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DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT | DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT Risk Management Policies We are exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value for those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes. Credit Risk Management The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and by monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty. We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties. Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. At September 30, 2017 and December 31, 2016, we held cash collateral of $48 and $575 million, respectively, under these agreements; this collateral is included in "Cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted. In connection with the agreements described above, we could be required to provide additional collateral or terminate transactions with certain counterparties in the event of a downgrade of our credit rating. The amount of collateral required would be determined by the net fair value of the associated derivatives with each counterparty. At September 30, 2017 and December 31, 2016, $104 million and $0, respectively, of additional collateral was required to be posted with our counterparties. The aggregate fair value of instruments not covered by the zero threshold bilateral collateral provisions were in a net liability position of $47 and $10 million at September 30, 2017 and December 31, 2016, respectively. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default. Accounting Policy for Derivative Instruments We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation. A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period. A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item. A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the foreign currency translation adjustment within AOCI. The remainder of the change in value of such instruments is recorded in earnings. Types of Hedges Commodity Risk Management Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. We periodically enter into option contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We normally designate and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur. Foreign Currency Risk Management To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with option and forward contracts. We normally designate and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur. We also hedge portions of our anticipated cash settlements of intercompany transactions and interest payments on certain debt subject to foreign currency remeasurement using foreign currency forward contracts. We normally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions; therefore, the resulting gains and losses from these hedges are recognized as a component of investment income and other when the underlying transactions are subject to currency remeasurement. We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedging is recognized as a component of investment income and other. Balances in the cumulative translation adjustment accounts remain until the sale or complete liquidation of the foreign entity. Interest Rate Risk Management Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure. We have designated and account for the majority of our interest rate swaps that convert fixed rate interest payments into floating rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We have designated and account for interest rate swaps that convert floating rate interest payments into fixed rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to the interest rate swaps are recorded to AOCI. We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings by using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt. Outstanding Positions As of September 30, 2017 and December 31, 2016, the notional amounts of our outstanding derivative positions were as follows (in millions):
| September 30, 2017 |  | December 31, 2016
Currency hedges: |  |  |  |  |
Euro | EUR | 4,141 |  |  | EUR | 3,702 |
British Pound Sterling | GBP | 1,758 |  |  | GBP | 1,380 |
Canadian Dollar | CAD | 1,244 |  |  | CAD | 1,053 |
Indian Rupee | INR | — |  |  | INR | 76 |
Mexican Peso | MXN | 166 |  |  | MXN | — |
Japanese Yen | JPY | 3,363 |  |  | JPY | 3,972 |
Singapore Dollar | SGD | 15 |  |  | SGD | 32 |
Interest rate hedges: |  |  |  |  |
Fixed to Floating Interest Rate Swaps | $ | 5,799 |  |  | $ | 5,799 |
Floating to Fixed Interest Rate Swaps | $ | 778 |  |  | $ | 778 |
Investment market price hedges: |  |  |  |  |
Marketable Securities | EUR | 204 |  |  | EUR | 76 |
As of September 30, 2017, we had no outstanding commodity hedge positions. Balance Sheet Recognition and Fair Value Measurements The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives (in millions). The table is segregated between those derivative instruments that qualify and are designated as hedging instruments and those that are not, as well as by type of contract and whether the derivative is in an asset or liability position. We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded on our consolidated balance sheets. The columns labeled "Net Amounts if Right of Offset had been Applied" indicate the potential net fair value positions by type of contract and location on the consolidated balance sheets had we elected to apply the right of offset.
|  |  | Fair Value Hierarchy Level |  | Gross Amounts Presented in Consolidated Balance Sheets |  | Net Amounts if Right of Offset had been Applied
Asset Derivatives | Balance Sheet Location |  |  | September 30, 2017 |  | December 31, 2016 |  | September 30, 2017 |  | December 31, 2016
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Other current assets |  | Level 2 |  | $ | 21 |  |  | $ | 176 |  |  | $ | 15 |  |  | $ | 176 |
Interest rate contracts | Other current assets |  | Level 2 |  | 4 |  |  | — |  |  | 4 |  |  | — |
Foreign exchange contracts | Other non-current assets |  | Level 2 |  | 3 |  |  | 131 |  |  | — |  |  | 126 |
Interest rate contracts | Other non-current assets |  | Level 2 |  | 88 |  |  | 137 |  |  | 75 |  |  | 119 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Other current assets |  | Level 2 |  | — |  |  | 1 |  |  | — |  |  | 1 |
Interest rate contracts | Other non-current assets |  | Level 2 |  | 34 |  |  | 42 |  |  | 33 |  |  | 40 |
Total Asset Derivatives |  |  |  |  | $ | 150 |  |  | $ | 487 |  |  | $ | 127 |  |  | $ | 462 |
|  |  | Fair Value Hierarchy Level |  | Gross Amounts Presented in Consolidated Balance Sheets |  | Net Amounts if Right of Offset had been Applied
Liability Derivatives | Balance Sheet Location |  |  | September 30, 2017 |  | December 31, 2016 |  | September 30, 2017 |  | December 31, 2016
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Other current liabilities |  | Level 2 |  | $ | 62 |  |  | $ | — |  |  | $ | 56 |  |  | $ | — |
