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Financial Instruments | 9 Months Ended
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Sep. 30, 2016
Financial Instruments | Note 8. Financial Instruments Fair Value of Derivative Instruments: Derivative instruments were recorded at fair value in the condensed consolidated balance sheets as follows:
|  | As of September 30, 2016 |  |  | As of December 31, 2015 |
|  | Asset |  |  | Liability |  |  | Asset |  |  | Liability |
|  | Derivatives |  |  | Derivatives |  |  | Derivatives |  |  | Derivatives |
|  | (in millions) |
Derivatives designated as accounting hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Currency exchange contracts |  | $ | 4 |  |  | $ | 8 |  |  | $ | 20 |  |  | $ | 7 |
Commodity contracts |  |  | 38 |  |  |  | 16 |  |  |  | 37 |  |  |  | 35 |
Interest rate contracts |  |  | 10 |  |  |  | 16 |  |  |  | 12 |  |  |  | 57 |
|  | $ | 52 |  |  | $ | 40 |  |  | $ | 69 |  |  | $ | 99 |
Derivatives not designated as accounting hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Currency exchange contracts |  | $ | 14 |  |  | $ | 57 |  |  | $ | 61 |  |  | $ | 33 |
Commodity contracts |  |  | 52 |  |  |  | 47 |  |  |  | 70 |  |  |  | 56 |
Interest rate contracts |  |  | 29 |  |  |  | 20 |  |  |  | 43 |  |  |  | 28 |
|  | $ | 95 |  |  | $ | 124 |  |  | $ | 174 |  |  | $ | 117 |
Total fair value |  | $ | 147 |  |  | $ | 164 |  |  | $ | 243 |  |  | $ | 216 |
During the first nine months of 2016 and 2015, 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. dollar denominated 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 7, Debt and Borrowing Arrangements. 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. The fair values (asset / (liability)) of our derivative instruments were determined using:
|  | As of September 30, 2016 |
|  |  |  |  | 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 |  | $ | (47 | ) |  | $ | – |  |  | $ | (47 | ) |  | $ | – |
Commodity contracts |  |  | 27 |  |  |  | 17 |  |  |  | 10 |  |  |  | – |
Interest rate contracts |  |  | 3 |  |  |  | – |  |  |  | 3 |  |  |  | – |
Total derivatives |  | $ | (17 | ) |  | $ | 17 |  |  | $ | (34 | ) |  | $ | – |
|  | As of December 31, 2015 |
|  |  |  |  | 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 |  | $ | 41 |  |  | $ | – |  |  | $ | 41 |  |  | $ | – |
Commodity contracts |  |  | 16 |  |  |  | 29 |  |  |  | (13 | ) |  |  | – |
Interest rate contracts |  |  | (30 | ) |  |  | – |  |  |  | (30 | ) |  |  | – |
Total derivatives |  | $ | 27 |  |  | $ | 29 |  |  | $ | (2 | ) |  | $ | – |
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 $16 million as of September 30, 2016 and margin deposits of $22 million as of December 31, 2015 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 asset position, our counterparties would owe us a total of $32 million as of September 30, 2016 and $52 million as of December 31, 2015. For derivatives we have in a net liability position, we would owe less than $1 million as of September 30, 2016. As of December 31, 2015, there were no Level 1 derivatives in a net liability position. 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 $36 million as of September 30, 2016 and $101 million as of December 31, 2015, and for derivatives we have in a net asset position, our counterparties would owe us a total of $54 million as of September 30, 2016 and $64 million as of December 31, 2015. 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, |
|  | 2016 |  |  | 2015 |
|  | (in millions) |
Currency exchange contracts: |  |  |  |  |  |  |  |
Intercompany loans and forecasted interest payments |  | $ | 3,211 |  |  | $ | 4,148 |
Forecasted transactions |  |  | 1,318 |  |  |  | 1,094 |
Commodity contracts |  |  | 654 |  |  |  | 732 |
Interest rate contracts |  |  | 2,050 |  |  |  | 3,033 |
Net investment hedge – euro notes |  |  | 5,280 |  |  |  | 4,345 |
Net investment hedge – pound sterling notes |  |  | 1,236 |  |  |  | 1,404 |
Net investment hedge – Swiss franc notes |  |  | 1,518 |  |  |  | 1,073 |
Cash Flow Hedges: Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings / (losses) included:
|  | For the Three Months Ended |  |  | For the Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |
|  | (in millions) |
Accumulated gain / (loss) at beginning of period |  | $ | (36 | ) |  | $ | (53 | ) |  | $ | (45 | ) |  | $ | (2 | )
Transfer of realized losses / (gains) in fair value to earnings |  |  | (2 | ) |  |  | 60 |  |  |  | 64 |  |  |  | 6 |
Unrealized gain / (loss) in fair value |  |  | 4 |  |  |  | (69 | ) |  |  | (53 | ) |  |  | (66 | )
Accumulated gain / (loss) at end of period |  | $ | (34 | ) |  | $ | (62 | ) |  | $ | (34 | ) |  | $ | (62 | )
After-tax gains / (losses) reclassified from accumulated other comprehensive earnings / (losses) into net earnings were: |
|  | For the Three Months Ended |  |  | For the Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |
|  | (in millions) |
Currency exchange contracts – forecasted transactions |  | $ | (6 | ) |  | $ | (11 | ) |  | $ | (3 | ) |  | $ | 73 |
Commodity contracts |  |  | 8 |  |  |  | (49 | ) |  |  | (1 | ) |  |  | (53 | )
Interest rate contracts |  |  | – |  |  |  | – |  |  |  | (60 | ) |  |  | (26 | )
Total |  | $ | 2 |  |  | $ | (60 | ) |  | $ | (64 | ) |  | $ | (6 | )
After-tax gains / (losses) recognized in other comprehensive earnings / (losses) were: |
|  | For the Three Months Ended |  |  | For the Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |
|  | (in millions) |
