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Financial Instruments, Derivatives and Fair Value Measures

12 Months Ended

Dec. 31, 2020

Financial Instruments, Derivatives and Fair Value Measures

Financial Instruments, Derivatives and Fair Value Measures

Note 12 — 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 primarily for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, with gross notional amounts totaling $8.1 billion at December 31, 2020, and $6.8 billion at December 31, 2019, 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 December 31, 2020 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months.

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, in exchange for primarily U.S. dollars and European currencies. For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar and European currencies. At December 31, 2020 and 2019, Abbott held gross notional amounts of $11.0 billion and $9.1 billion, respectively, of such foreign currency forward exchange contracts.

In November 2019, Abbott borrowed ¥59.8 billion under a 5-year term loan and designated the yen-denominated loan as a hedge of the net investment in certain foreign subsidiaries. The proceeds equated to approximately $550 million. The value of this long-term debt was approximately $577 million and $546 million as of December 31, 2020 and December 31, 2019, respectively. The change in the value of the debt, which is due to changes in foreign exchange rates, was recorded in Accumulated other comprehensive income (loss), net of tax.

Abbott is a party to interest rate hedge contracts totaling approximately $2.9 billion at December 31, 2020 and 2019, 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.

In October 2018, Abbott unwound approximately $1.1 billion in interest rate swaps relating to the 3.40% Note due in 2023 and the 3.75% Note due in 2026. As a part of the unwinding, Abbott paid approximately $90 million in cash, which was included in the Financing Activities section of the Consolidated Statement of Cash Flows in 2018.

Note 12 — Financial Instruments, Derivatives and Fair Value Measures (Continued)

The following table summarizes the amounts and location of certain derivative financial instruments as of December 31:


	Fair Value — Assets					Fair Value — Liabilities
(in millions)	2020		2019		Balance Sheet Caption	2020		2019		Balance Sheet Caption
Interest rate swaps designated as fair value hedges	$	210	$	48	Deferred income taxes and other assets	$	—	$	—	Post-employment obligations and other long-term liabilities
Foreign currency forward exchange contracts:
Hedging instruments		30		110	Other prepaid expenses and receivables		433		56	Other accrued liabilities
Others not designated as hedges		60		38	Other prepaid expenses and receivables		65		33	Other accrued liabilities
Debt designated as a hedge of net investment in a foreign subsidiary		—		—	n/a		577		546	Long-term debt
	$	300	$	196		$	1,075	$	635

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.


	Gain (loss) Recognized in						Income (expense) and
	Other Comprehensive						Gain (loss) Reclassified
	Income (loss)						into Income
(in millions)	2020		2019		2018		2020		2019		2018		Income Statement Caption
Foreign currency forward exchange contracts designated as cash flow hedges	$	(207)	$	9	$	73	$	102	$	79	$	(114)	Cost of products sold
Debt designated as a hedge of net investment in a foreign subsidiary		(31)		4		—		n/a		n/a		n/a	n/a
Interest rate swaps designated as fair value hedges		n/a		n/a		n/a		162		148		(97)	Interest expense

A loss of $171 million, a gain of $75 million and a loss of $100 million were recognized in 2020, 2019 and 2018, respectively, related to foreign currency forward exchange contracts not designated as hedges. These amounts are reported in the Consolidated Statement of Earnings on the Net foreign exchange (gain) loss 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.

Note 12 — Financial Instruments, Derivatives and Fair Value Measures (Continued)

The carrying values and fair values of certain financial instruments as of December 31 are shown in the table below. 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.


	2020				2019
	Carrying		Fair		Carrying		Fair
(in millions)	Value		Value		Value		Value
Long-term Investment Securities:
Equity securities	$	776	$	776	$	836	$	836
Other		45		45		47		47
Total Long-term debt		(18,534)		(22,809)		(17,938)		(20,772)
Foreign Currency Forward Exchange Contracts:
Receivable position		90		90		148		148
(Payable) position		(498)		(498)		(89)		(89)
Interest Rate Hedge Contracts:
Receivable position		210		210		48		48
(Payable) position		—		—		—		—

The fair value of the debt was determined based on significant other observable inputs, including current interest rates.

Note 12 — Financial Instruments, Derivatives and Fair Value Measures (Continued)

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
			Quoted		Significant
			Prices in		Other		Significant
	Outstanding		Active		Observable		Unobservable
(in millions)	Balances		Markets		Inputs		Inputs
December 31, 2020:
Equity securities	$	386	$	386	$	—	$	—
Interest rate swap derivative financial instruments		210		—		210		—
Foreign currency forward exchange contracts		90		—		90		—
Total Assets	$	686	$	386	$	300	$	—

Fair value of hedged long-term debt	$	3,049	$	—	$	3,049	$	—
Foreign currency forward exchange contracts		498		—		498		—
Contingent consideration related to business combinations		68		—		—		68
Total Liabilities	$	3,615	$	—	$	3,547	$	68

December 31, 2019:
Equity securities	$	357	$	357	$	—	$	—
Interest rate swap derivative financial instruments		48		—		48		—
Foreign currency forward exchange contracts		148		—		148		—
Total Assets	$	553	$	357	$	196	$	—

Fair value of hedged long-term debt	$	2,890	$	—	$	2,890	$	—
Foreign currency forward exchange contracts		89		—		89		—
Contingent consideration related to business combinations		68		—		—		68
Total Liabilities	$	3,047	$	—	$	2,979	$	68

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 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 using significant other observable inputs.

Contingent consideration relates to businesses acquired by Abbott. 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. The maximum amount for certain contingent consideration is not determinable as it is based on a percent of certain sales. Excluding such contingent consideration, the maximum amount estimated to be due is approximately $200 million, which is dependent upon attaining certain sales thresholds or based on the occurrence of certain events, such as regulatory approvals.