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Financial Instruments | 6 Months Ended
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Jun. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Financial Instruments | Note 9. Financial Instruments Fair Value of Derivative Instruments: Derivative instruments were recorded at fair value in the condensed consolidated balance sheets as follows:
| As of June 30, 2018 |  | As of December 31, 2017
| Asset Derivatives |  | Liability Derivatives |  | Asset Derivatives |  | Liability Derivatives
| (in millions)
Derivatives designated as accounting hedges: |  |  |  |  |  |  |
Interest rate contracts | $ | 20 |  |  | $ | 403 |  |  | $ | 15 |  |  | $ | 509 |
Net investment hedge contracts | 385 |  |  | — |  |  | — |  |  | — |
| $ | 405 |  |  | $ | 403 |  |  | $ | 15 |  |  | $ | 509 |
Derivatives not designated as accounting hedges: |  |  |  |  |  |  |
Currency exchange contracts | $ | 111 |  |  | $ | 53 |  |  | $ | 65 |  |  | $ | 76 |
Commodity contracts | 217 |  |  | 122 |  |  | 84 |  |  | 229 |
Interest rate contracts | 7 |  |  | 5 |  |  | 15 |  |  | 11 |
| $ | 335 |  |  | $ | 180 |  |  | $ | 164 |  |  | $ | 316 |
Total fair value | $ | 740 |  |  | $ | 583 |  |  | $ | 179 |  |  | $ | 825 |
Derivatives designated as accounting hedges include cash flow, fair value and net investment hedge contracts. Derivatives not designated as accounting hedges include our 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 8, 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 June 30, 2018
| 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 | $ | 58 |  |  | $ | — |  |  | $ | 58 |  |  | $ | — |
Commodity contracts | 95 |  |  | 65 |  |  | 30 |  |  | — |
Interest rate contracts | (381 | ) |  | — |  |  | (381 | ) |  | — |
Net investment hedge contracts | 385 |  |  | — |  |  | 385 |  |  | — |
Total derivatives | $ | 157 |  |  | $ | 65 |  |  | $ | 92 |  |  | $ | — |
| As of December 31, 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 | $ | (11 | ) |  | $ | — |  |  | $ | (11 | ) |  | $ | — |
Commodity contracts | (145 | ) |  | (138 | ) |  | (7 | ) |  | — |
Interest rate contracts | (490 | ) |  | — |  |  | (490 | ) |  | — |
Total derivatives | $ | (646 | ) |  | $ | (138 | ) |  | $ | (508 | ) |  | $ | — |
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. We 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. In connection with our exchange-traded derivatives, we have recorded margin requirements of $25 million as of June 30, 2018 within accounts payable and margin deposits of $171 million as of December 31, 2017 within other current assets. 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 derivative contracts do not have a legal right of set-off. 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 hedging instruments were:
| Notional Amount
| As of June 30, 2018 |  | As of December 31, 2017
| (in millions)
Currency exchange contracts: |  |  |
Intercompany loans and forecasted interest payments | $ | 3,378 |  |  | $ | 7,089 |
Forecasted transactions | 2,355 |  |  | 2,213 |
Commodity contracts | 580 |  |  | 1,204 |
Interest rate contracts | 9,117 |  |  | 6,532 |
Net investment hedge contracts | 7,114 |  |  | — |
Net investment hedge debt: |  |  |
Euro notes | 3,581 |  |  | 3,679 |
British pound sterling notes | 448 |  |  | 459 |
Swiss franc notes | 1,413 |  |  | 1,694 |
Canadian dollar notes | 457 |  |  | — |
Cash Flow Hedges: Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings/(losses) included:
| For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in millions)
Accumulated (loss)/gain at beginning of period | $ | (159 | ) |  | $ | (103 | ) |  | $ | (113 | ) |  | $ | (121 | )
Transfer of realized (gains)/losses in fair value to earnings | 5 |  |  | (4 | ) |  | (9 | ) |  | 3 |
Unrealized gain/(loss) in fair value | 21 |  |  | 16 |  |  | (11 | ) |  | 27 |
Accumulated (loss)/gain at end of period | $ | (133 | ) |  | $ | (91 | ) |  | $ | (133 | ) |  | $ | (91 | )
After-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings were:
| For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in millions)
Currency exchange contracts – forecasted transactions | $ | — |  |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |
Commodity contracts | $ | — |  |  | $ | 3 |  |  | $ | — |  |  | $ | (4 | )
Interest rate contracts | (5 | ) |  | — |  |  | 9 |  |  | — |
Total | $ | (5 | ) |  | $ | 4 |  |  | $ | 9 |  |  | $ | (3 | )
After-tax gains/(losses) recognized in other comprehensive earnings/(losses) were:
