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Financial Instruments | 9 Months Ended
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Sep. 30, 2021
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 September 30, 2021 |  | As of December 31, 2020
| Asset Derivatives |  | Liability Derivatives |  | Asset Derivatives |  | Liability Derivatives
| (in millions)
Derivatives designated as accounting hedges: |  |  |  |  |  |  |
Interest rate contracts | $ | 9 |  |  | $ | 29 |  |  | $ | 12 |  |  | $ | 340 |
Net investment hedge derivative contracts (1) | 111 |  |  | 37 |  |  | 114 |  |  | 129 |
| $ | 120 |  |  | $ | 66 |  |  | $ | 126 |  |  | $ | 469 |
Derivatives not designated as accounting hedges: |  |  |  |  |  |  |
Currency exchange contracts | $ | 108 |  |  | $ | 51 |  |  | $ | 134 |  |  | $ | 119 |
Commodity contracts | 452 |  |  | 164 |  |  | 205 |  |  | 128 |
Equity method investment contracts(2) | — |  |  | 3 |  |  | — |  |  | — |
| $ | 560 |  |  | $ | 218 |  |  | $ | 339 |  |  | $ | 247 |
Total fair value | $ | 680 |  |  | $ | 284 |  |  | $ | 465 |  |  | $ | 716 |
(1)Net investment hedge derivative contracts consist of cross-currency interest rate swaps, forward contracts and options. 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. (2)Equity method investment contracts consist of the bifurcated embedded derivative option that was a component of the September 20, 2021 €300 million exchangeable bonds issuance. Refer to Note 8, Debt and Borrowing Arrangements. Derivatives designated as accounting hedges include cash flow and net investment hedge derivative contracts. Our currency exchange, commodity derivative and equity method investment contracts are economic hedges that are not designated as accounting hedges. 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 other assets and the fair value of our liability derivatives is recorded within other current liabilities and other liabilities. The fair values (asset/(liability)) of our derivative instruments were determined using:
| As of September 30, 2021
| 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 | $ | 57 |  |  | $ | — |  |  | $ | 57 |  |  | $ | — |
Commodity contracts | 288 |  |  | 171 |  |  | 117 |  |  | — |
Interest rate contracts | (20) |  |  | — |  |  | (20) |  |  | — |
Net investment hedge contracts | 74 |  |  | — |  |  | 74 |  |  | — |
Equity method investment contracts | (3) |  |  | — |  |  | (3) |  |  | — |
Total derivatives | $ | 396 |  |  | $ | 171 |  |  | $ | 225 |  |  | $ | — |
| 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) |  |  | $ | — |
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; net investment hedge contracts; 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 bifurcated exchange options are valued, as derivative instrument liabilities, using the Black-Scholes option pricing model. This model requires assumptions related to the market price of the underlying note and associated credit spread combined with the share of price, expected dividend yield, and expected volatility of the JDE Peet’s shares over the life of the option. 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 notional values of our hedging instruments were:
| Notional Amount
| As of September 30, 2021 |  | As of December 31, 2020
| (in millions)
Currency exchange contracts: |  |  |
Intercompany loans and forecasted interest payments | $ | 1,185 |  |  | $ | 2,184 |
Forecasted transactions | 4,022 |  |  | 4,169 |
Commodity contracts | 8,573 |  |  | 7,947 |
Interest rate contracts | 1,850 |  |  | 3,500 |
Net investment hedges: |  |  |
Net investment hedge derivative contracts | 3,914 |  |  | 4,551 |
Non-U.S. dollar debt designated as net investment hedges |  |  |
Euro notes | 3,688 |  |  | 3,744 |
British pound sterling notes | 355 |  |  | 360 |
Swiss franc notes | 1,116 |  |  | 1,175 |
Canadian dollar notes | 473 |  |  | 472 |
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,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in millions)
Accumulated (loss)/gain at beginning of period | $ | (142) |  |  | $ | (154) |  |  | $ | (161) |  |  | $ | (213) |
Transfer of realized losses/(gains) in fair value to earnings | (52) |  |  | 65 |  |  | (139) |  |  | 153 |
Unrealized (loss)/gain in fair value | 45 |  |  | (69) |  |  | 151 |  |  | (98) |
Accumulated (loss)/gain at end of period | $ | (149) |  |  | $ | (158) |  |  | $ | (149) |  |  | $ | (158) |
After-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) to net earnings were:
| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in millions)
Interest rate contracts | $ | 52 |  |  | $ | (65) |  |  | $ | 139 |  |  | $ | (153) |
Within interest and other expense, net, due to changes in forecasted debt, we recognized losses related to forward-starting interest rate swaps of $79 million ($103 million pre-tax) in the first quarter of 2020 and in the nine months ended September 30, 2020. 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,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in millions)
Currency exchange contracts – forecasted transactions | $ | (6) |  |  | $ | — |  |  | $ | — |  |  | $ | (1) |
Interest rate contracts | 51 |  |  | (69) |  |  | 151 |  |  | (97) |
Total | $ | 45 |  |  | $ | (69) |  |  | $ | 151 |  |  | $ | (98) |
Cash flow hedge ineffectiveness was not material 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 $35 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, 2021, our longest dated cash flow hedges were interest rate swaps that hedge forecasted interest rate payments over the next 4 years and 11 months. Hedges of Net Investments in International Operations: Net investment hedge ("NIH") derivative contracts: We enter into cross-currency interest rate swaps, forwards and options to hedge certain investments in our non-U.S. operations against movements in exchange rates. The aggregate notional value as of September 30, 2021 was $3.9 billion. The impacts of the net investment hedge derivative contracts on other comprehensive earnings and net earnings were as follows:
| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in millions)
After-tax gain/(loss) on NIH contracts(1) | $ | 50 |  |  | $ | (223) |  |  | $ | 73 |  |  | $ | (6) |
(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 condensed consolidated statement of cash flows.
| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in millions)
Amounts excluded from the assessment of hedge effectiveness(1) | $ | 19 |  |  | $ | 28 |  |  | $ | 58 |  |  | $ | 92 |
(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 Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
| (in millions)
Euro notes | $ | 67 |  |  | $ | (122) |  |  | $ | 160 |  |  | $ | (135) |
British pound sterling notes | 7 |  |  | (10) |  |  | 4 |  |  | 7 |
Swiss franc notes | 6 |  |  | (27) |  |  | 45 |  |  | (47) |
Canadian notes | 9 |  |  | (6) |  |  | (1) |  |  | 9 |
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
| 2021 |  | 2020 |  | 2021 |  | 2020 |
| (in millions) |  |
Currency exchange contracts: |  |  |  |  |  |  |  |  |
Intercompany loans and forecasted interest payments | $ | (5) |  |  | $ | 7 |  |  | $ | 67 |  |  | $ | (73) |  |  | Interest and other expense, net
Forecasted transactions | 29 |  |  | 28 |  |  | 41 |  |  | 50 |  |  | Cost of sales
Forecasted transactions | — |  |  | 6 |  |  | (2) |  |  | (3) |  |  | Interest and other expense, net
Forecasted transactions | (1) |  |  | (1) |  |  | — |  |  | (2) |  |  | Selling, general and administrative expenses
Commodity contracts | 151 |  |  | 136 |  |  | 362 |  |  | (47) |  |  | Cost of sales
Equity method investment contracts | 2 |  |  | — |  |  | 2 |  |  | — |  |  | Gain on equity method investment transactions
Total | $ | 176 |  |  | $ | 176 |  |  | $ | 470 |  |  | $ | (75) |  |  |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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