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Financial Instruments | 9 Months Ended
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Sep. 30, 2018
Financial Instruments [Abstract] |
Financial Instruments | Financial Instruments A. Fair Value Measurements Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis On January 1, 2018, we adopted a new accounting and disclosure standard related to accounting for the recognition of financial assets and liabilities. For additional information see Note 1B.
The following table presents the financial assets and liabilities measured at fair value using a market approach on a recurring basis by balance sheet categories and fair value hierarchy level as defined in Notes to Consolidated Financial Statements––Note 1E. Basis of Presentation and Significant Accounting Policies: Fair Value in Pfizer’s 2017 Financial Report:
|  | September 30, 2018 |  | December 31, 2017
(MILLIONS OF DOLLARS) |  | Total |  | Level 1 |  | Level 2 |  | Total |  | Level 1 |  | Level 2
Financial assets measured at fair value on a recurring basis: |  |  |  |  |  |  |  |  |  |  |  |
Short-term investments |  |  |  |  |  |  |  |  |  |  |  |
Classified as equity securities: |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 1,184 |  |  | $ | — |  |  | $ | 1,184 |  |  | $ | 2,115 |  |  | $ | — |  |  | $ | 2,115 |
Equity(a) |  | 29 |  |  | 17 |  |  | 12 |  |  | 35 |  |  | 16 |  |  | 19 |
|  | 1,213 |  |  | 17 |  |  | 1,196 |  |  | 2,150 |  |  | 16 |  |  | 2,134 |
Classified as available-for-sale debt securities: |  |  |  |  |  |  |  |  |  |  |  |
Government and agency—non-U.S. |  | 8,336 |  |  | — |  |  | 8,336 |  |  | 12,242 |  |  | — |  |  | 12,242 |
Corporate |  | 2,890 |  |  | — |  |  | 2,890 |  |  | 2,766 |  |  | — |  |  | 2,766 |
Government—U.S. |  | 8 |  |  | — |  |  | 8 |  |  | 252 |  |  | — |  |  | 252 |
Agency asset-backed—U.S. |  | 17 |  |  | — |  |  | 17 |  |  | 23 |  |  | — |  |  | 23 |
Other asset-backed |  | 5 |  |  | — |  |  | 5 |  |  | 79 |  |  | — |  |  | 79 |
|  | 11,256 |  |  | — |  |  | 11,256 |  |  | 15,362 |  |  | — |  |  | 15,362 |
Total short-term investments |  | 12,469 |  |  | 17 |  |  | 12,452 |  |  | 17,512 |  |  | 16 |  |  | 17,496 |
Other current assets |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | 88 |  |  | — |  |  | 88 |  |  | 104 |  |  | — |  |  | 104 |
Foreign exchange contracts |  | 488 |  |  | — |  |  | 488 |  |  | 234 |  |  | — |  |  | 234 |
Total other current assets |  | 576 |  |  | — |  |  | 576 |  |  | 337 |  |  | — |  |  | 337 |
Long-term investments |  |  |  |  |  |  |  |  |  |  |  |
Classified as equity securities: |  |  |  |  |  |  |  |  |  |  |  |
Equity(a) |  | 1,563 |  |  | 1,527 |  |  | 36 |  |  | 1,440 |  |  | 1,398 |  |  | 42 |
Classified as trading securities: |  |  |  |  |  |  |  |  |  |  |  |
Debt |  | 50 |  |  | 50 |  |  | — |  |  | 73 |  |  | 73 |  |  | — |
|  | 1,612 |  |  | 1,577 |  |  | 36 |  |  | 1,514 |  |  | 1,472 |  |  | 42 |
Classified as available-for-sale debt securities: |  |  |  |  |  |  |  |  |  |  |  |
Government and agency—non-U.S. |  | 106 |  |  | — |  |  | 106 |  |  | 387 |  |  | — |  |  | 387 |
Corporate |  | 3,210 |  |  | — |  |  | 3,210 |  |  | 4,172 |  |  | 36 |  |  | 4,136 |
Government—U.S. |  | 421 |  |  | — |  |  | 421 |  |  | 495 |  |  | — |  |  | 495 |
Other asset-backed |  | 4 |  |  | — |  |  | 4 |  |  | 35 |  |  | — |  |  | 35 |
|  | 3,742 |  |  | — |  |  | 3,742 |  |  | 5,090 |  |  | 36 |  |  | 5,054 |
Total long-term investments |  | 5,354 |  |  | 1,577 |  |  | 3,778 |  |  | 6,603 |  |  | 1,507 |  |  | 5,096 |
Other noncurrent assets |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | 246 |  |  | — |  |  | 246 |  |  | 477 |  |  | — |  |  | 477 |
Foreign exchange contracts |  | 220 |  |  | — |  |  | 220 |  |  | 7 |  |  | — |  |  | 7 |
Total other noncurrent assets |  | 467 |  |  | — |  |  | 467 |  |  | 484 |  |  | — |  |  | 484 |
Total assets |  | $ | 18,866 |  |  | $ | 1,594 |  |  | $ | 17,272 |  |  | $ | 24,937 |  |  | $ | 1,523 |  |  | $ | 23,414 |
