Financial Instruments

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 10. 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,
	2020				2019
	Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
	(in millions)
Derivatives designated as accounting hedges:
Interest rate contracts	$	12	$	340	$	19	$	190
Net investment hedge derivative contracts (1)	114		129		312		65
	$	126	$	469	$	331	$	255
Derivatives not designated as accounting hedges:
Currency exchange contracts	$	134	$	119	$	67	$	50
Commodity contracts	205		128		201		120
	$	339	$	247	$	268	$	170
Total fair value	$	465	$	716	$	599	$	425

(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 9, 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 above include cash flow and net investment hedge derivative contracts. Our currency exchange and commodity derivative contracts are economic hedges that are 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, 2020
	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	$	15	$	—	$	15	$	—
Commodity contracts	77		46		31		—
Interest rate contracts	(328)		—		(328)		—
Net investment hedge contracts	(15)		—		(15)		—
Total derivatives	$	(251)	$	46	$	(297)	$	—


	As of December 31, 2019
	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	$	17	$	—	$	17	$	—
Commodity contracts	81		27		54		—
Interest rate contracts	(171)		—		(171)		—
Net investment hedge contracts	247		—		247		—
Total derivatives	$	174	$	27	$	147	$	—

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 gross notional values of our derivative instruments were:


	Notional Amount
	As of December 31,
	2020		2019
	(in millions)
Currency exchange contracts:
Intercompany loans and forecasted interest payments	$	2,184	$	2,474
Forecasted transactions	4,169		3,993
Commodity contracts	7,947		7,238
Interest rate contracts	3,500		5,250
Net investment hedges:
Net investment hedge derivative contracts	4,551		6,864
Non-U.S. dollar debt designated as net investment hedges
Euro notes	3,744		3,436
British pound sterling notes	360		349
Swiss franc notes	1,175		1,448
Canadian dollar notes	472		462

Cash Flow Hedges:

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


	For the Years Ended December 31,
	2020		2019		2018
	(in millions)
Accumulated (loss)/gain at beginning of period	$	(213)	$	(168)	$	(114)
Transfer of realized (gains)/losses in fair value to earnings	161		154		(9)
Unrealized gain/(loss) in fair value	(109)		(199)		(45)
Accumulated (loss)/gain at end of period	$	(161)	$	(213)	$	(168)

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


	For the Years Ended December 31,
	2020		2019		2018
	(in millions)
Interest rate contracts	$	(161)	$	(154)	$	9

Within interest and other expense, net, we recognized losses related to forward starting interest rate swaps of $79 million ($103 million pre-tax) in 2020, a loss of $111 million in 2019 and a gain of $10 million in 2018 due to changes in related forecasted debt. During the second quarter of 2019, we also recognized a loss of $12 million related to the net loss on equity method investment transactions noted in Note 7, Equity Method Investments – JDE / Keurig Exchange.

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


	For the Years Ended December 31,
	2020		2019		2018
	(in millions)
Currency exchange contracts – forecasted transactions	$	(2)	$	3	$	—
Interest rate contracts	(107)		(202)		(45)
Total	$	(109)	$	(199)	$	(45)

Cash flow hedge ineffectiveness was immaterial for all 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 interest and other expense, net for interest rate contracts.

Based on current market conditions, we would expect to transfer losses of $179 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, 2020, our longest dated cash flow hedges were interest rate swaps that hedge forecasted interest rate payments over the next 3 years and 9 months.

Hedges of Net Investments in International Operations:

Net investment hedge ("NIH") derivative contracts:

We enter into cross-currency interest rate swaps and forwards to hedge certain investments in our non-U.S. operations against movements in exchange rates. As of December 31, 2020, the aggregate notional value of these NIH derivative contracts was $4.6 billion and their impact on other comprehensive earnings and net earnings during the years presented below were as follows:


	For the Years Ended December 31,
	2020		2019		2018
	(in millions)
After-tax gain/(loss) on NIH contracts(1)	$	(221)	$	(6)	$	191

(1)Amounts recorded for unsettled and settled NIH derivative contracts are recorded in the cumulative translation adjustment within other comprehensive earnings. The cash flows from the settled contracts are reported within other investing activities in the consolidated statement of cash flows.


	For the Years Ended December 31,
	2020		2019		2018
	(in millions)
Amounts excluded from the assessment of hedge effectiveness(1)	$	117	$	133	$	120

(1)We elected to record changes in the fair value of amounts excluded from the assessment of effectiveness in net earnings within interest and other expense, net.

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,
	2020		2019		2018
	(in millions)
Euro notes	$	(251)	$	60	$	126
British pound sterling notes	(8)		(10)		19
Swiss franc notes	(82)		(19)		7
Canadian notes	(7)		(17)		17

Economic Hedges:

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


	For the Years Ended December 31,						Recognized in Earnings
	2020		2019		2018
	(in millions)
Currency exchange contracts:
Intercompany loans and forecasted interest payments	$	(70)	$	100	$	98	Interest and other expense, net
Forecasted transactions	41		17		103		Cost of sales
Forecasted transactions	(4)		(3)		(4)		Interest and other expense, net
Forecasted transactions	(1)		(8)		(3)		Selling, general and administrative expenses
Commodity contracts	4		67		40		Cost of sales
Total	$	(30)	$	173	$	234