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Financial Instruments | 9 Months Ended
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Sep. 30, 2017
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, 2017 |  |  | As of December 31, 2016 |
|  | Asset |  |  | Liability |  |  | Asset |  |  | Liability |
|  | Derivatives |  |  | Derivatives |  |  | Derivatives |  |  | Derivatives |
|  | (in millions) |
Derivatives designated as accounting hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Currency exchange contracts |  | $ | – |  |  | $ | 2 |  |  | $ | 19 |  |  | $ | 8 |
Commodity contracts |  |  | 1 |  |  |  | – |  |  |  | 17 |  |  |  | 22 |
Interest rate contracts |  |  | 33 |  |  |  | 421 |  |  |  | 108 |  |  |  | 19 |
|  | $ | 34 |  |  | $ | 423 |  |  | $ | 144 |  |  | $ | 49 |
Derivatives not designated as accounting hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Currency exchange contracts |  | $ | 70 |  |  | $ | 45 |  |  | $ | 29 |  |  | $ | 43 |
Commodity contracts |  |  | 35 |  |  |  | 169 |  |  |  | 112 |  |  |  | 167 |
Interest rate contracts |  |  | 15 |  |  |  | 10 |  |  |  | 27 |  |  |  | 19 |
|  | $ | 120 |  |  | $ | 224 |  |  | $ | 168 |  |  | $ | 229 |
Total fair value |  | $ | 154 |  |  | $ | 647 |  |  | $ | 312 |  |  | $ | 278 |
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 on our condensed consolidated balance sheets. 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, 2017 |
|  | 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 |  | $ | 23 |  |  | $ | – |  |  | $ | 23 |  |  | $ | – |
Commodity contracts |  |  | (133 | ) |  |  | (133 | ) |  |  | – |  |  |  | – |
Interest rate contracts |  |  | (383 | ) |  |  | – |  |  |  | (383 | ) |  |  | – |
Total derivatives |  | $ | (493 | ) |  | $ | (133 | ) |  | $ | (360 | ) |  | $ | – |
|  | As of December 31, 2016 |
|  | 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 |  | $ | (3 | ) |  | $ | – |  |  | $ | (3 | ) |  | $ | – |
Commodity contracts |  |  | (60 | ) |  |  | (86 | ) |  |  | 26 |  |  |  | – |
Interest rate contracts |  |  | 97 |  |  |  | – |  |  |  | 97 |  |  |  | – |
Total derivatives |  | $ | 34 |  |  | $ | (86 | ) |  | $ | 120 |  |  | $ | – |
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 $198 million as of September 30, 2017 and $133 million as of December 31, 2016 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 $65 million as of September 30, 2017 and $48 million as of December 31, 2016. As of September 30, 2017, we have no derivatives in a net liability position, and as of December 31, 2016 we would have owed $2 million for 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 $409 million as of September 30, 2017 and $40 million as of December 31, 2016, and for derivatives we have in a net asset position, our counterparties would owe us a total of $25 million as of September 30, 2017 and $162 million as of December 31, 2016. 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, 2017 |  |  | As of December 31, 2016 |
|  | (in millions) |
Currency exchange contracts: |  |  |  |  |  |  |  |
Intercompany loans and forecasted interest payments |  | $ | 3,649 |  |  | $ | 3,343 |
Forecasted transactions |  |  | 2,066 |  |  |  | 1,452 |
Commodity contracts |  |  | 1,137 |  |  |  | 837 |
Interest rate contracts |  |  | 6,517 |  |  |  | 6,365 |
Net investment hedge – euro notes |  |  | 3,975 |  |  |  | 4,012 |
Net investment hedge – pound sterling notes |  |  | 454 |  |  |  | 419 |
Net investment hedge – Swiss franc notes |  |  | 1,704 |  |  |  | 1,447 |
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, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
|  | (in millions) |
Accumulated (loss)/gain at beginning of period |  | $ | (91 | ) |  | $ | (36 | ) |  | $ | (121 | ) |  | $ | (45 | )
Transfer of realized (gains)/losses in fair value to earnings |  |  | (13 | ) |  |  | (2 | ) |  |  | (10 | ) |  |  | 64 |
Unrealized gain/(loss) in fair value |  |  | (6 | ) |  |  | 4 |  |  |  | 21 |  |  |  | (53 | )
