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Financial Instruments, Derivatives and Fair Value Measures
 6 Months Ended
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.