Financial liabilities measured at fair value on a recurring basis: |  |  |  |  |  |  |  |  |  |  |  |
Other current liabilities |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 9 |  |  | $ | — |  |  | $ | 9 |  |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |
Foreign exchange contracts |  | 80 |  |  | — |  |  | 80 |  |  | 201 |  |  | — |  |  | 201 |
Total other current liabilities |  | 89 |  |  | — |  |  | 89 |  |  | 201 |  |  | — |  |  | 201 |
Other noncurrent liabilities |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | 653 |  |  | — |  |  | 653 |  |  | 177 |  |  | — |  |  | 177 |
Foreign exchange contracts |  | 432 |  |  | — |  |  | 432 |  |  | 313 |  |  | — |  |  | 313 |
Total other noncurrent liabilities |  | 1,085 |  |  | — |  |  | 1,085 |  |  | 490 |  |  | — |  |  | 490 |
Total liabilities |  | $ | 1,174 |  |  | $ | — |  |  | $ | 1,174 |  |  | $ | 691 |  |  | $ | — |  |  | $ | 691 |
(a) | As of September 30, 2018, short-term equity securities of $12 million and long-term equity securities of $35 million are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan. As of December 31, 2017, short-term equity securities of $19 million and long-term equity securities of $42 million are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan.
Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
The following table presents the financial liabilities not measured at fair value on a recurring basis, including the carrying values and estimated fair values:
|  | September 30, 2018 |  | December 31, 2017
|  | Carrying Value |  | Estimated Fair Value |  | Carrying Value |  | Estimated Fair Value
(MILLIONS OF DOLLARS) |  |  |  | Total |  | Level 2 |  |  |  | Total |  | Level 2
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Long-term debt, excluding the current portion |  | $ | 33,652 |  |  | $ | 36,243 |  |  | $ | 36,243 |  |  | $ | 33,538 |  |  | $ | 37,253 |  |  | $ | 37,253 |
The differences between the estimated fair values and carrying values of held-to-maturity debt securities, restricted stock and private equity securities at cost, and short-term borrowings not measured at fair value on a recurring basis were not significant as of September 30, 2018 or December 31, 2017, except for our investment in Allogene (see Note 2B). The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs. The fair value measurements of our private equity securities carried at cost, which represent investments in the life sciences sector, are based on Level 3 inputs. In addition, as of September 30, 2018 and December 31, 2017, we had long-term receivables whose fair value is based on Level 3 inputs. As of September 30, 2018 and December 31, 2017, the differences between the estimated fair values and carrying values of these receivables were not significant. Total Short-Term and Long-Term Investments
The following table represents our investments by classification type:
(MILLIONS OF DOLLARS) |  | September 30, 2018 |  |  | December 31, 2017 |
Short-term investments |  |  |  |
Equity securities |  | $ | 1,213 |  |  | $ | 2,150 |
Available-for-sale debt securities |  | 11,256 |  |  | 15,362 |
Held-to-maturity debt securities |  | 1,211 |  |  | 1,138 |
Total Short-term investments |  | $ | 13,680 |  |  | $ | 18,650 |
Long-term investments |  |  |  |
Equity securities |  | $ | 1,563 |  |  | $ | 1,440 |
Trading debt securities |  | 50 |  |  | 73 |
Available-for-sale debt securities |  | 3,742 |  |  | 5,090 |
Held-to-maturity debt securities |  | 63 |  |  | 4 |
Private equity investments carried at equity-method or cost |  | 1,027 |  |  | 408 |
Total Long-term investments |  | $ | 6,444 |  |  | $ | 7,015 |
Held-to-maturity cash equivalents |  | $ | 237 |  |  | $ | 719 |
Fair Value Methodology The following inputs and valuation techniques were used to estimate the fair value of our financial assets and liabilities:
• | Trading debt securities—quoted market prices.
