Financial Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments and Hedging Activities

The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.

The following table presents the fair values of derivative instruments included on the Condensed Consolidated Balance Sheet:


	Derivative Assets					Derivative Liabilities
In millions	Balance Sheet Classification	March 31, 2021		December 31, 2020		Balance Sheet Classification	March 31, 2021		December 31, 2020
Derivatives designated as hedging instruments
Foreign currency	Prepaid expenses and other current assets	$	11.7			Accrued payroll and other liabilities	$	(32.9)	$	(64.5)
Interest rate	Prepaid expenses and other current assets	5.7				Accrued payroll and other liabilities
Foreign currency	Miscellaneous other assets	23.0		$	5.6	Other long-term liabilities	(1.2)		(15.0)
Interest rate	Miscellaneous other assets	21.2		35.8		Other long-term liabilities
Total derivatives designated as hedging instruments		$	61.6	$	41.4		$	(34.1)	$	(79.5)
Derivatives not designated as hedging instruments
Equity	Prepaid expenses and other current assets	$	194.4	$	185.6	Accrued payroll and other liabilities	$	(4.1)	$	(8.6)
Foreign currency	Prepaid expenses and other current assets					Accrued payroll and other liabilities	(7.1)		(9.4)
Equity	Miscellaneous other assets
Total derivatives not designated as hedging instruments		$	194.4	$	185.6		$	(11.2)	$	(18.0)
Total derivatives		$	256.0	$	227.0		$	(45.3)	$	(97.5)

The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the three months ended March 31, 2021 and 2020, respectively:


	Location of Gain or Loss Recognized in Income on Derivative	Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified into Income from AOCI					Gain (Loss) Recognized in Income on Derivative


In millions		2021		2020			2021		2020			2021		2020
Foreign currency	Nonoperating income/expense	$	29.9	$	39.3		$	(17.8)	$	12.6
Interest rate	Interest expense			(90.8)			(1.6)		(0.7)
Cash flow hedges		$	29.9	$	(51.5)		$	(19.4)	$	11.9

Foreign currency denominated debt	Nonoperating income/expense	$	379.7	$	350.4		$	16.2
Foreign currency derivatives	Nonoperating income/expense	26.6		11.9
Foreign currency derivatives(1)	Interest expense											$	3.7	$	3.7
Net investment hedges		$	406.3	$	362.3		$	16.2				$	3.7	$	3.7


Foreign currency	Nonoperating income/expense											$	2.3	$	7.5
Equity	Selling, general & administrative expenses											20.4		(66.3)
Equity	Other operating income/expense, net											(4.7)
Undesignated derivatives												$	18.0	$	(58.8)
(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.

Fair Value Hedges

The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps. At March 31, 2021, the carrying amount of fixed-rate debt that was effectively converted was $1.0 billion, which included an increase of $26.9 million of cumulative hedging adjustments. For the three months ended March 31, 2021, the Company recognized an $8.9 million loss on the fair value of interest rate swaps, and a corresponding gain on the fair value of the related hedged debt instrument to interest expense.

Cash Flow Hedges

The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies.

As of March 31, 2021, the Company had derivatives outstanding with an equivalent notional amount of $1.2 billion that hedged a portion of forecasted foreign currency denominated cash flows.

Based on market conditions at March 31, 2021, the $73.2 million in cumulative cash flow hedging losses, after tax, is not expected to have a significant effect on earnings over the next 12 months.

Net Investment Hedges

The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of Other comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of March 31, 2021, $11.6 billion of the Company's third party foreign currency denominated debt and $877.8 million of intercompany foreign currency denominated debt was designated to hedge investments in certain foreign subsidiaries and affiliates.

Undesignated Derivatives

The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in Selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. The Company may also use certain derivatives to mitigate the share price risk related to its sale of stock in McDonald’s Japan. The changes in the fair value of the undesignated derivatives used for the most recent sale transaction were recognized immediately in earnings in Other Operating (income) expense, net. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at March 31, 2021 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At March 31, 2021, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.