Note 9. Financial Instruments

Fair Value of Derivative Instruments:

Derivative instruments were recorded at fair value in the consolidated balance sheets as follows:


	As of December 31,
	2014				2013
	Asset		Liability		Asset		Liability
	Derivatives		Derivatives		Derivatives		Derivatives
	(in millions)

Derivatives designated as accounting hedges:
Currency exchange contracts	$	69	$	17	$	3	$	11
Commodity contracts		12		33		2		3
Interest rate contracts		13		42		209		–

	$	94	$	92	$	214	$	14

Derivatives not designated as accounting hedges:
Currency exchange contracts	$	735	$	24	$	84	$	8
Commodity contracts		90		194		60		51
Interest rate contracts		59		39		64		38

	$	884	$	257	$	208	$	97

Total fair value	$	978	$	349	$	422	$	111

During 2014 and 2013, derivatives designated as accounting hedges include cash flow and fair value hedges and derivatives not designated as accounting hedges include economic hedges. Non-U.S. debt designated as a hedge of our net investments in non-U.S. operations is not reflected in the table above, but is included in long-term debt summarized in Note 8, Debt and Borrowing Arrangements. We record derivative assets and liabilities on a gross basis in our consolidated balance sheet. The fair value of our asset derivatives is recorded within other current assets and the fair value of our liability derivatives is recorded within other current liabilities.

The fair values (asset / (liability)) of our derivative instruments were determined using:


	As of December 31, 2014
				Quoted Prices in
				Active Markets			Significant			Significant
	Total			for Identical			Other Observable			Unobservable
	Fair Value of Net			Assets			Inputs			Inputs
	Asset / (Liability)			(Level 1)			(Level 2)			(Level 3)
	(in millions)

Currency exchange contracts	$	763		$	–		$	763		$	–
Commodity contracts		(125	)		(49	)		(76	)		–
Interest rate contracts		(9	)		–			(9	)		–

Total derivatives	$	629		$	(49	)	$	678		$	–


	As of December 31, 2013
				Quoted Prices in
				Active Markets			Significant			Significant
	Total			for Identical			Other Observable			Unobservable
	Fair Value of Net			Assets			Inputs			Inputs
	Asset /(Liability)			(Level 1)			(Level 2)			(Level 3)
	(in millions)

Currency exchange contracts	$	68		$	–		$	68		$	–
Commodity contracts		8			(4	)		12			–
Interest rate contracts		235			–			235			–

Total derivatives	$	311		$	(4	)	$	315		$	–

Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges. Our exchange-traded derivatives are generally subject to master netting arrangements that permit net settlement of transactions with the same counterparty when certain criteria are met, such as in the event of default. We also are required to maintain cash margin accounts in connection with funding the settlement of our open positions, and the margin requirements generally fluctuate daily based on market conditions. We have recorded margin deposits related to our exchange-traded derivatives of $84 million as of December 31, 2014 and $21 million as of December 31, 2013 within other current assets. Based on our net asset or liability positions with individual counterparties, in the event of default and immediate net settlement of all of our open positions, for derivatives we have in a net liability position, we would owe $3 million as of December 31, 2014, and for derivatives we have in a net asset position, our counterparties would owe us a total of $38 million as of December 31, 2014 and $17 million as of December 31, 2013.

Level 2 financial assets and liabilities consist primarily of over-the-counter (“OTC”) currency exchange forwards, options and swaps; commodity forwards and options; and interest rate swaps. Our currency exchange contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk. Our OTC derivative transactions are governed by International Swap Dealers Association agreements and other standard industry contracts. Under these agreements, we do not post nor require collateral from our counterparties. The majority of our commodity and currency exchange OTC derivatives do not have a legal right of set-off. In connection with our OTC derivatives that could be net-settled in the event of default, assuming all parties were to fail to comply with the terms of the agreements, for derivatives we have in a net liability position, we would owe $156 million as of December 31, 2014 and $40 million as of December 31, 2013, and for derivatives we have in a net asset position, our counterparties would owe us a total of $72 million as of December 31, 2014 and $275 million as of December 31, 2013. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.

Derivative Volume:

The net notional values of our derivative instruments were:


	Notional Amount
	As of December 31,
	2014		2013
	(in millions)

Currency exchange contracts:
Intercompany loans and forecasted interest payments	$	3,640	$	4,369
Forecasted transactions		6,681		2,565
Commodity contracts		1,569		805
Interest rate contracts		3,970		2,273
Net investment hedge – euro notes		3,932		4,466
Net investment hedge – pound sterling notes		545		1,076

Cash Flow Hedges:

Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings / (losses) included:


	For the Years Ended December 31,
	2014			2013			2012
	(in millions)

Accumulated gain / (loss) at January 1	$	117		$	(38	)	$	(297	)
Transfer of realized (gains) / losses to earnings		(40	)		53			312
Unrealized gain / (loss)		(79	)		102			(75	)
Discontinued operations		–			–			(134	)
Impact of Spin-Off		–			–			156