• | Available-for-sale debt securities—third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data and credit-adjusted interest rate yield curves. Mortgage-backed, loan-backed and receivable-backed securities are valued by third-party models that use significant inputs derived from observable market data like prepayment rates, default rates, and recovery rates.
• | Equity securities—quoted market prices.
• | Derivative assets and liabilities (financial instruments)—third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data. Where applicable, these models discount future cash flow amounts using market-based observable inputs, including interest rate yield curves, and forward and spot prices for currencies. The credit risk impact to our derivative financial instruments was not significant.
• | Money market funds—observable net asset value prices.
We periodically review the methodologies, inputs and outputs of third-party pricing services for reasonableness. Our procedures can include, for example, referencing other third-party pricing models, monitoring key observable inputs (like LIBOR interest rates) and selectively performing test-comparisons of values with actual sales of financial instruments. B. Investments
At September 30, 2018, the investment securities portfolio consisted of debt securities that were virtually all investment-grade. Information on investments in debt and equity securities at September 30, 2018 and December 31, 2017 is as follows, including, as of September 30, 2018, the contractual maturities, or as necessary, the estimated maturities, of the available-for-sale and held-to-maturity debt securities:
|  | September 30, 2018 |  | December 31, 2017
|  |  |  | Gross Unrealized |  |  |  | Maturities (in Years) |  |  |  |  | Gross Unrealized |  |  |
(MILLIONS OF DOLLARS) |  | Amortized Cost |  |  | Gains |  |  | Losses |  |  | Fair Value |  |  | Within 1 |  |  | Over 1 to 5 |  |  | Over 5 |  |  | Total |  |  | Amortized Cost |  |  | Gains |  |  | Losses |  |  | Fair Value |
Available-for-sale debt securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agency––non-U.S. |  | $ | 8,476 |  |  | $ | 9 |  |  | $ | (43 | ) |  | $ | 8,442 |  |  | $ | 8,336 |  |  | $ | 106 |  |  | $ | — |  |  | $ | 8,442 |  |  | $ | 12,616 |  |  | $ | 61 |  |  | $ | (48 | ) |  | $ | 12,629 |
Corporate(a) |  | 6,192 |  |  | 2 |  |  | (94 | ) |  | 6,100 |  |  | 2,890 |  |  | 2,356 |  |  | 854 |  |  | 6,100 |  |  | 6,955 |  |  | 15 |  |  | (33 | ) |  | 6,938 |
Government––U.S. |  | 451 |  |  | — |  |  | (23 | ) |  | 428 |  |  | 8 |  |  | 421 |  |  | — |  |  | 428 |  |  | 765 |  |  | — |  |  | (19 | ) |  | 747 |
Agency asset-backed––U.S. |  | 18 |  |  | — |  |  | (1 | ) |  | 18 |  |  | 17 |  |  | — |  |  | — |  |  | 18 |  |  | 24 |  |  | — |  |  | (1 | ) |  | 24 |
Other asset-backed(b) |  | 9 |  |  | — |  |  | — |  |  | 9 |  |  | 5 |  |  | 3 |  |  | 2 |  |  | 9 |  |  | 114 |  |  | — |  |  | — |  |  | 114 |
Held-to-maturity debt securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits and other |  | 734 |  |  | — |  |  | — |  |  | 734 |  |  | 670 |  |  | 23 |  |  | 40 |  |  | 734 |  |  | 1,091 |  |  | — |  |  | — |  |  | 1,091 |
Government and agency––non-U.S. |  | 778 |  |  | — |  |  | — |  |  | 778 |  |  | 778 |  |  | — |  |  | — |  |  | 778 |  |  | 770 |  |  | — |  |  | — |  |  | 770 |
Total debt securities |  | $ | 16,658 |  |  | $ | 11 |  |  | $ | (160 | ) |  | $ | 16,509 |  |  | $ | 12,704 |  |  | $ | 2,909 |  |  | $ | 896 |  |  | $ | 16,509 |  |  | $ | 22,337 |  |  | $ | 77 |  |  | $ | (100 | ) |  | $ | 22,313 |
Available-for-sale equity securities(c) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 2,115 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,115 |
Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 728 |  |  | 586 |  |  | (124 | ) |  | 1,190 |
Total available-for-sale equity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 2,843 |  |  | $ | 586 |  |  | $ | (124 | ) |  | $ | 3,304 |
(a) | Issued by a diverse group of corporations.
