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Derivative Instruments
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
DERIVATIVE INSTRUMENTS
We use operational and economic hedges, foreign currency exchange forward contracts, net investment hedges and interest rate derivative instruments to manage the impact of currency exchange and interest rate fluctuations on earnings and cash flow. At inception the derivative is designated as a cash flow hedge, a fair value hedge or a free standing derivative. We do not enter into derivative instruments for speculative purposes. We did not change our hedging strategies, accounting practices, or objectives from those disclosed in our Annual Report on Form 10-K for 2015.
Designated Net Investment Hedges
We have designated certain long-term intercompany loans payable and forward exchange contracts as net investment hedges of our investments in certain international subsidiaries that use the Euro as their functional currency. For derivative instruments that are designated and qualify as a net investment hedge, the effective portion of the derivative's gain or loss is recognized in OCI and reported as a component of Accumulated Other Comprehensive Income (AOCI). On September 30, 2016 the total after-tax amount in AOCI related to our designated net investment hedges was $6.
We use the forward method to measure ineffectiveness. Under this method the change in the carrying value of the Euro-denominated amounts, due to remeasurement of the effective portion, is reported as a component of AOCI. The remaining change in the carrying value of the ineffective portion, if any, is recognized in other income (expense), net. The gain or loss related to settled net investment hedges will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated. We evaluate the effectiveness of our net investment hedges quarterly and did not recognize any ineffectiveness in the nine months 2016.
Designated and Non-Designated Hedges
September 2016
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
1,100

 
$
2,851

 
$
3,951

Maximum term in days
 
 
 
 
 
548

Fair value:
 
 
 
 
 
 
Other current assets
 
$
7

 
$
4

 
$
11

Other noncurrent assets
 
1

 
—

 
1

Other current liabilities
 
(25
)
 
(6
)
 
(31
)
Other noncurrent liabilities
 
(2
)
 
—

 
(2
)
Total
 
$
(19
)
 
$
(2
)
 
$
(21
)

December 2015
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
889

 
$
4,061

 
$
4,950

Maximum term in days
 
 
 
 
 
546

Fair value:
 
 
 
 
 
 
Other current assets
 
$
27

 
$
41

 
$
68

Other noncurrent assets
 
1

 
—

 
1

Other current liabilities
 
(6
)
 
(3
)
 
(9
)
Other noncurrent liabilities
 
(1
)
 
—

 
(1
)
Total
 
$
21

 
$
38

 
$
59


We are exposed to credit loss in the event of nonperformance by our counterparties on our outstanding derivative instruments but do not anticipate nonperformance by any of our counterparties. Should a counterparty default, our maximum exposure to loss is the asset balance of the instrument.
Net Currency Exchange Rate Gains (Losses)
 
Three Months
 
Nine Months
Reported in:
2016
2015
 
2016
2015
Cost of sales
$
(3
)
$
7

 
$
5

$
12

Other income (expense), net
(5
)
(5
)
 
(15
)
(16
)
Total
$
(8
)
$
2

 
$
(10
)
$
(4
)

On September 30, 2016 and December 31, 2015 pretax (losses) gains on derivatives designated as hedges of ($25) and $17, reported in AOCI, were expected to be reclassified to earnings during the next 12 months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases. There were no ineffective portions of derivatives that resulted in gains or losses in any of the periods presented.
Interest Rate Risk on Future Debt Issuance
Forward starting interest rate derivative instruments designated as cash flow hedges are used to manage the exposure to interest rate volatility with regard to future issuance and refinancing of debt. The effective portion of the gains or losses on forward starting interest rate derivative instruments that are designated and qualify as cash flow hedges is reported as a component of AOCI. Beginning in the period in which the debt refinancing occurs and the related derivative instruments is terminated, the effective portion of the gains or losses is then reclassified into interest expense over the term of the related debt.
On September 30, 2016 we had interest rate swaps with notional amounts of $600 designated as forward starting interest rate swaps in anticipation of future debt issuances. The market value of outstanding interest rate swap agreements on September 30, 2016 was $1, which is recorded in other assets with an offsetting amount recorded in AOCI. Upon the probable issuance of the debt, these amounts will be released to interest expense over the term of the debt. The cash flow effect of this hedge is recorded in cash flow from operations.
In the nine months 2016 we terminated multiple designated interest rate cash flow hedges, recognized $7 in OCI related to hedges on our debt issuances and recognized a nominal amount of ineffectiveness in interest expense. The remaining amounts in AOCI will be reclassified to interest expense over the term of the debt. The cash flow effect of these hedges is recognized in cash flow from operations.
Fair Value Hedges
On September 30, 2016 we had interest rate swaps with gross notional amounts of $500 designated as fair value hedges of underlying fixed rate obligations representing a portion of our $600 senior unsecured notes due in 2024. In the nine months 2016 there was no hedge ineffectiveness recorded as a result of these fair value hedges.
Fair Value Interest Rate Hedge Instruments
 
September 2016
 
December 2015
Gross notional amount
$
500

 
$
500

Fair value:
 
 
 
Other noncurrent assets
$
38

 
$
15

Long-term debt
(38
)
 
(15
)
Total
$
—

 
$
—