| For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in millions)
Currency exchange contracts – forecasted transactions | $ | — |  |  | $ | (14 | ) |  | $ | — |  |  | $ | (26 | )
Commodity contracts | — |  |  | 6 |  |  | — |  |  | 6 |
Interest rate contracts | 21 |  |  | 24 |  |  | (11 | ) |  | 47 |
Total | $ | 21 |  |  | $ | 16 |  |  | $ | (11 | ) |  | $ | 27 |
We recognized a loss of $5 million in the three months and a gain of $9 million in the six months ended June 30, 2018 in 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. We record pre-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 currency exchange contracts related to forecasted transactions;
• | cost of sales for commodity contracts; 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 gains of less than $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months. Cash Flow Hedge Coverage: As of June 30, 2018, our longest dated cash flow hedges were interest rate swaps that hedge forecasted interest rate payments over the next 5 years and 4 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 June 30, |  | For the Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in millions)
Borrowings | $ | — |  |  | $ | 1 |  |  | $ | 1 |  |  | $ | (2 | )
Derivatives | — |  |  | (1 | ) |  | (1 | ) |  | 2 |
Total | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
The carrying amount of our hedged fixed interest rate debt is detailed below and is recorded in the current portion of long-term debt as this debt will mature during the third quarter of 2018.
| As of June 30, 2018 |  | As of December 31, 2017
| (in millions)
Notional value of borrowings (and related derivatives) | $ | (279 | ) |  | $ | (801 | )
Cumulative fair value hedging adjustments | (1 | ) |  | — |
Carrying amount of borrowings | $ | (280 | ) |  | $ | (801 | )
Hedges of Net Investments in International Operations: Beginning in the first quarter of 2018, we entered into cross-currency interest rate swaps and forwards to hedge certain investments in our non-U.S. operations against movements in exchange rates. The aggregate notional value as of June 30, 2018 was $7.1 billion. The after-tax gain on these net investment hedge contracts was recorded in the cumulative translation adjustment section of other comprehensive income and was $276 million for the three months and $265 million for the six months ended June 30, 2018. There were no after-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings in the three or six months ended June 30, 2018. We elected to record changes in the fair value of amounts excluded from the assessment of effectiveness in net earnings. Amounts excluded from the assessment of hedge effectiveness were $33 million for the three months and $50 million for the six months ended June 30, 2018 and were recorded as income in interest and other expense, net. After-tax gains/(losses) related to hedges of net investments in international operations in the form of euro, British pound sterling, Swiss franc and Canadian dollar-denominated debt were recorded within the cumulative translation adjustment section of other comprehensive income and were:
| For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in millions)
Euro notes | $ | 151 |  |  | $ | (168 | ) |  | $ | 76 |  |  | $ | (196 | )
British pound sterling notes | 21 |  |  | (10 | ) |  | 8 |  |  | (15 | )
Swiss franc notes | 42 |  |  | (49 | ) |  | 16 |  |  | (64 | )
Canadian notes | 6 |  |  | — |  |  | 4 |  |  | — |
Economic Hedges: Pre-tax gains/(losses) recorded in net earnings for economic hedges were:
| For the Three Months Ended June 30, |  | For the Six Months Ended June 30, |  | Location of Gain/(Loss) Recognized in Earnings
| 2018 |  | 2017 |  | 2018 |  | 2017 |
| (in millions) |  |
Currency exchange contracts: |  |  |  |  |  |  |  |  |
Intercompany loans and forecasted interest payments | $ | 7 |  |  | $ | 3 |  |  | $ | 14 |  |  | $ | 5 |  |  | Interest and other expense, net
Forecasted transactions | 72 |  |  | 18 |  |  | 65 |  |  | 2 |  |  | Cost of sales
Forecasted transactions | — |  |  | 1 |  |  | (5 | ) |  | (2 | ) |  | Interest and other expense, net
Forecasted transactions | (1 | ) |  | 2 |  |  | (4 | ) |  | 2 |  |  | Selling, general and administrative expenses
Commodity contracts | (48 | ) |  | (97 | ) |  | 101 |  |  | (160 | ) |  | Cost of sales
Total | $ | 30 |  |  | $ | (73 | ) |  | $ | 171 |  |  | $ | (153 | ) |  |

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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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