(b) | Includes mortgage-backed, loan-backed and receivable-backed securities, all of which are in senior positions in the capital structure of the security. Mortgage-backed securities are collateralized by diversified pools of residential and commercial mortgages. Loan-backed securities are collateralized by senior secured obligations of a diverse pool of companies or student loans. Receivable-backed securities are collateralized by credit cards receivables.
(c) | Upon the 2018 adoption of a new accounting standard related to financial assets and liabilities, available-for-sale equity securities were classified as equity securities. For additional information see Note 1B.
The following table presents the net unrealized gains and losses for the period that relates to equity securities still held at the reporting date, calculated as follows:
(MILLIONS OF DOLLARS) |  | Three Months Ended September 30, 2018 |  | Nine Months Ended September 30, 2018 |
Net gains recognized during the period on investments in equity securities(a) |  | $ | 94 |  | $ | 460 |
Less: Net gains recognized during the period on equity securities sold during the period |  | (54 | ) | (90 | )
Net unrealized gains during the reporting period on equity securities still held at the reporting date(b) |  | $ | 40 |  | $ | 370 |
(a) | The net gains on investments in equity securities are reported in Other (income)/deductions––net and, for the third quarter and first nine months of 2018, include unrealized net gains on equity securities reflecting the adoption of a new accounting standard in the first quarter of 2018. For additional information, see Note 4.
(b) | The third quarter of 2018 includes $8 million of unrealized net gains in Other (income)/deductions––net reflecting the adoption of a new accounting standard in the first quarter of 2018 and $32 million of unrealized gains on other equity securities. The first nine months of 2018 includes $344 million of unrealized net gains in Other (income)/deductions––net reflecting the adoption of a new accounting standard in the first quarter of 2018 and $26 million of unrealized gains on other equity securities. For additional information, see Note 1B and Note 4.
C. Short-Term Borrowings
Short-term borrowings include:
(MILLIONS OF DOLLARS) |  | September 30, 2018 |  |  | December 31, 2017 |
Commercial paper |  | $ | 2,600 |  |  | $ | 6,100 |
Current portion of long-term debt, principal amount |  | 4,260 |  |  | 3,532 |
Other short-term borrowings, principal amount(a) |  | 537 |  |  | 320 |
Total short-term borrowings, principal amount |  | 7,396 |  |  | 9,951 |
Net fair value adjustments related to hedging and purchase accounting |  | (5 | ) |  | 14 |
Net unamortized discounts, premiums and debt issuance costs |  | (7 | ) |  | (12 | )
Total Short-term borrowings, including current portion of long-term debt, carried at historical proceeds, as adjusted |  | $ | 7,385 |  |  | $ | 9,953 |
(a) | Other short-term borrowings primarily include cash collateral. For additional information, see Note 7F.
D. Long-Term Debt New Issuances
In the third quarter of 2018, we issued the following senior unsecured notes:
|  |  |  | Principal
(MILLIONS OF DOLLARS) |  | Maturity Date |  | As of September 30, 2018
3.000% notes(a) |  | September 15, 2021 |  | $ | 1,000 |
Floating rate notes (LIBOR plus 0.33%)(b) |  | September 15, 2023 |  | 300 |
3.200% notes(a) |  | September 15, 2023 |  | 1,000 |
3.600% notes(a) |  | September 15, 2028 |  | 1,000 |
4.100% notes(a) |  | September 15, 2038 |  | 700 |
4.200% notes(a) |  | September 15, 2048 |  | 1,000 |
Total long-term debt issued in the third quarter of 2018 |  |  |  | $ | 5,000 |
(a) | Fixed rate notes may be redeemed by us at any time, in whole, or in part, at varying redemption prices plus accrued and unpaid interest.
(b) | Floating rate notes may not be redeemed by their terms prior to maturity.
