.V. ordinary shares, which have been in an unrealized loss position for less than six months at June 30, 2016. Factors considered in assessing other-than-temporary impairment losses include the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, Abbott’s intent and ability to retain the securities for a period of time sufficient to allow for recovery in fair value, overall market conditions, and industry and company specific factors. Based on that evaluation and Abbott’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, Abbott does not consider these securities to be other-than-temporarily impaired at June 30, 2016.

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