Interest rate contracts | Other current liabilities |  | Level 2 |  | — |  |  | 1 |  |  | — |  |  | 1 |
Foreign exchange contracts | Other non-current liabilities |  | Level 2 |  | 155 |  |  | 6 |  |  | 152 |  |  | 1 |
Interest rate contracts | Other non-current liabilities |  | Level 2 |  | 18 |  |  | 21 |  |  | 5 |  |  | 3 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Other current liabilities |  | Level 2 |  | — |  |  | — |  |  | — |  |  | — |
Investment market price contracts | Other current liabilities |  | Level 2 |  | 47 |  |  | 10 |  |  | 47 |  |  | 10 |
Interest rate contracts | Other non-current liabilities |  | Level 2 |  | 5 |  |  | 7 |  |  | 4 |  |  | 5 |
Total Liability Derivatives |  |  |  |  | $ | 287 |  |  | $ | 45 |  |  | $ | 264 |  |  | $ | 20 |
Our foreign currency, interest rate and investment market price derivatives are largely comprised of over-the-counter derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, currency exchange rates and investment forward prices; therefore, these derivatives are classified as Level 2. Income Statement and AOCI Recognition The following table indicates the amount of gains and losses that have been recognized in AOCI for the three and nine months ended September 30, 2017 and 2016 for those derivatives designated as cash flow hedges (in millions):
Three Months Ended September 30: |  |  |  |
Derivative Instruments in Cash Flow Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
| 2017 |  | 2016
Interest rate contracts |  | $ | — |  |  | $ | — |
Foreign exchange contracts |  | (141 | ) |  | (27 | )
Total |  | $ | (141 | ) |  | $ | (27 | )
Nine Months Ended September 30: |  |  |  |
Derivative Instruments in Cash Flow Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
| 2017 |  | 2016
Interest rate contracts |  | $ | — |  |  | $ | (3 | )
Foreign exchange contracts |  | (431 | ) |  | (36 | )
Total |  | $ | (431 | ) |  | $ | (39 | )
As of September 30, 2017, there are $108 million of pre-tax losses related to cash flow hedges that are currently deferred in AOCI that are expected to be reclassified to income over the 12 month period ended September 30, 2018. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flow is approximately 15 years. The amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships was immaterial for the three and nine months ended September 30, 2017 and 2016. The following table indicates the amount of gains and losses that have been recognized in AOCI within foreign currency translation adjustment for the three and nine months ended September 30, 2017 and 2016 for those instruments designated as net investment hedges (in millions):
Three Months Ended September 30: |  |  |  |
Non-derivative Instruments in Net Investment Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
| 2017 |  | 2016
Foreign denominated debt |  | $ | (142 | ) |  | $ | (7 | )
Total |  | $ | (142 | ) |  | $ | (7 | )
Nine Months Ended September 30: |  |  |  |
Non-derivative Instruments in Net Investment Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
| 2017 |  | 2016
Foreign denominated debt |  | $ | (389 | ) |  | (30 | )
Total |  | $ | (389 | ) |  | $ | (30 | )
The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the three and nine months ended September 30, 2017 and 2016. The following table indicates the amount and location in the statements of consolidated income in which derivative gains and losses, as well as the associated gains and losses on the underlying exposure, have been recognized for those derivatives designated as fair value hedges for the three and nine months ended September 30, 2017 and 2016 (in millions):
Derivative Instruments in Fair Value Hedging Relationships | Location of Gain (Loss) Recognized in Income |  | Derivative Amount of Gain (Loss) Recognized in Income |  | Hedged Items in Fair Value Hedging Relationships |  | Location of Gain (Loss) Recognized In Income |  | Hedged Items Amount of Gain (Loss) Recognized in Income
| 2017 |  | 2016 |  |  |  | 2017 |  | 2016
Three Months Ended September 30: |  |  |  |  |  |  |
Interest rate contracts | Interest Expense |  | $ | (18 | ) |  | $ | (59 | ) |  | Fixed-Rate Debt |  | Interest Expense |  | $ | 18 |  |  | $ | 59 |
Nine Months Ended September 30: |  |  |  |  |  |  |  |  |  |
Interest rate contracts | Interest Expense |  | $ | (41 | ) |  | $ | 56 |  |  | Fixed-Rate Debt |  | Interest Expense |  | $ | 41 |  |  | $ | (56 | )
Additionally, we maintain some interest rate swaps, foreign currency forwards and investment market price forward contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of a portfolio of interest bearing receivables. These foreign exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement and settlement risk for certain assets and liabilities on our consolidated balance sheets. These investment market price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable securities. We also periodically terminate interest rate swaps and foreign currency options by entering into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign currency contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in market valuation. The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the three and nine months ended September 30, 2017 and 2016 (in millions):
Derivative Instruments Not Designated in Hedging Relationships | Location of Gain (Loss) Recognized in Income |  | Amount of Gain (Loss) Recognized in Income
| 2017 |  | 2016
Three Months Ended September 30: |  |  |  |  |
Interest rate contracts | Interest expense |  | $ | (2 | ) |  | $ | (2 | )
Foreign exchange contracts | Investment income and other |  | 14 |  |  | (11 | )
Investment market price contracts | Investment income and other |  | (45 | ) |  | (28 | )
|  |  | $ | (33 | ) |  | $ | (41 | )
Nine Months Ended September 30: |  |  |  |  |
Interest rate contracts | Interest expense |  | $ | (6 | ) |  | $ | (6 | )
Foreign exchange contracts | Investment income and other |  | 34 |  |  | $ | (117 | )
Investment market price contracts | Investment income and other |  | (37 | ) |  | 152 |
|  |  | $ | (9 | ) |  | $ | 29 |

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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 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41620-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624163-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579240-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624177-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41641-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579245-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624258-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708775-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708773-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5618551-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 + Details
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