The following table provides the aggregate principal amount of our senior unsecured long-term debt, and adjustments to report our aggregate long-term debt:
(MILLIONS OF DOLLARS) |  | September 30, 2018 |  |  | December 31, 2017 |
Total long-term debt, principal amount |  | $ | 33,658 |  |  | $ | 32,783 |
Net fair value adjustments related to hedging and purchase accounting |  | 129 |  |  | 872 |
Net unamortized discounts, premiums and debt issuance costs |  | (142 | ) |  | (125 | )
Other long-term debt |  | 7 |  |  | 8 |
Total long-term debt, carried at historical proceeds, as adjusted |  | $ | 33,652 |  |  | $ | 33,538 |
Current portion of long-term debt, carried at historical proceeds, as adjusted |  | $ | 4,255 |  |  | $ | 3,546 |
E. Other Noncurrent Liabilities Mylotarg (gemtuzumab ozogamicin) In April 2018, the EU approved Mylotarg for the treatment of acute myeloid leukemia. In connection with the EU approval, we incurred an obligation to make guaranteed fixed annual payments over a ten-year period aggregating $301 million related to a research and development arrangement. We recorded the estimated net present value of $240 million as a liability and an intangible asset in Developed technology rights as of the approval date. In June 2018, we entered into a transaction with the obligee to buyout the remaining liability for the fixed annual payments for a lump sum payment of $224 million. As a result of the buyout transaction, the liability was extinguished and we recognized a non-cash $17 million pre-tax gain in Other (income)/deductions––net in the second quarter of 2018 (see Note 4). Bosulif (bosutinib) In December 2017, the U.S. FDA approved Bosulif for the treatment of patients with newly-diagnosed chronic-phase Ph+ CML. In connection with the U.S. approval, we incurred an obligation to make guaranteed fixed annual payments over a ten-year period aggregating $416 million related to a research and development arrangement. We recorded the estimated net present value of $364 million as of the approval date as an intangible asset in Developed technology rights. In August 2018, we entered into a transaction with the obligee to buyout a portion of the remaining liability for the fixed annual payments for a lump sum payment of $71 million. As a result of the buyout transaction, the liability was reduced and we recognized a non-cash $9 million pre-tax gain in Other (income)/deductions––net in the third quarter of 2018. The present value of the remaining future payments as of September 30, 2018 is $208 million, of which $23 million is recorded in Other current liabilities and $185 million is recorded in Other noncurrent liabilities. Besponsa (inotuzumab ozogamicin) In August 2017, the U.S. FDA approved Besponsa and in June 2017, the EU approved Besponsa as monotherapy for the treatment of adults with relapsed or refractory CD22-positive B-cell precursor acute lymphoblastic leukemia. In connection with the U.S. approval, we incurred an obligation to make guaranteed fixed annual payments over a nine-year period aggregating $296 million related to a research and development arrangement. We recorded the estimated net present value of $248 million as of the approval date as an intangible asset in Developed technology rights. The present value of the remaining future payments as of September 30, 2018 is $240 million, of which $7 million is recorded in Other current liabilities and $233 million is recorded in Other noncurrent liabilities. In connection with the EU approval, we incurred an obligation to make guaranteed fixed annual payments over a nine-year period aggregating $148 million related to a research and development arrangement. We recorded the estimated net present value of $123 million as of the approval date as an intangible asset in Developed technology rights. The present value of the remaining future payments as of September 30, 2018 is $121 million, of which $3 million is recorded in Other current liabilities and $118 million is recorded in Other noncurrent liabilities. The differences between the estimated fair values in the Level 2 fair value hierarchy and carrying values of these obligations were not significant as of September 30, 2018. F. Derivative Financial Instruments and Hedging Activities We adopted a new accounting standard in the first quarter of 2018, as of January 2018. For additional information, see Note 1B. Foreign Exchange Risk A significant portion of our revenues, earnings and net investments in foreign affiliates is exposed to changes in foreign exchange rates. We manage our foreign exchange risk, in part, through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. We also manage our foreign exchange risk, depending on market conditions, through fair value, cash flow, and net investment hedging programs through the use of derivative financial instruments and foreign currency debt. These financial instruments serve to protect net income against the impact of remeasurement into another currency, or against the impact of translation into U.S. dollars of certain foreign exchange-denominated transactions. All derivative financial instruments used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the consolidated balance sheet. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen, U.K. pound and Swedish krona. Changes in fair value are reported in earnings or in Other comprehensive income/(loss), depending on the nature and purpose of the financial instrument (hedge or offset relationship) and the effectiveness of the hedge relationships, as follows:
• | Generally, we recognize the gains and losses on foreign exchange contracts that are designated as fair value hedges in earnings upon the recognition of the change in fair value of the hedged risk. Upon the adoption of the new standard in 2018, for certain foreign exchange contracts, we exclude an amount from the assessment of hedge effectiveness and recognize that excluded amount through an amortization approach. We also recognize the offsetting foreign exchange impact attributable to the hedged item in earnings.
