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Financial Instruments | 9 Months Ended
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Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Financial Instruments | Financial Instruments: Altria enters into derivative financial instruments to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria uses various types of derivative financial instruments, including forward contracts, options and swaps. Altria does not enter into or hold derivative financial instruments for trading or speculative purposes. Altria’s investment in ABI, whose functional currency is the Euro, exposes Altria to foreign currency exchange risk on the carrying value of its investment. To manage this risk, Altria designates certain foreign exchange contracts, including cross-currency swap contracts and forward contracts (collectively, “foreign currency contracts”), and Euro denominated unsecured long-term notes (“foreign currency denominated debt”) as net investment hedges of Altria’s investment in ABI. At September 30, 2020 and December 31, 2019, Altria had foreign currency contracts with aggregate notional amounts of $1,402 million and $2,246 million, respectively. At September 30, 2020, Altria had foreign currency denominated debt with an aggregate fair value and carrying value of $5,368 million and $4,960 million, respectively. At December 31, 2019, Altria had foreign currency denominated debt with an aggregate fair value and carrying value of $5,057 million and $4,741 million, respectively. Altria’s estimates of the fair values of its foreign currency contracts are determined using valuation models with significant inputs that are readily available in public markets, or can be derived from observable market transactions, and therefore are classified in Level 2 of the fair value hierarchy. An adjustment for credit risk and nonperformance risk is included in the fair values of foreign currency contracts. Altria’s estimate of the fair value of its total long-term debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria’s total long-term debt at September 30, 2020 and December 31, 2019 was $33.8 billion and $30.7 billion, respectively, as compared with its carrying value of $29.3 billion and $28.0 billion, respectively. The Fixed-price Preemptive Rights and Cronos warrant, which are further discussed in Note 4. Investments in Equity Securities, are derivative financial instruments, which are required to be recorded at fair value. The fair values of the Fixed-price Preemptive Rights and Cronos warrant are estimated using Black-Scholes option-pricing models, adjusted for observable inputs (which are classified in Level 1 of the fair value hierarchy), including share price, and unobservable inputs, including probability factors and weighting of expected life, volatility levels and risk-free interest rates (which are classified in Level 3 of the fair value hierarchy) based on the following assumptions at:
|  | September 30, 2020 |  | December 31, 2019 |  | September 30, 2020 |  | December 31, 2019 |  |  |  |
|  | Fixed-price Preemptive Rights |  | Cronos Warrant |  |  |  |
Share price (1) |  | C$6.69 |  | C$9.97 |  | C$6.69 |  | C$9.97 |  |  |  |
Expected life (2) |  | 1.18 years |  | 1.67 years |  | 2.43 years |  | 3.18 years |  |  |  |
Expected volatility (3) |  | 80.68% |  | 81.61% |  | 80.68% |  | 81.61% |  |  |  |
Risk-free interest rate (4)(5) |  | 0.20% |  | 1.71% |  | 0.25% |  | 1.69% |  |  |  |
Expected dividend yield (6) |  | —% |  | —% |  | —% |  | —% |  |  |  |
(1) Based on the closing market price for Cronos common stock on the Toronto Stock Exchange on the date indicated. (2) Based on the weighted-average expected life of the Fixed-price Preemptive Rights (with a range from approximately 0.25 year to 5.25 years at September 30, 2020 and 0.25 year to 6 years at December 31, 2019) and the March 8, 2023 expiration date of the Cronos warrant. (3) Based on a blend of historical volatility levels of the underlying equity security and peer companies. (4) Based on the implied yield currently available on Canadian Treasury zero coupon issues (with a range from approximately 0.12% to 0.36% at September 30, 2020 and 1.66% to 1.74% at December 31, 2019) weighted for the remaining expected life of the Fixed-price Preemptive Rights. (5) Based on the implied yield currently available on Canadian Treasury zero coupon issues and the expected life of the Cronos warrant. (6) Based on Cronos’s expected dividend payments. The following table provides a reconciliation of the beginning and ending balance of the Fixed-price Preemptive Rights and Cronos warrant, which are classified in Level 3 of the fair value hierarchy:
|  | (in millions)
Balance at December 31, 2019 |  | $ | 303 |
Pre-tax earnings (losses) recognized in net earnings |  | (202) |
Balance at September 30, 2020 |  | $ | 101 |
Altria elects to record the gross assets and liabilities of derivative financial instruments executed with the same counterparty on its condensed consolidated balance sheets. The fair values of Altria’s derivative financial instruments on a gross basis included on the condensed consolidated balance sheets were as follows:
| Fair Value of Assets |  | Fair Value of Liabilities
| Balance Sheet Classification |  | September 30, 2020 |  | December 31, 2019 |  | Balance Sheet Classification | September 30, 2020 |  | December 31, 2019
Derivatives designated as hedging instruments: | (in millions)
Foreign currency contracts | Other current assets |  | $ | 3 |  |  | $ | 46 |  |  | Other accrued liabilities | $ | 39 |  |  | $ | 7 |
Foreign currency contracts | Other assets |  | — |  |  | — |  |  | Other liabilities | 16 |  |  | 21 |
Total |  | $ | 3 |  |  | $ | 46 |  |  |  | $ | 55 |  |  | $ | 28 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Cronos warrant | Investments in equity securities |  | $ | 86 |  |  | $ | 234 |  |  |  |  |  |
Fixed-price Preemptive Rights | Investments in equity securities |  | 15 |  |  | 69 |  |  |  |  |  |
Total |  |  | $ | 101 |  |  | $ | 303 |  |  |  |  |  |
Total derivatives |  |  | $ | 104 |  |  | $ | 349 |  |  |  | $ | 55 |  |  | $ | 28 |
Altria records in its condensed consolidated statements of earnings any changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant as gains or losses on Cronos-related financial instruments in the periods in which the changes occur. For the nine and three months ended September 30, 2020 and 2019, Altria recognized pre-tax unrealized gains/(losses), representing the changes in the fair values of the Fixed-price Preemptive Rights and Cronos warrant, as follows:
| For the Nine Months Ended September 30, |  | For the Three Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
| (in millions)
Fixed-price Preemptive Rights | $ | (54) |  |  | $ | (400) |  |  | $ | (25) |  |  | $ | (188) |
Cronos warrant | (148) |  |  | (896) |  |  | (80) |  |  | (448) |
| $ | (202) |  |  | $ | (1,296) |  |  | $ | (105) |  |  | $ | (636) |
Additionally, in January and February 2019, Altria entered into derivative financial instruments in the form of forward contracts, which were settled in March 2019, to hedge Altria’s exposure to CAD to USD foreign currency exchange rate movements, in relation to the CAD $2.4 billion purchase price for the Cronos transaction. The aggregate notional amounts of the forward contracts were USD $1.8 billion (CAD $2.4 billion). The forward contracts did not qualify for hedge accounting; therefore, in the first quarter of 2019, pre-tax losses of USD $31 million representing changes in the fair values of the forward contracts were recorded in loss on Cronos-related financial instruments in Altria’s condensed consolidated statement of earnings. Counterparties to Altria’s foreign currency contracts are domestic and international financial institutions. Altria is exposed to potential losses due to non-performance by these counterparties. Altria manages its credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure Altria has with each counterparty and monitoring the financial condition of each counterparty. The counterparty agreements contain provisions that require Altria to maintain an investment grade credit rating. In the event Altria’s credit rating falls below investment grade, counterparties to Altria’s foreign currency contracts can require Altria to post collateral. No collateral was received or posted related to derivative assets and liabilities at September 30, 2020 and December 31, 2019. Net Investment Hedging The pre-tax effects of Altria’s net investment hedges on accumulated other comprehensive losses and the condensed consolidated statements of earnings were as follows:
|  | Gain (Loss) Recognized in Accumulated Other Comprehensive Losses |  | Gain (Loss) Recognized in Net Earnings (Losses) (1) |  | Gain (Loss) Recognized in Accumulated Other Comprehensive Losses |  | Gain (Loss) Recognized in Net Earnings (Losses) (1)
|  | For the Nine Months Ended September 30, |  | For the Three Months Ended September 30,
|  | 2020 |  | 2019 |  | 2020 |  | 2019 |  | 2020 |  | 2019 |  | 2020 |  | 2019
|  | (in millions)
Foreign currency contracts |  | $ | (28) |  |  | $ | 70 |  |  | $ | 33 |  |  | $ | 26 |  |  | $ | (66) |  |  | $ | 57 |  |  | $ | 8 |  |  | $ | 10 |
Foreign currency denominated debt |  | (215) |  |  | 168 |  |  | — |  |  | — |  |  | (206) |  |  | 200 |  |  | — |  |  | — |
Total |  | $ | (243) |  |  | $ | 238 |  |  | $ | 33 |  |  | $ | 26 |  |  | $ | (272) |  |  | $ | 257 |  |  | $ | 8 |  |  | $ | 10 |
(1) Related to amounts excluded from effectiveness testing. The changes in the fair value of the foreign currency contracts and in the carrying value of the foreign currency denominated debt due to changes in the Euro to USD exchange rate were recognized in accumulated other comprehensive losses related to ABI. Gains on the foreign currency contracts arising from components excluded from effectiveness testing were recognized in interest and other debt expense, net in the condensed consolidated statements of earnings based on an amortization approach.

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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 + Details
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