Currency exchange contracts – forecasted transactions |  | $ | (11 | ) |  | $ | 8 |  |  | $ | (21 | ) |  | $ | 33 |
Commodity contracts |  |  | 10 |  |  |  | (38 | ) |  |  | 19 |  |  |  | (61 | )
Interest rate contracts |  |  | 5 |  |  |  | (39 | ) |  |  | (51 | ) |  |  | (38 | )
Total |  | $ | 4 |  |  | $ | (69 | ) |  | $ | (53 | ) |  | $ | (66 | )
Cash flow hedge ineffectiveness was not material for all periods presented. Within interest and other expense, net, we recorded pre-tax losses of $97 million in the first quarter of 2016 and $34 million in the first quarter of 2015 related to amounts excluded from effectiveness testing. These amounts relate to interest rate swaps no longer designated as cash flow hedges due to changes in financing plans. Due to lower overall costs and our decision to hedge a greater portion of our net investments in operations that use currencies other than the U.S. dollar as their functional currencies, our plans to issue U.S. dollar-denominated debt changed and we instead issued euro and Swiss franc-denominated notes in the current year first quarter, and euro, British pound sterling and Swiss franc-denominated notes in the prior-year first quarter. Amounts excluded from effectiveness testing were not material for the third quarter of 2016 and 2015. 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 gains of $11 million (net of taxes) for commodity cash flow hedges, unrealized losses of $11 million (net of taxes) for currency cash flow hedges and unrealized losses of less than $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months. Hedge Coverage: As of September 30, 2016, 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 7 years and 2 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, net:
|  | For the Three Months Ended |  |  | For the Nine Months Ended |  |  |  |
|  | September 30, |  |  | September 30, |  |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |  |
|  | (in millions) |  |
Derivatives |  | $ | (11 | ) |  | $ | 4 |  |  | $ | (2 | ) |  | $ | 8 |  |
Borrowings |  |  | 11 |  |  |  | (4 | ) |  |  | 2 |  |  |  | (8 | ) |  |  |  |
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: |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Location of |
|  | For the Three Months Ended |  |  | For the Nine Months Ended |  |  | Gain / (Loss) |
|  | September 30, |  |  | September 30, |  |  | Recognized |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |  |  | in Earnings |
|  | (in millions) |  |  |  |
Currency exchange contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Intercompany loans and forecasted interest payments |  | $ | 7 |  |  | $ | 8 |  |  | $ | 18 |  |  | $ | 22 |  |  |  | Interest and other expense, net |
Forecasted transactions |  |  | (14 | ) |  |  | 43 |  |  |  | (91 | ) |  |  | 33 |  |  |  | Cost of sales |
Forecasted transactions |  |  | 2 |  |  |  | 36 |  |  |  | 10 |  |  |  | 437 |  |  |  | Interest and other expense, net |
Forecasted transactions |  |  | 4 |  |  |  | 5 |  |  |  | 16 |  |  |  | (11 | ) |  |  | Selling, general and administrative expenses |
Interest rate contracts |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | Interest and other expense, net |
Commodity contracts |  |  | (13 | ) |  |  | (99 | ) |  |  | (26 | ) |  |  | (158 | ) |  |  | Cost of sales |
Total |  | $ | (14 | ) |  | $ | (7 | ) |  | $ | (73 | ) |  | $ | 323 |  |  |  |  |
In connection with the JDE coffee business transactions, we entered into a number of consecutive euro to U.S. dollar currency exchange forward contracts in 2015 to lock in an equivalent expected value in U.S. dollars. The mark-to-market gains and losses on the derivatives were recorded in earnings. We recorded net gains of $29 million for the three months and $436 million for the nine months ended September 30, 2015 within interest and other expense, net in connection with the forward contracts and the transferring of proceeds to our subsidiaries where coffee net assets and shares were deconsolidated. The currency hedge and related gains and losses were recorded within interest and other expense, net. See Note 2, Divestitures and Acquisitions — JDE Coffee Business Transactions, for additional information. 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: |
|  |  |  |  |  |  |  | Location of |
|  | For the Three Months Ended |  |  | For the Nine Months Ended |  |  | Gain / (Loss) |
|  | September 30, |  |  | September 30, |  |  | Recognized in |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |  |  | AOCI |
|  | (in millions) |  |  |  |
Euro notes |  | $ | (38 | ) |  | $ | (8 | ) |  | $ | (110 | ) |  | $ | 188 |  |  |  | Currency |
Pound sterling notes |  |  | 21 |  |  |  | 30 |  |  |  | 107 |  |  |  | 17 |  |  |  | Translation |
Swiss franc notes |  |  | (4 | ) |  |  | 18 |  |  |  | (33 | ) |  |  | (13 | ) |  |  | Adjustment

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41620-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624163-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579240-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624177-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41641-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579245-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624258-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708775-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708773-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5618551-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 + Details
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