FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURES

12 Months Ended

Dec. 31, 2019

Financial Instruments And Fair Value Measures [Abstract]

Financial Instruments and Fair Value Measures

Credit and Market Risk—Financial instruments, including derivatives, expose the Company to counterparty credit risk for nonperformance and to market risk related to changes in interest and currency exchange rates. Our counterparties in derivative transactions are substantial investment and commercial banks with significant experience using such derivative instruments.

The Company continually monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. Our sales are not materially dependent on a single customer or a small group of customers.

Foreign Currency Risk Management—The Company conducts business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our primary objective is to preserve the U.S. Dollar value of foreign currency denominated cash flows and earnings. We monitor our collective foreign currency exposure and enter into foreign currency exchange forward and option contracts (foreign currency exchange contracts) with third parties, when necessary, to minimize the impact of changes in foreign currency exchange rates.

The Company has monetary assets and liabilities denominated in non-functional currencies. Prior to conversion into U.S. dollars, these assets and liabilities are remeasured at spot exchange rates in effect on the balance sheet date. The effects of changes in spot rates are recognized in earnings and included in other (income) expense. We may purchase or enter into derivative instruments to hedge our foreign currency exposure. We hedge forecasted sales and purchases, which are denominated in non-functional currencies, with foreign currency exchange contracts. Changes in the forecasted non-functional currency cash flows due to movements in exchange rates are substantially offset by changes in the fair value of these foreign currency exchange contracts designated as hedges. Market value gains and losses on these contracts are recognized in earnings when the hedged transaction is recognized. As of December 31, 2019 and 2018, we had contracts with notional amounts of $12,746 million and $14,995 million to exchange foreign currencies, principally the U.S. Dollar, Euro, Canadian Dollar, British Pound, Mexican Peso, Chinese Renminbi, Indian Rupee, Malaysian Ringgit, and Swiss Franc. As of December 31, 2019, we estimate that approximately $52 million of net derivative gains related to our cash flow hedges included in Accumulated other comprehensive income (loss) will be reclassified into earnings within the next 12 months.

The Company has also designated foreign currency debt and certain derivative contracts as hedges against portions of its net investment in foreign operations during the year ended December 31, 2019. Gains or losses of the foreign currency debt and derivative contracts designated as a net investment hedge are recorded in the same manner as foreign currency translation adjustments.

Interest Rate Risk Management—Financial instruments, including derivatives, expose the Company to market risk related to changes in interest rates. The Company uses a combination of financial instruments, including long-term, medium-term and short-term financing, variable-rate commercial paper, and interest rate swaps to manage the interest rate mix of our total debt portfolio and related overall cost of borrowing. At December 31, 2019 and 2018, interest rate swap agreements designated as fair value hedges effectively changed $3,950 million and $2,600 million of fixed rate debt at 2.87% and 2.93% to LIBOR based floating rate debt. Our interest rate swaps mature at various dates through 2029.

Fair Value of Financial Instruments—The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy.


•	Level 1-Inputs are based on quoted prices in active markets for identical assets and liabilities.


•	Level 2-Inputs are based on observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.


•	Level 3-One or more inputs are unobservable and significant.

Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2019 and 2018:



	December 31,
	2019		2018
Assets:
Foreign currency exchange contracts	$	291	$	119
Available for sale investments	1,523		1,784
Interest rate swap agreements	38		20
Cross currency swap agreements	51		32
Liabilities:
Foreign currency exchange contracts	$	21	$	4
Interest rate swap agreements	13		65

The foreign currency exchange contracts, interest rate swap agreements, and cross currency swap agreements are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are classified within level 2. The Company also holds investments in commercial paper, certificates of deposits, and time deposits that are designated as available for sale and are valued using published prices based off observable market data. As such, these investments are classified within level 2. The Company also holds available for sale investments in U.S. government and corporate debt securities valued utilizing published prices based on quoted market pricing, which are classified within level 1.

