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DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS | DERIVATIVE FINANCIAL INSTRUMENTS Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, primarily the Euro. To manage this risk, we may hedge a portion of our foreign currency exposure related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes. We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges and, as a result, changes in their fair value are recorded in Other income (expense), net on our Condensed Consolidated Statements of Operations. We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturities of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess hedge effectiveness using regression analysis. The unrealized gains or losses in Accumulated other comprehensive income (“AOCI”) are reclassified into product sales when the respective hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI as of September 30, 2021 are expected to be reclassified to product sales within 12 months. The cash flow effects of our derivative contracts for the nine months ended September 30, 2021 and 2020 were included within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows. We had notional amounts on foreign currency exchange contracts outstanding of $3.0 billion and $2.4 billion as of September 30, 2021 and December 31, 2020, respectively. While all our derivative contracts allow us the right to offset assets and liabilities, we have presented amounts on a gross basis. The following table summarizes the classification and fair values of derivative instruments on our Condensed Consolidated Balance Sheets:
|  | September 30, 2021
|  | Derivative Assets |  | Derivative Liabilities
(in millions) |  | Classification |  | Fair Value |  | Classification |  | Fair Value
Derivatives designated as hedges: |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Prepaid and other current assets |  | $ | 50 |  |  | Accrued and other current liabilities |  | $ | (8) |
Foreign currency exchange contracts |  | Other long-term assets |  | 5 |  |  | Other long-term obligations |  | — |
Total derivatives designated as hedges |  |  |  | 55 |  |  |  |  | (8) |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Prepaid and other current assets |  | — |  |  | Accrued and other current liabilities |  | — |
Total derivatives not designated as hedges |  |  |  | — |  |  |  |  | — |
Total derivatives |  |  |  | $ | 55 |  |  |  |  | $ | (8) |
|  | December 31, 2020
|  | Derivative Assets |  | Derivative Liabilities
(in millions) |  | Classification |  | Fair Value |  | Classification |  | Fair Value
Derivatives designated as hedges: |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Prepaid and other current assets |  | $ | — |  |  | Accrued and other current liabilities |  | $ | (113) |
Foreign currency exchange contracts |  | Other long-term assets |  | — |  |  | Other long-term obligations |  | (7) |
Total derivatives designated as hedges |  |  |  | — |  |  |  |  | (120) |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Prepaid and other current assets |  | 12 |  |  | Accrued and other current liabilities |  | (1) |
Total derivatives not designated as hedges |  |  |  | 12 |  |  |  |  | (1) |
Total derivatives |  |  |  | $ | 12 |  |  |  |  | $ | (121) |
The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Financial Statements:
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
(in millions) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Derivatives designated as hedges: |  |  |  |  |  |  |  |
Gains (losses) recognized in AOCI |  | $ | 42 |  |  | $ | (52) |  |  | $ | 104 |  |  | $ | (28) |
Gains (losses) reclassified from AOCI into product sales |  | $ | (21) |  |  | $ | 12 |  |  | $ | (69) |  |  | $ | 57 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |
Gains (losses) recognized in Other income (expense), net |  | $ | 5 |  |  | $ | (13) |  |  | $ | 24 |  |  | $ | (10) |
From time to time, we may discontinue cash flow hedges and, as a result, record related amounts in Other income (expense), net on our Condensed Consolidated Statements of Operations. There were no discontinuances of cash flow hedges for the three and nine months ended September 30, 2021 and 2020. As of September 30, 2021 and December 31, 2020, we only held foreign currency exchange contracts. The following table summarizes the potential effect of offsetting our foreign currency exchange contracts on our Condensed Consolidated Balance Sheets:
|  |  |  |  |  |  |  | Gross Amounts Not Offset on our Condensed Consolidated Balance Sheets |  |
(in millions) |  | Gross Amounts of Recognized Assets/Liabilities |  | Gross Amounts Offset on our Condensed Consolidated Balance Sheets |  | Amounts of Assets/Liabilities Presented on our Condensed Consolidated Balance Sheets |  | Derivative Financial Instruments |  | Cash Collateral Received/ Pledged |  | Net Amount (Legal Offset)
As of September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets |  | $ | 55 |  |  | $ | — |  |  | $ | 55 |  |  | $ | (7) |  |  | $ | — |  |  | $ | 48 |
Derivative liabilities |  | $ | (8) |  |  | $ | — |  |  | $ | (8) |  |  | $ | 7 |  |  | $ | — |  |  | $ | (1) |
As of December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets |  | $ | 12 |  |  | $ | — |  |  | $ | 12 |  |  | $ | (12) |  |  | $ | — |  |  | $ | — |
Derivative liabilities |  | $ | (121) |  |  | $ | — |  |  | $ | (121) |  |  | $ | 12 |  |  | $ | — |  |  | $ | (109) |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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