• | Generally, we record in Other comprehensive income/(loss) gains or losses on foreign exchange contracts that are designated as cash flow hedges and reclassify those amounts, as appropriate, into earnings in the same period or periods during which the hedged transaction affects earnings. Upon the adoption of the new standard in 2018, for certain foreign exchange contracts, we exclude an amount from the assessment of hedge effectiveness and recognize that excluded amount through an amortization approach.
• | Historically, as part of our net investment hedging program, we recognize the gain and loss impact on foreign exchange contracts designated as hedges of our net investments in earnings in three ways: over time––for the periodic net swap payments; immediately––to the extent of any change in the difference between the foreign exchange spot rate and forward rate; and upon sale or substantial liquidation of our net investments––to the extent of change in the foreign exchange spot rates. Upon the adoption of the new standard in 2018, for foreign exchange contracts, we exclude an amount from the assessment of hedge effectiveness and recognize that excluded amount through an amortization approach. We record in Other comprehensive income/(loss) the foreign exchange gains and losses related to foreign exchange-denominated debt designated as a hedge of our net investments in foreign subsidiaries and reclassify those amounts into earnings upon the sale or substantial liquidation of our net investments.
• | For certain foreign exchange contracts not designated as hedging instruments, we recognize the gains and losses on foreign currency exchange contracts that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement.
As a part of our cash flow hedging program, we designate foreign exchange contracts to hedge a portion of our forecasted euro, Japanese yen, Chinese renminbi, Canadian dollar, U.K. pound, and Australian dollar-denominated intercompany inventory sales expected to occur no more than two years from the date of each hedge. For the third quarter and first nine months ended October 1, 2017, any ineffectiveness is recognized immediately into earnings. There is no significant ineffectiveness for these periods. Interest Rate Risk Our interest-bearing investments and borrowings are subject to interest rate risk. With respect to our investments, we strive to maintain a predominantly floating-rate basis position, but our strategy may change based on prevailing market conditions. We currently borrow primarily on a long-term, fixed rate basis. Historically, we strove to borrow primarily on a floating-rate basis; but in recent years we borrowed on a long-term, fixed-rate basis. From time to time, depending on market conditions, we will change the profile of our outstanding debt by entering into derivative financial instruments like interest rate swaps. We entered into derivative financial instruments to hedge or offset the fixed interest rates on the hedged item, matching the amount and timing of the hedged item. The derivative financial instruments primarily hedge U.S. dollar fixed-rate debt. All derivative contracts used to manage interest rate risk are measured at fair value and reported as assets or liabilities on the consolidated balance sheet. Changes in fair value are reported in earnings, as follows:
• | We recognize the gains and losses on interest rate contracts that are designated as fair value hedges in earnings upon the recognition of the change in fair value of the hedged risk. We also recognize the offsetting earnings impact of fixed-rate debt attributable to the hedged risk in earnings.
For the third quarter and first nine months ended October 1, 2017, any ineffectiveness is recognized immediately into earnings. There is no significant ineffectiveness for these periods.
The following table provides the fair value of the derivative financial instruments and the related notional amounts presented between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:
(MILLIONS OF DOLLARS) |  | September 30, 2018 |  | December 31, 2017
|  |  |  | Fair Value |  |  |  | Fair Value
|  | Notional |  | Asset |  | Liability |  | Notional |  | Asset |  | Liability
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts(a) |  | $ | 19,955 |  |  | $ | 590 |  |  | $ | 464 |  |  | $ | 18,723 |  |  | $ | 179 |  |  | $ | 459 |
Interest rate contracts |  | 11,300 |  |  | 335 |  |  | 661 |  |  | 12,430 |  |  | 581 |  |  | 178 |
|  |  |  | 925 |  |  | 1,126 |  |  |  |  | 760 |  |  | 637 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | $ | 16,798 |  |  | 118 |  |  | 48 |  |  | $ | 14,300 |  |  | 62 |  |  | 54 |
Total |  |  |  | $ | 1,043 |  |  | $ | 1,174 |  |  |  |  | $ | 822 |  |  | $ | 691 |
(a) | As of September 30, 2018, the notional amount of outstanding foreign currency forward-exchange contracts hedging our intercompany forecasted inventory sales was $5.4 billion.