Accumulated gain / (loss) at December 31	$	(2	)	$	117		$	(38	)

After-tax gains / (losses) reclassified from accumulated other comprehensive earnings / (losses) into net earnings were:


	For the Years Ended December 31,
	2014			2013			2012
	(in millions)
Currency exchange contracts - forecasted transactions	$	26		$	(26	)	$	58
Commodity contracts		16			(23	)		(10	)
Interest rate contracts		(2	)		(4	)		(360	)

Total	$	40		$	(53	)	$	(312	)

After-tax gains / (losses) recognized in other comprehensive earnings / (losses) were:


	For the Years Ended December 31,
	2014			2013			2012
	(in millions)
Currency exchange contracts - forecasted transactions	$	82		$	(23	)	$	(16	)
Commodity contracts		(2	)		3			(24	)
Interest rate contracts		(159	)		122			(35	)

Total	$	(79	)	$	102		$	75

Pre-tax gains / (losses) on ineffectiveness recognized in net earnings from continuing operations were:


	For the Years Ended December 31,
	2014			2013		2012
	(in millions)

Commodity contracts	$	(10	)	$	1	$	(3	)
Interest rate contracts		–			–		(23	)

Total	$	(10	)	$	1	$	(26	)

Pre-tax gains / (losses) on amounts excluded from effectiveness testing recognized in net earnings from continuing operations included a pre-tax loss of $556 million we recognized in 2012 within interest and other expense, net related to certain forward-starting interest rate swaps for which the planned timing of the related forecasted debt was changed in connection with our Spin-Off plans and related debt capitalization plans.

We record pre-tax and after-tax (i) gains or losses reclassified from accumulated other comprehensive earnings / (losses) into earnings, (ii) gains or losses on ineffectiveness and (iii) gains or losses on amounts excluded from effectiveness testing in:

•

cost of sales for commodity contracts;

•

cost of sales for currency exchange contracts related to forecasted transactions; and

•

interest and other expense, net for interest rate contracts and currency exchange contracts related to intercompany loans.

Based on current market conditions, we would expect to transfer unrealized losses of $20 million (net of taxes) for commodity cash flow hedges, unrealized gains of $53 million (net of taxes) for currency cash flow hedges and unrealized losses of $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Hedge Coverage:

As of December 31, 2014, we hedged transactions forecasted to impact cash flows over the following periods:

•

commodity transactions for periods not exceeding the next 15 months;

•

interest rate transactions for periods not exceeding the next 31 years and 2 months; and

•

currency exchange transactions for periods not exceeding the next 4 years and 10 months.

Fair Value Hedges:

Pre-tax gains / (losses) due to changes in fair value of our interest rate swaps and related hedged long-term debt were recorded in interest and other expense, net:


	For the Years Ended December 31,
	2014			2013		2012
				(in millions)

Derivatives	$	13		$	–	$	(2	)
Borrowings		(13	)		–		2

Fair value hedge ineffectiveness and amounts excluded from effectiveness testing were not material for all periods presented.

Economic Hedges:

Pre-tax gains / (losses) recorded in net earnings for economic hedges were:


	For the Years Ended December 31,									Location of Gain / (Loss) Recognized in Earnings
	2014			2013			2012
	(in millions)

Currency exchange contracts:
Intercompany loans and forecasted interest payments	$	4		$	18		$	24		Interest and other expense, net
Forecasted transactions		29			65			7		Cost of sales
Forecasted transactions		610			9			(17	)	Interest and other expense, net
Forecasted transactions		(4	)		4			–		Selling, general and administrative expenses
Interest rate contracts		–			–			3		Interest and other expense, net
Commodity contracts		(136	)		(40	)		(49	)	Cost of sales

Total	$	503		$	56		$	(32	)

In connection with the planned coffee business transactions, we entered into euro to U.S. dollar currency exchange forward contracts to hedge an expected cash receipt of €4 billion upon closing. As the forward contracts relate to a pending business divestiture, unrealized gains and losses on the derivative are recorded in earnings. We recorded a $628 million unrealized gain for the year ended December 31, 2014 within interest and other expense, net in connection with the forward contracts as the U.S. dollar strengthened relative to the euro. See Note 2, Divestitures and Acquisitions—Planned Coffee Business Transactions, for additional information on the monetization of the currency exchange forward contracts in the first quarter of 2015.

Hedges of Net Investments in International Operations:

After-tax gains / (losses) related to hedges of net investments in international operations in the form of euro and pound sterling-denominated debt were:


									Location of
	For the Years Ended December 31,								Gain / (Loss)
	2014		2013			2012			Recognized in AOCI
			(in millions)

Euro notes	$	328	$	(50	)	$	(41	)	Currency Translation
Pound sterling notes		39		(13	)		(29	)	Adjustment