The carrying value of cash and cash equivalents, trade accounts and notes receivables, payables, commercial paper (of which $3,513 million and $3,583 million was Euro denominated as of December 31, 2019 and 2018) and short-term borrowings contained in the Consolidated Balance Sheet approximates fair value.

The following table sets forth the Company’s financial assets and liabilities that were not carried at fair value:



	December 31, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Long-term receivables	$	129	$	127	$	333	$	329
Liabilities
Long-term debt and related current maturities	$	12,486	$	13,578	$	12,628	$	13,133

The following table sets forth the amounts recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:



Line in the Consolidated Balance Sheet of Hedged Item	Carrying Amount of the Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Item
Line in the Consolidated Balance Sheet of Hedged Item	December 31, 2019		December 31, 2018		December 31, 2019		December 31, 2018
Long-term debt	$	3,975	$	2,555	$	25	$	(45	)

The Company determined the fair value of the long-term receivables by utilizing transactions in the listed markets for identical or similar assets. As such, the fair value of these receivables is considered level 2. The Company determined the fair value of the long-term debt and related current maturities utilizing transactions in the listed markets for identical or similar liabilities. As such, the fair value of the long-term debt and related current maturities is considered level 2.

Interest rate swap agreements are designated as hedge relationships with gains or losses on the derivative recognized in interest and other financial charges offsetting the gains and losses on the underlying debt being hedged. Gains and losses on interest rate swap agreements recognized in earnings were $70 million of income, $37 million of expense and $29 million of expense in the years ended December 31, 2019, 2018 and 2017. Gains and losses are fully offset by losses and gains on the underlying debt being hedged.

The Company economically hedges its exposure to changes in foreign exchange rates principally with forward contracts. These contracts are marked-to-market with the resulting gains and losses recognized in earnings offsetting the gains and losses on the non-functional currency denominated monetary assets and liabilities being hedged. We recognized $106 million of income, $394 million of income, and $207 million of expense in Other (income) expense in the years ended December 31, 2019, 2018 and 2017.

The following tables summarize the location and impact to the Consolidated Statement of Operations related to fair value and cash flow hedging relationships:



	Year Ended December 31, 2019
	Revenue		Cost of Products Sold		SG&A		Other (Income) Expense			Interest and Other Financial Charges
	$	36,709	$	19,269	$	5,519	$	(1,065	)	$	357
Gain or (loss) on cash flow hedges:
Foreign Currency Exchange Contracts:
Amount reclassified from accumulated other comprehensive income into income	3		44		1		73			—
Amount excluded from effectiveness testing recognized in earnings using an amortization approach	—		22		—		35			—
Gain or (loss) on fair value hedges:
Interest Rate Swap Agreements:
Hedged Items	—		—		—		—			(70		)
Derivatives designated as hedges	—		—		—		—			70



	Year Ended December 31, 2018
	Revenue			Cost of Products Sold			SG&A			Other (Income) Expense			Interest and Other Financial Charges
	$	41,802		$	23,634		$	6,051		$	(1,149	)	$	367
Gain or (loss) on cash flow hedges:
Foreign Currency Exchange Contracts:
Amount reclassified from accumulated other comprehensive income into income	(9		)	(35		)	(2		)	47			—
Amount excluded from effectiveness testing recognized in earnings using an amortization approach	—			6			—			9			—
Gain or (loss) on fair value hedges:
Interest Rate Swap Agreements:
Hedged Items	—			—			—			—			37
Derivatives designated as hedges	—			—			—			—			(37		)

The following table summarizes the amounts of gain or (loss) on net investment hedges recognized in Accumulated other comprehensive income (loss):



Derivatives Net Investment Hedging Relationships	Years Ended December 31,
Derivatives Net Investment Hedging Relationships	2019		2018
Euro-denominated long-term debt	$	68	$	177
Euro-denominated commercial paper	71		168
Cross currency swap	32		44
Foreign currency exchange contracts	23		—