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RISK MANAGEMENT AND DERIVATIVES | 9 Months Ended
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Feb. 28, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
RISK MANAGEMENT AND DERIVATIVES |
NOTE 9 — RISK MANAGEMENT AND DERIVATIVES
The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. As of and for the nine months ended February 28, 2023, there have been no material changes to the Company's hedging program or strategy from what was disclosed within the Annual Report on Form 10-K. For additional information about the Company's derivatives and hedging policies, refer to Note 1 — Summary of Significant Accounting Policies and Note 14 — Risk Management and Derivatives of the Annual Report on Form 10-K for the fiscal year ended May 31, 2022. The majority of derivatives outstanding as of February 28, 2023, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, Chinese Yuan/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs. All derivatives are recognized on the Unaudited Condensed Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. The following tables present the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets:
| DERIVATIVE ASSETS
| BALANCE SHEET LOCATION | FEBRUARY 28, |  | MAY 31,
(Dollars in millions) | 2023 |  | 2022
Derivatives formally designated as hedging instruments: |  |  |  |
Foreign exchange forwards and options | Prepaid expenses and other current assets | $ | 530 |  |  | $ | 639 |
Foreign exchange forwards and options | Deferred income taxes and other assets | 100 |  |  | 206 |
Total derivatives formally designated as hedging instruments |  | 630 |  |  | 845 |
Derivatives not designated as hedging instruments: |  |  |  |
Foreign exchange forwards and options | Prepaid expenses and other current assets | 21 |  |  | 30 |
Embedded derivatives | Prepaid expenses and other current assets | 5 |  |  | 5 |
Total derivatives not designated as hedging instruments |  | 26 |  |  | 35 |
TOTAL DERIVATIVE ASSETS |  | $ | 656 |  |  | $ | 880 |
| DERIVATIVE LIABILITIES
| BALANCE SHEET LOCATION | FEBRUARY 28, |  | MAY 31,
(Dollars in millions) | 2023 |  | 2022
Derivatives formally designated as hedging instruments: |  |  |  |
Foreign exchange forwards and options | Accrued liabilities | $ | 93 |  |  | $ | 37 |
Foreign exchange forwards and options | Deferred income taxes and other liabilities | 64 |  |  | 11 |
Total derivatives formally designated as hedging instruments |  | 157 |  |  | 48 |
Derivatives not designated as hedging instruments: |  |  |  |
Foreign exchange forwards and options | Accrued liabilities | 19 |  |  | 28 |
Embedded derivatives | Accrued liabilities | 2 |  |  | 1 |
Total derivatives not designated as hedging instruments |  | 21 |  |  | 29 |
TOTAL DERIVATIVE LIABILITIES |  | $ | 178 |  |  | $ | 77 |
The following tables present the amounts in the Unaudited Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items:
| THREE MONTHS ENDED FEBRUARY 28,
| 2023 |  | 2022
(Dollars in millions) | TOTAL | AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY |  | TOTAL | AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY
Revenues | $ | 12,390 |  | $ | 14 |  |  | $ | 10,871 |  | $ | (22) |
Cost of sales | 7,019 |  | 182 |  |  | 5,804 |  | 17 |
Demand creation expense | 923 |  | (1) |  |  | 854 |  | — |
Other (income) expense, net | (58) |  | 90 |  |  | (94) |  | 45 |
Interest expense (income), net | (7) |  | (2) |  |  | 53 |  | (2) |
| NINE MONTHS ENDED FEBRUARY 28,
| 2023 |  | 2022
(Dollars in millions) | TOTAL | AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY |  | TOTAL | AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY
Revenues | $ | 38,392 |  | $ | 9 |  |  | $ | 34,476 |  | $ | (63) |
Cost of sales | 21,695 |  | 464 |  |  | 18,500 |  | (79) |
Demand creation expense | 2,968 |  | (4) |  |  | 2,789 |  | 1 |
Other (income) expense, net | (283) |  | 297 |  |  | (235) |  | 56 |
Interest expense (income), net | 22 |  | (6) |  |  | 165 |  | (5) |
The following tables present the amounts affecting the Unaudited Condensed Consolidated Statements of Income:
(Dollars in millions) | AMOUNT OF GAIN (LOSS) RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES(1) |  | AMOUNT OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME(1)
THREE MONTHS ENDED FEBRUARY 28, |  | LOCATION OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME |  | THREE MONTHS ENDED FEBRUARY 28,
2023 | 2022 |  |  | 2023 | 2022
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |
Foreign exchange forwards and options | $ | 30 |  | $ | (37) |  |  | Revenues |  | $ | 14 |  | $ | (22) |
Foreign exchange forwards and options | (141) |  | 4 |  |  | Cost of sales |  | 182 |  | 17 |
Foreign exchange forwards and options | 1 |  | — |  |  | Demand creation expense |  | (1) |  | — |
Foreign exchange forwards and options | (65) |  | 31 |  |  | Other (income) expense, net |  | 90 |  | 45 |
Interest rate swaps(2) | — |  | — |  |  | Interest expense (income), net |  | (2) |  | (2) |
TOTAL DESIGNATED CASH FLOW HEDGES | $ | (175) |  | $ | (2) |  |  |  |  | $ | 283 |  | $ | 38 |
(1)For the three months ended February 28, 2023 and 2022, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. (2)Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt.
