Note 8. Financial Instruments

Fair Value of Derivative Instruments:

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


	As of September 30, 2015				As of December 31, 2014
	Asset		Liability		Asset		Liability
	Derivatives		Derivatives		Derivatives		Derivatives
	(in millions)

Derivatives designated as accounting hedges:
Currency exchange contracts	$	23	$	4	$	69	$	17
Commodity contracts		12		25		12		33
Interest rate contracts		22		69		13		42

	$	57	$	98	$	94	$	92


Derivatives not designated as accounting hedges:
Currency exchange contracts	$	61	$	23	$	735	$	24
Commodity contracts		80		98		90		194
Interest rate contracts		44		29		59		39

	$	185	$	150	$	884	$	257

Total fair value	$	242	$	248	$	978	$	349

We record derivative assets and liabilities on a gross basis in our condensed 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. See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2014 for additional information on our risk management strategies and use of derivatives and related accounting.

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


	As of September 30, 2015
	Total Fair Value of Net Asset / (Liability)			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in millions)

Currency exchange contracts	$	57		$	–		$	57		$	–
Commodity contracts		(31	)		(7	)		(24	)		–
Interest rate contracts		(32	)		–			(32	)		–

Total derivatives	$	(6	)	$	(7	)	$	1		$	–


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

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

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

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 $40 million as of September 30, 2015 and $84 million as of December 31, 2014 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 $32 million as of September 30, 2015 and $38 million as of December 31, 2014.

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 $117 million as of September 30, 2015 and $156 million as of December 31, 2014, and for derivatives we have in a net asset position, our counterparties would owe us a total of $66 million as of September 30, 2015 and $72 million as of December 31, 2014. 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 September 30,		As of December 31,
	2015		2014
	(in millions)

Currency exchange contracts:
Intercompany loans and forecasted interest payments	$	3,657	$	3,640
Forecasted transactions		1,660		6,681
Commodity contracts		617		1,569
Interest rate contracts		3,051		3,970
Net investment hedge – euro notes		4,471		3,932
Net investment hedge – pound sterling notes		1,210		545
Net investment hedge – Swiss franc notes		694		–

Cash Flow Hedges:

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
	(in millions)

Accumulated gain / (loss) at beginning of period	$	(53	)	$	44		$	(2	)	$	117
Transfer of realized losses / (gains) in fair value to earnings		60			(17	)		6			(20	)
Unrealized gain / (loss) in fair value		(69	)		47			(66	)		(23	)

Accumulated gain / (loss) at end of period	$	(62	)	$	74		$	(62	)	$	74

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


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2015			2014		2015			2014
	(in millions)

Currency exchange contracts – forecasted transactions	$	(11	)	$	12	$	73		$	8
Commodity contracts		(49	)		5		(53	)		14
Interest rate contracts		–			–		(26	)		(2	)

Total	$	(60	)	$	17	$	(6	)	$	20

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
	(in millions)

Currency exchange contracts – forecasted transactions	$	8		$	58		$	33		$	65
Commodity contracts		(38	)		7			(61	)		10
Interest rate contracts		(39	)		(18	)		(38	)		(98	)

Total	$	(69	)	$	47		$	(66	)	$	(23	)

Cash flow hedge ineffectiveness was not material for all periods presented.

Pre-tax gains / (losses) on amounts excluded from effectiveness testing recognized in net earnings from continuing operations included a pre-tax loss of $34 million recognized in the three months ended March 31, 2015 within interest and other expense / (income) related to certain U.S. dollar interest rate swaps that we no longer designate as accounting cash flow hedges due to a change in financing and hedging plans. In the first quarter, our plans to issue U.S. dollar debt changed and we issued euro, British pound sterling and Swiss franc-denominated notes due to lower overall cost and our decision to hedge a greater portion of our net investments in operations that use these currencies as their functional currencies. In the second and third quarters of 2015 and the prior-year periods, amounts excluded from effectiveness testing were not material.

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 / (income) 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 $28 million (net of taxes) for commodity cash flow hedges, unrealized gains of $10 million (net of taxes) for currency cash flow hedges and unrealized losses of $2 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Hedge Coverage:

As of September 30, 2015, 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 30 years and 5 months; and

•

currency exchange transactions for periods not exceeding the next 15 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 / (income):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
	(in millions)

Derivatives	$	4		$	(13	)	$	8		$	1
Borrowings		(4	)		13			(8	)		(1	)

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 Three Months Ended September 30,						For the Nine Months Ended September 30,						Location of Gain / (Loss) Recognized in Earnings
	2015			2014			2015			2014
	(in millions)

Currency exchange contracts:
Intercompany loans and forecasted interest payments	$	8		$	4		$	22		$	5		Interest and other expense / (income)
Forecasted transactions		43			29			33			(11	)	Cost of sales
Forecasted transactions		36			419			437			405		Interest and other expense / (income)
Forecasted transactions		5			(4	)		(11	)		(7	)	Selling, general and administrative expenses
Interest rate contracts		–			(1	)		–			–		Interest and other expense / (income)
Commodity contracts		(99	)		(36	)		(158	)		(4	)	Cost of sales

Total	$	(7	)	$	411		$	323		$	388

In connection with the coffee business transactions, we entered into euro to U.S. dollar currency exchange forward contracts to hedge an expected cash receipt of approximately €4 billion upon closing. The mark-to-market gains and losses on the derivatives were recorded in earnings. We recorded net gains of $19 million for the three months and $405 million for the nine months ended September 30, 2015 and $420 million for the three months and $413 million for the nine months ended September 30, 2014 within interest and other expense / (income) in connection with the forward contracts. We also entered into currency exchange forward contracts to hedge a portion of the cash proceeds distributed to our subsidiaries in multiple countries where coffee net assets and shares were deconsolidated. The hedges with a notional value of €1.6 billion generated net losses of $4 million in the three months and net gains of $17 million in the nine months ended September 30, 2015. The currency hedge gains and losses were recorded within interest and other expense / (income). See Note 2, Divestitures and Acquisitions — Coffee Business Transactions, for additional information on our currency exchange forward contracts transactions in the first nine months 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, pound sterling and Swiss franc-denominated debt were:


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,					Location of Gain / (Loss) Recognized in AOCI
	2015			2014		2015			2014
	(in millions)
Euro notes	$	(8	)	$	219	$	188		$	219	Currency
Pound sterling notes		30			37		17			14	Translation
Swiss franc notes		18			–		(13	)		–	Adjustment