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Financial Instruments
 12 Months Ended
Dec. 31, 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 consolidated balance sheets as follows:
 
 
As of December 31,
 
2018
 
2017
 
Asset
Derivatives
 
Liability
Derivatives
 
Asset
Derivatives
 
Liability
Derivatives
 
(in millions)
Derivatives designated as
accounting hedges:
 
 
 
 
 
 
 
Interest rate contracts
$
17

 
$
355

 
$
15

 
$
509

Net investment hedge derivative contracts (1)
337

 
28

 
—

 
—

 
$
354

 
$
383

 
$
15

 
$
509

Derivatives not designated as
   accounting hedges:
 
 
 
 
 
 
 
Currency exchange contracts
$
72

 
$
37

 
$
65

 
$
76

Commodity contracts
191

 
210

 
84

 
229

Interest rate contracts
—

 
—

 
15

 
11

 
$
263

 
$
247

 
$
164

 
$
316

Total fair value
$
617

 
$
630

 
$
179

 
$
825



(1)
Net investment hedge contracts consist of cross-currency interest rate swaps and forward contracts. We also designate some of our non-U.S. dollar denominated debt to hedge a portion of our net investments in our non-U.S. operations. This debt is not reflected in the table above, but is included in long-term debt discussed in Note 8, Debt and Borrowing Arrangements. Both net investment hedge derivative contracts and non-U.S. dollar denominated debt acting as net investment hedges are also disclosed in the Derivative Volume table and the Hedges of Net Investments in International Operations section appearing later in this footnote.

Derivatives designated as accounting hedges have included cash flow, fair value and net investment hedge derivative contracts. Our economic hedges are derivatives not designated as accounting hedges. We record derivative assets and liabilities on a gross basis on our 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 December 31, 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
$
35

 
$
—

 
$
35

 
$
—

Commodity contracts
(19
)
 
(1
)
 
(18
)
 
—

Interest rate contracts
(338
)
 
—

 
(338
)
 
—

Net investment hedge contracts
309

 
—

 
309

 
—

Total derivatives
$
(13
)
 
$
(1
)
 
$
(12
)
 
$
—


 
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.

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 derivative instruments were:
 
 
Notional Amount
 
As of December 31,
 
2018
 
2017
 
(in millions)
Currency exchange contracts:
 
 
 
Intercompany loans and forecasted interest payments
$
3,239

 
$
7,089

Forecasted transactions
2,396

 
2,213

Commodity contracts
393

 
1,204

Interest rate contracts
8,679

 
6,532

Net investment hedges:
 
 
 
Net investment hedge derivative contracts
6,678

 
—

Non-U.S. dollar debt designated as net investment hedges
 
 
 
Euro notes
3,514

 
3,679

British pound sterling notes
336

 
459

Swiss franc notes
1,424

 
1,694

Canadian dollar notes
440

 
—



Cash Flow Hedges:
Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings/(losses) included:
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Accumulated (loss)/gain at beginning of period
$
(113
)
 
$
(121
)
 
$
(45
)
Transfer of realized (gains)/losses in fair value to earnings
(9
)
 
27

 
53

Unrealized gain/(loss) in fair value
(45
)
 
(19
)
 
(129
)
Accumulated (loss)/gain at end of period
$
(167
)
 
$
(113
)
 
$
(121
)


After-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings were:
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Currency exchange contracts – forecasted transactions
$
—

 
$
(3
)
 
$
(1
)
Commodity contracts
—

 
(24
)
 
(4
)
Interest rate contracts
9

 
—

 
(48
)
Total
$
9

 
$
(27
)
 
$
(53
)

After-tax gains/(losses) recognized in other comprehensive earnings/(losses) were:
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Currency exchange contracts – forecasted transactions
$
—

 
$
(38
)
 
$
8

Commodity contracts
—

 
7

 
(34
)
Interest rate contracts
(45
)
 
12

 
(103
)
Total
$
(45
)
 
$
(19
)
 
$
(129
)


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

We recognized a gain of $10 million in 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 also recorded pre-tax losses of $97 million within interest and other expense, net in the first quarter of 2016 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, we changed our plans to issue U.S. dollar-denominated debt and instead issued euro and Swiss franc-denominated notes in 2016. Amounts excluded from effectiveness testing were not material for all other periods presented.

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 unrealized losses of $106 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Cash Flow Hedge Coverage:
As of December 31, 2018, our longest dated cash flow hedges are interest rate swaps that hedge forecasted interest rate payments over 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,
 
2018
 
2017
 
2016
 
(in millions)
Borrowings
$
1

 
$
4

 
$
6

Derivatives
(1
)
 
(4
)
 
(6
)
Total
$
—

 
$
—

 
$
—



The carrying amount of our hedged fixed interest rate debt at December 31, 2017 was $801 million and was recorded in the current portion of long-term debt until this debt matured during the third quarter of 2018.

 
As of December 31,
 
2018
 
2017
 
(in millions)
Notional value of borrowings (and related derivatives)
$
—

 
$
(801
)
Cumulative fair value hedging adjustments
—

 
—

Carrying amount of borrowings
$
—

 
$
(801
)


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

Hedges of Net Investments in International Operations:

Net investment hedge derivative contracts:
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 December 31, 2018 was $6.7 billion. The after-tax unrealized gain/(loss) on these net investment hedge contracts was recorded in the cumulative translation adjustment section of other comprehensive income and was $207 million in 2018. In addition, the after-tax realized gain on net investment hedge contracts settled in 2018 was recorded in the cumulative translation adjustment section of other comprehensive income and was $191 million. There were no after-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings in 2018. During the fourth quarter of 2018, we replaced six cross-currency swaps with new derivative contracts and received $127 million in cash. Also, during 2018, eight currency forward contracts matured and we received $152 million in cash upon the settlement. The cash received was recorded within other investing activities on the consolidated statement of cash flows. 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 $120 million in 2018 and were recorded as income in interest and other expense, net. The cash flows from these contracts are reported as other investing activities in the consolidated statement of cash flows.

Non-U.S. dollar debt designated as net investment hedges:
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 Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Euro notes
$
126

 
$
(323
)
 
$
73

British pound sterling notes
19

 
(26
)
 
148

Swiss franc notes
7

 
(49
)
 
12

Canadian notes
17

 
—

 
—



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

 
For the Years Ended December 31,
 
Recognized
in Earnings
 
2018
 
2017
 
2016
 
 
(in millions)
 
 
Currency exchange contracts:
 
 
 
 
 
 
 
   Intercompany loans and
      forecasted interest payments
$
98

 
$
13

 
$
21

 
Interest and other
expense, net
   Forecasted transactions
103

 
(37
)
 
(76
)
 
Cost of sales
   Forecasted transactions
(4
)
 
(2
)
 
11

 
Interest and other
expense, net
   Forecasted transactions
(3
)
 
3

 
7

 
Selling, general
and administrative
expenses
Commodity contracts
40

 
(218
)
 
(101
)
 
Cost of sales
Total
$
234

 
$
(241
)
 
$
(138
)