(Dollars in millions) | AMOUNT OF GAIN (LOSS) RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES(1) |  | AMOUNT OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME(1)
NINE MONTHS ENDED FEBRUARY 28, |  | LOCATION OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME |  | NINE MONTHS ENDED FEBRUARY 28,
2023 | 2022 |  |  | 2023 | 2022
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |
Foreign exchange forwards and options | $ | 52 |  | $ | (74) |  |  | Revenues |  | $ | 9 |  | $ | (63) |
Foreign exchange forwards and options | 245 |  | 522 |  |  | Cost of sales |  | 464 |  | (79) |
Foreign exchange forwards and options | (2) |  | (3) |  |  | Demand creation expense |  | (4) |  | 1 |
Foreign exchange forwards and options | 181 |  | 304 |  |  | Other (income) expense, net |  | 297 |  | 56 |
Interest rate swaps(2) | — |  | — |  |  | Interest expense (income), net |  | (6) |  | (5) |
TOTAL DESIGNATED CASH FLOW HEDGES | $ | 476 |  | $ | 749 |  |  |  |  | $ | 760 |  | $ | (90) |
(1)For the nine months ended February 28, 2023 and 2022, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. (2)Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt.
| AMOUNT OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES | LOCATION OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
| THREE MONTHS ENDED FEBRUARY 28, |  | NINE MONTHS ENDED FEBRUARY 28,
(Dollars in millions) | 2023 | 2022 |  | 2023 | 2022
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Foreign exchange forwards and options | $ | (12) |  | $ | (20) |  |  | $ | 32 |  | $ | 12 |  | Other (income) expense, net
Embedded derivatives | (14) |  | — |  |  | 20 |  | (9) |  | Other (income) expense, net
CASH FLOW HEDGES All changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Unaudited Condensed Consolidated Statements of Income in the same manner as the underlying exposure. When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period, hedge accounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below. Additionally, the gains and losses associated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income (loss) are recognized immediately in Other (income) expense, net, if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-month period thereafter. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the Company. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was approximately $19.5 billion as of February 28, 2023. Approximately $495 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) as of February 28, 2023, are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of February 28, 2023, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 27 months. UNDESIGNATED DERIVATIVE INSTRUMENTS The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Unaudited Condensed Consolidated Balance Sheets and/or embedded derivative contracts. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the remeasurement gain or loss from the hedged balance sheet position and/or embedded derivative contract. The total notional amount of outstanding undesignated derivative instruments was $4.7 billion as of February 28, 2023. EMBEDDED DERIVATIVES Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, through the date the foreign currency fluctuations cease to exist. As of February 28, 2023, the total notional amount of embedded derivatives outstanding was approximately $460 million. CREDIT RISK The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could trigger collateral requirements. As of February 28, 2023, the Company was in compliance with all credit risk-related contingent features, and derivative instruments with such features were in a net asset position of approximately $475 million. Accordingly, the Company was not required to post cash collateral as a result of these contingent features. Further, $100 million of collateral was received on the Company's derivative asset balance as of February 28, 2023. The Company considers the impact of the risk of counterparty default to be immaterial. For additional information related to the Company's derivative financial instruments and collateral, refer to Note 4 — Fair Value Measurements.

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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 https://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 https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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