The following table provides information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk:
|  | Amount of Gains/(Losses) Recognized in OID(a), (b) |  | Amount of Gains/(Losses) Recognized in OCI(a), (c) |  | Amount of Gains/(Losses) Reclassified from OCI into OID and COS(a), (c)
(MILLIONS OF DOLLARS) |  | Sep 30, 2018 |  |  | Oct 1, 2017 |  |  | Sep 30, 2018 |  |  | Oct 1, 2017 |  |  | Sep 30, 2018 |  |  | Oct 1, 2017 |
Three Months Ended |  |  |  |  |  |  |  |  |  |  |  |
Derivative Financial Instruments in Cash Flow Hedge Relationships: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts(d) |  | $ | — |  |  | $ | 1 |  |  | $ | 183 |  |  | $ | (51 | ) |  | $ | 198 |  |  | $ | (56 | )
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach |  | — |  |  | — |  |  | 39 |  |  | — |  |  | 36 |  |  | — |
Derivative Financial Instruments in Fair Value Hedge Relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | (195 | ) |  | 10 |  |  | — |  |  | — |  |  | — |  |  | — |
Hedged item gain/(loss) |  | 195 |  |  | (10 | ) |  | — |  |  | — |  |  | — |  |  | — |
Foreign exchange contracts |  | 1 |  |  | (11 | ) |  | — |  |  | — |  |  | — |  |  | — |
Hedged item gain/(loss) |  | (1 | ) |  | 11 |  |  | — |  |  | — |  |  | — |  |  | — |
Derivative Financial Instruments in Net Investment Hedge Relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | — |  |  | — |  |  | 43 |  |  | — |  |  | — |  |  | — |
The portion of gains/(losses) on foreign exchange contracts excluded from the assessment of hedge effectiveness |  | — |  |  | — |  |  | 14 |  |  | — |  |  | 21 |  |  | — |
Non-Derivative Financial Instruments in Net Investment Hedge Relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency short-term borrowings(e) |  | — |  |  | — |  |  | 8 |  |  | — |  |  | — |  |  | — |
Foreign currency long-term debt(e) |  | — |  |  | — |  |  | 17 |  |  | (166 | ) |  | — |  |  | — |
Derivative Financial Instruments Not Designated as Hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | 150 |  |  | 33 |  |  | — |  |  | — |  |  | — |  |  | — |
All other net |  | — |  |  | — |  |  | — |  |  | 1 |  |  | — |  |  | — |
|  | $ | 150 |  |  | $ | 34 |  |  | $ | 304 |  |  | $ | (216 | ) |  | $ | 256 |  |  | $ | (55 | )
|  | Amount of Gains/(Losses) Recognized in OID(a), (b) |  | Amount of Gains/(Losses) Recognized in OCI(a), (c) |  | Amount of Gains/(Losses) Reclassified from OCI into OID and COS(a), (c)
(MILLIONS OF DOLLARS) |  | Sep 30, 2018 |  |  | Oct 1, 2017 |  |  | Sep 30, 2018 |  |  | Oct 1, 2017 |  |  | Sep 30, 2018 |  |  | Oct 1, 2017 |
Nine Months Ended |  |  |  |  |  |  |  |  |  |  |  |
Derivative Financial Instruments in Cash Flow Hedge Relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts(d) |  | $ | — |  |  | $ | (5 | ) |  | $ | 147 |  |  | $ | (149 | ) |  | $ | (204 | ) |  | $ | 394 |
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach |  | — |  |  | — |  |  | 87 |  |  | — |  |  | 84 |  |  | — |
Derivative Financial Instruments in Fair Value Hedge Relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | (715 | ) |  | 19 |  |  | — |  |  | — |  |  | — |  |  | — |
Hedged item gain/(loss) |  | 715 |  |  | (19 | ) |  | — |  |  | — |  |  | — |  |  | — |
Foreign exchange contracts |  | 5 |  |  | (19 | ) |  | — |  |  | — |  |  | — |  |  | — |
Hedged item gain/(loss) |  | (5 | ) |  | 19 |  |  | — |  |  | — |  |  | — |  |  | — |
Derivative Financial Instruments in Net Investment Hedge Relationships: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | — |  |  | — |  |  | 191 |  |  | — |  |  | — |  |  | — |
The portion of gains/(losses) on foreign exchange contracts excluded from the assessment of hedge effectiveness |  | — |  |  | — |  |  | 41 |  |  | — |  |  | 47 |  |  | — |
Non-Derivative Financial Instruments in Net Investment Hedge Relationships: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency short-term borrowings(e) |  | — |  |  | — |  |  | 50 |  |  | — |  |  | — |  |  | — |
Foreign currency long-term debt(e) |  | — |  |  | — |  |  | 111 |  |  | (518 | ) |  | — |  |  | — |
Derivative Financial Instruments Not Designated as Hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | 156 |  |  | (112 | ) |  | — |  |  | — |  |  | — |  |  | — |
All other net |  | — |  |  | — |  |  | 1 |  |  | 1 |  |  | 1 |  |  | — |
|  | $ | 156 |  |  | $ | (117 | ) |  | $ | 629 |  |  | $ | (666 | ) |  | $ | (72 | ) |  | $ | 394 |
(a) | OID = Other (income)/deductions—net, included in Other (income)/deductions—net in the condensed consolidated statements of income. COS = Cost of Sales, included in Cost of sales in the condensed consolidated statements of income. OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.