Accumulated (loss)/gain at end of period |  | $ | (110 | ) |  | $ | (34 | ) |  | $ | (110 | ) |  | $ | (34 | )
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, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
|  | (in millions) |
Currency exchange contracts – forecasted transactions |  | $ | (3 | ) |  | $ | (6 | ) |  | $ | (2 | ) |  | $ | (3 | )
Commodity contracts |  |  | 16 |  |  |  | 8 |  |  |  | 12 |  |  |  | (1 | )
Interest rate contracts |  |  | – |  |  |  | – |  |  |  | – |  |  |  | (60 | )
Total |  | $ | 13 |  |  | $ | 2 |  |  | $ | 10 |  |  | $ | (64 | )
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, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
|  | (in millions) |
Currency exchange contracts – forecasted transactions |  | $ | (11 | ) |  | $ | (11 | ) |  | $ | (37 | ) |  | $ | (21 | )
Commodity contracts |  |  | 25 |  |  |  | 10 |  |  |  | 31 |  |  |  | 19 |
Interest rate contracts |  |  | (20 | ) |  |  | 5 |  |  |  | 27 |  |  |  | (51 | )
Total |  | $ | (6 | ) |  | $ | 4 |  |  | $ | 21 |  |  | $ | (53 | )
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 related to amounts excluded from effectiveness testing. This amount relates 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, we changed our plans to issue U.S. dollar-denominated debt and instead issued euro and Swiss franc-denominated notes in the first quarter of 2016. Amounts excluded from effectiveness testing were not material for all other periods presented. 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 losses of $11 million (net of taxes) for commodity cash flow hedges, unrealized losses of $2 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. Cash Flow Hedge Coverage: As of September 30, 2017, we hedged transactions forecasted to impact cash flows over the following periods:
| • |  | commodity transactions for periods not exceeding the next 3 months;
| • |  | interest rate transactions for periods not exceeding the next 6 years and 1 month; and
| • |  | currency exchange transactions for periods not exceeding the next 3 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 September 30, |  |  | For the Nine Months Ended September 30, |  |  |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |  |
|  | (in millions) |  |
Derivatives |  | $ | (2 | ) |  | $ | (11 | ) |  | $ | (4 | ) |  | $ | (2 | ) |
Borrowings |  |  | 2 |  |  |  | 11 |  |  |  | 4 |  |  |  | 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 Three Months Ended September 30, |  |  | For the Nine Months Ended September 30, |  |  | Location of Gain/(Loss) Recognized in Earnings
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |  |
|  | (in millions) |  |  |
Currency exchange contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Intercompany loans and forecasted interest payments |  | $ | (13 | ) |  | $ | 7 |  |  | $ | (8 | ) |  | $ | 18 |  |  | Interest and other expense, net
Forecasted transactions |  |  | (1 | ) |  |  | (14 | ) |  |  | – |  |  |  | (91 | ) |  | Cost of sales
Forecasted transactions |  |  | 1 |  |  |  | 2 |  |  |  | (1 | ) |  |  | 10 |  |  | Interest and other expense, net
Forecasted transactions |  |  | – |  |  |  | 4 |  |  |  | 2 |  |  |  | 16 |  |  | Selling, general and administrative expenses
Commodity contracts |  |  | (17 | ) |  |  | (13 | ) |  |  | (176 | ) |  |  | (26 | ) |  | Cost of sales
Total |  | $ | (30 | ) |  | $ | (14 | ) |  | $ | (183 | ) |  | $ | (73 | ) |  |
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
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |  |
|  | (in millions) |  |  |
Euro notes |  | $ | (83 | ) |  | $ | (38 | ) |  | $ | (279 | ) |  | $ | (110 | ) |  | Currency
Pound sterling notes |  |  | (8 | ) |  |  | 21 |  |  |  | (23 | ) |  |  | 107 |  |  | Translation
Swiss franc notes |  |  | 12 |  |  |  | (4 | ) |  |  | (53 | ) |  |  | (33 | ) |  | 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 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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