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Financial Instruments | 8 Months Ended
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Sep. 04, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Financial Instruments | Financial Instruments We are exposed to market risks arising from adverse changes in: •commodity prices, affecting the cost of our raw materials and energy; •foreign exchange rates and currency restrictions; and •interest rates. There have been no material changes during the 36 weeks ended September 4, 2021 with respect to our risk management policies or strategies and valuation techniques used in measuring the fair value of the financial assets or liabilities disclosed in Note 9 to our consolidated financial statements in our 2020 Form 10-K. Certain of our agreements with our counterparties require us to post full collateral on derivative instruments in a net liability position if our credit rating is at A2 (Moody’s Investors Service, Inc.) or A (S&P Global Ratings) and we have been placed on credit watch for possible downgrade or if our credit rating falls below either of these levels. The fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of September 4, 2021 was $175 million. We have posted no collateral under these contracts and no credit-risk-related contingent features were triggered as of September 4, 2021. The notional amounts of our financial instruments used to hedge the above risks as of September 4, 2021 and December 26, 2020 are as follows:
| Notional Amounts(a)
| 9/4/2021 |  | 12/26/2020
Commodity | $ | 1.4 |  |  | $ | 1.1 |
Foreign exchange | $ | 2.3 |  |  | $ | 1.9 |
Interest rate | $ | 2.3 |  |  | $ | 3.0 |
Net investment (b) | $ | 2.7 |  |  | $ | 2.7 |
(a)In billions. (b)The total notional of our net investment hedge consists of non-derivative debt instruments. As of September 4, 2021, approximately 2% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to 3% as of December 26, 2020. Held-to-Maturity Debt Securities Investments in debt securities that we have the positive intent and ability to hold until maturity are classified as held-to-maturity. Highly liquid debt securities with original maturities of three months or less are recorded as cash equivalents. Our held-to-maturity debt securities consist of U.S. Treasury securities and commercial paper. As of September 4, 2021, we had no investments in U.S. Treasury securities. As of December 26, 2020, we had $2.1 billion of investments in U.S. Treasury securities with $2.0 billion recorded in cash and cash equivalents and $0.1 billion in short-term investments. As of September 4, 2021, we had $258 million of investments in commercial paper recorded in cash and cash equivalents. As of December 26, 2020, we had $260 million of investments in commercial paper with $75 million recorded in cash and cash equivalents and $185 million in short-term investments. Held-to-maturity debt securities are recorded at amortized cost, which approximates fair value, and realized gains or losses are reported in earnings. Our investments mature in less than one year. As of September 4, 2021 and December 26, 2020, gross unrecognized gains and losses and the allowance for expected credit losses were not material. Fair Value Measurements The fair values of our financial assets and liabilities as of September 4, 2021 and December 26, 2020 are categorized as follows:
|  |  | 9/4/2021 |  | 12/26/2020
| Fair Value Hierarchy Levels(a) |  | Assets(a) |  | Liabilities(a) |  | Assets(a) |  | Liabilities(a)
Index funds (b) | 1 |  | $ | 339 |  |  | $ | — |  |  | $ | 231 |  |  | $ | — |
Prepaid forward contracts (c) | 2 |  | $ | 19 |  |  | $ | — |  |  | $ | 18 |  |  | $ | — |
Deferred compensation (d) | 2 |  | $ | — |  |  | $ | 506 |  |  | $ | — |  |  | $ | 477 |
Contingent consideration (e) | 3 |  | $ | — |  |  | $ | 840 |  |  | $ | — |  |  | $ | 861 |
Derivatives designated as fair value hedging instruments: |  |  |  |  |  |  |  |  |
Interest rate (f) | 2 |  | $ | — |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |  |
Foreign exchange (g) | 2 |  | $ | 11 |  |  | $ | 25 |  |  | $ | 9 |  |  | $ | 71 |
Interest rate (g) | 2 |  | 28 |  |  | 221 |  |  | 13 |  |  | 307 |
Commodity (h) | 2 |  | 80 |  |  | 1 |  |  | 32 |  |  | — |
|  |  | $ | 119 |  |  | $ | 247 |  |  | $ | 54 |  |  | $ | 378 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |
Foreign exchange (g) | 2 |  | $ | 5 |  |  | $ | 10 |  |  | $ | 4 |  |  | $ | 8 |
Commodity (h) | 2 |  | 48 |  |  | 12 |  |  | 19 |  |  | 7 |
|  |  | $ | 53 |  |  | $ | 22 |  |  | $ | 23 |  |  | $ | 15 |
Total derivatives at fair value (i) |  |  | $ | 172 |  |  | $ | 269 |  |  | $ | 79 |  |  | $ | 393 |
Total |  |  | $ | 530 |  |  | $ | 1,615 |  |  | $ | 328 |  |  | $ | 1,731 |
(a)Fair value hierarchy levels are categorized consistently by Level 1 (quoted prices in active markets for identical assets), Level 2 (significant other observable inputs) and Level 3 (significant unobservable inputs) in both years. Unless otherwise noted, financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities. (b)Based on the price of index funds. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability. (c)Based primarily on the price of our common stock. (d)Based on the fair value of investments corresponding to employees’ investment elections. (e)In connection with our acquisition of Rockstar, we recorded a liability for tax-related contingent consideration payable over up to 15 years, with an option to accelerate all remaining payments, with estimated maximum payments of approximately $1.1 billion, using current tax rates. The fair value of the liability is estimated using probability-weighted, discounted future cash flows at current tax rates. The significant unobservable inputs (Level 3) used to estimate the fair value include the expected future tax benefits associated with the acquisition, the probability that the option to accelerate all remaining payments will be exercised and discount rates. These unobservable inputs did not materially differ from those used as of December 26, 2020. The expected annual future tax benefits range from approximately $40 million to $110 million, with an average of $70 million. The probability, in any given year, that the option to accelerate will be exercised ranges from 2 to 35 percent, with a weighted-average payment period of approximately 3 years. The discount rates range from less than 1 percent to 5 percent, with a weighted average of 4 percent. The contingent consideration measured at fair value using unobservable inputs as of September 4, 2021 is $840 million, comprised of an $861 million liability as of December 26, 2020, a fair value decrease of $19 million in the 36 weeks ended September 4, 2021, recorded in selling, general and administrative expenses, and a fair value decrease of $2 million in the 36 weeks ended September 4, 2021, recorded in goodwill as a result of the finalization of purchase price allocation. (f)Based on London Interbank Offered Rate forward rates. The carrying amount of hedged fixed-rate debt was $0.2 billion as of September 4, 2021 and December 26, 2020, and is classified on our balance sheet within short-term debt obligations. As of September 4, 2021, fair value hedging adjustments to hedged fixed-rate debt were not material. As of December 26, 2020, the cumulative amount of fair value hedging adjustments to hedged fixed-rate debt was a $2 million gain. As of September 4, 2021, the cumulative amount of fair value hedging adjustments on discontinued hedges was a $4 million net loss, which is being amortized over the remaining life of the related debt obligations. (g)Based on recently reported market transactions of spot and forward rates. (h)Based on recently reported market transactions of swap arrangements. (i)Derivative assets and liabilities are presented on a gross basis on our balance sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the balance sheet as of September 4, 2021 and December 26, 2020 were not material. Collateral received or posted against our asset or liability positions was not material. Exchange-traded commodity futures are cash-settled on a daily basis and, therefore, not included in the table. The carrying amounts of our cash and cash equivalents and short-term investments recorded at amortized cost approximate fair value due to their short-term maturity. Our cash equivalents and short-term investments recorded at amortized cost are classified as Level 2 in the fair value hierarchy. The fair value of our debt obligations as of September 4, 2021 and December 26, 2020 was $46 billion and $50 billion, respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs. Losses/(gains) on our hedging instruments are categorized as follows:
| 12 Weeks Ended
| Fair Value/Non- designated Hedges |  | Cash Flow and Net Investment Hedges
| Losses/(Gains) Recognized in Income Statement(a) |  | Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss |  | Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement(b)
| 9/4/2021 |  | 9/5/2020 |  | 9/4/2021 |  | 9/5/2020 |  | 9/4/2021 |  | 9/5/2020
Foreign exchange | $ | (5) |  |  | $ | (10) |  |  | $ | (18) |  |  | $ | 31 |  |  | $ | 27 |  |  | $ | (22) |
Interest rate | 1 |  |  | 4 |  |  | 52 |  |  | (117) |  |  | 53 |  |  | (102) |
Commodity | (31) |  |  | (37) |  |  | 11 |  |  | (29) |  |  | (66) |  |  | 24 |
Net investment | — |  |  | — |  |  | (63) |  |  | 118 |  |  | — |  |  | — |
Total | $ | (35) |  |  | $ | (43) |  |  | $ | (18) |  |  | $ | 3 |  |  | $ | 14 |  |  | $ | (100) |
| 36 Weeks Ended
| Fair Value/Non- designated Hedges |  | Cash Flow and Net Investment Hedges
| Losses/(Gains) Recognized in Income Statement(a) |  | Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss |  | Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement(b)
| 9/4/2021 |  | 9/5/2020 |  | 9/4/2021 |  | 9/5/2020 |  | 9/4/2021 |  | 9/5/2020
Foreign exchange | $ | 5 |  |  | $ | (11) |  |  | $ | 20 |  |  | $ | (47) |  |  | $ | 67 |  |  | $ | (37) |
Interest rate | 2 |  |  | (8) |  |  | (12) |  |  | (24) |  |  | 2 |  |  | (73) |
Commodity | (182) |  |  | 120 |  |  | (235) |  |  | 48 |  |  | (109) |  |  | 40 |
Net investment | — |  |  | — |  |  | (71) |  |  | 159 |  |  | — |  |  | — |
Total | $ | (175) |  |  | $ | 101 |  |  | $ | (298) |  |  | $ | 136 |  |  | $ | (40) |  |  | $ | (70) |
(a)Foreign exchange derivative losses/gains are primarily included in selling, general and administrative expenses. Interest rate derivative losses/gains are primarily from fair value hedges and are included in net interest expense and other. These losses/gains are substantially offset by decreases/increases in the value of the underlying debt, which are also included in net interest expense and other. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. (b)Foreign exchange derivative losses/gains are primarily included in cost of sales. Interest rate derivative losses/gains on cross-currency interest rate swaps are included in selling, general and administrative expenses. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. Based on current market conditions, we expect to reclassify net gains of $166 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.

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