(b) | For the third quarter and first nine months ended October 1, 2017, there was no significant ineffectiveness.
(c) | For derivative financial instruments in cash flow hedge relationships, the gains and losses are included in Other comprehensive income/(loss)––Unrealized holding gains/(losses) on derivative financial instruments, net. For derivative financial instruments in net investment hedge relationships and for foreign currency debt designated as hedging instruments, the effective portion is included in Other comprehensive income/(loss)––Foreign currency translation adjustments, net.
(d) | Based on quarter-end foreign exchange rates that are subject to change, we expect to reclassify a pre-tax gain of $120 million within the next 12 months into Cost of sales. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $1.8 billion U.K. pound debt maturing in 2043.
(e) | Short-term borrowings include foreign currency short-term borrowings with carrying values of $1.5 billion as of September 30, 2018, which are used as hedging instruments in net investment hedges. Long-term debt includes foreign currency long-term borrowings with carrying values of $3.2 billion as of September 30, 2018, which are used as hedging instruments in net investment hedges.
The following table provides the total amount of each income and expense line in which the results of fair value or cash flow hedges are recorded:
|  | Three Months Ended |  | Nine Months Ended
(MILLIONS OF DOLLARS) |  | September 30, 2018 |  |  | September 30, 2018 |
Cost of sales |  | $ | 2,694 |  |  | $ | 8,173 |
Other (income)/deductions—net |  | (414 | ) |  | (1,143 | )
The following table provides the amounts recorded in our condensed consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
|  | Carrying Amount of Hedged Assets/Liabilities |  |  | Cumulative Amount of Fair Value Hedging Adjustment Gains/(Losses) Included in the Carrying Amount of the Hedged Assets/Liabilities |
(MILLIONS OF DOLLARS) |  | September 30, 2018 |  |  | September 30, 2018 |
Short-term investments |  | $ | 156 |  |  | $ | — |
Long-term investments |  | 45 |  |  | (1 | )
Short-term borrowings, including current portion of long-term debt |  | 1,490 |  |  | 8 |
Long-term debt |  | 9,548 |  |  | 407 |
Certain of our derivative instruments are covered by associated credit-support agreements that have credit-risk-related contingent features designed to reduce both counterparties’ exposure to risk of defaulting on amounts owed by the other party. As of September 30, 2018, the aggregate fair value of these derivative instruments that are in a net liability position was $545 million, for which we have posted collateral of $535 million in the normal course of business. If there had been a downgrade to below an A rating by S&P or the equivalent rating by Moody’s, we would not have been required to post any additional collateral to our counterparties. As of September 30, 2018, we received cash collateral of $472 million from various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. With respect to the collateral received, the obligations are reported in Short-term borrowings, including current portion of long-term debt. G. Credit Risk On an ongoing basis, we review the creditworthiness of counterparties to our foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements. There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty, except for certain significant customers. For additional information as to significant customers, see Notes to Consolidated Financial Statements––Note 18C. Segment, Geographic and Other Revenue Information: Other Revenue Information in Pfizer’s 2017 Financial Report. As of September 30, 2018, we had amounts due from a well-diversified, high quality group of banks ($2.1 billion) from around the world. For details about our investments, see Note 7B above. In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under credit-support agreements that provide for the ability to request to receive cash collateral, depending on levels of exposure, our credit rating and the credit rating of the counterparty, see Note 7F above.

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- Definition The entire disclosure for financial instruments. This disclosure includes, but is not limited to, fair value measurements of short and long term marketable securities, international currencies forward contracts, and auction rate securities. Financial instruments may include hedging and non-hedging currency exchange instruments, derivatives, securitizations and securities available for sale at fair value. Also included are investment results, realized and unrealized gains and losses as well as impairments and risk management disclosures. + References No definition available. + Details
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