XML 34 R21.htm IDEA: XBRL DOCUMENT
v3.19.2

DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT | 6 Months Ended
--- | ---
Jun. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT | DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT Risk Management Policies Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations. These exposures are actively monitored by management. To manage the impact of these exposures, we enter into a variety of derivative financial instruments. Our objective is to manage, 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 from 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 seek to minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and by monitoring counterparties 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. At June 30, 2019 and December 31, 2018, we held cash collateral of $448 and $325 million, respectively, under these agreements; this collateral is included in "Cash and cash equivalents" in the consolidated balance sheets and its use by UPS is not restricted. At June 30, 2019 and December 31, 2018, respectively, $0 million of additional collateral was required to be posted with our 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. Alternatively, 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. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default. At June 30, 2019 and December 31, 2018 there were no instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions. 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 cash flow hedges, 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. A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability in the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as fair value hedges, 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 hedge accounting requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the foreign currency translation adjustment within AOCI, and are recorded in the income statement when the hedged item affects 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. In order to mitigate the impact of fuel surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We periodically enter into derivative 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. Balances in the cumulative translation adjustment accounts remain until the sale or substantially complete liquidation of the foreign entity, upon which they are recognized as a component of investment income and other. 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 June 30, 2019 and December 31, 2018, the notional amounts of our outstanding derivative positions were as follows (in millions):
| June 30, 2019 |  | December 31, 2018
Currency hedges: |  |  |  |  |
Euro | EUR | 4,793 |  |  | EUR | 4,924 |
British Pound Sterling | GBP | 1,806 |  |  | GBP | 2,037 |
Canadian Dollar | CAD | 1,444 |  |  | CAD | 1,443 |
Hong Kong Dollar | HKD | 3,629 |  |  | HKD | 3,642 |
Singapore Dollar | SGD | — |  |  | SGD | 20 |
Interest rate hedges: |  |  |  |  |
Fixed to Floating Interest Rate Swaps | USD | 3,674 |  |  | USD | 4,674 |
Floating to Fixed Interest Rate Swaps | USD | 778 |  |  | USD | 778 |
As of June 30, 2019 and December 31, 2018, we had no outstanding commodity hedge positions. Balance Sheet Recognition and Fair Value Measurements The following table indicates the location in the consolidated balance sheets where 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 in the 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 in 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 |  |  | June 30, 2019 |  | December 31, 2018 |  | June 30, 2019 |  | December 31, 2018
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Other current assets |  | Level 2 |  | $ | 119 |  |  | $ | 90 |  |  | $ | 114 |  |  | $ | 83 |
Interest rate contracts | Other current assets |  | Level 2 |  | 4 |  |  | 1 |  |  | 4 |  |  | 1 |
Foreign exchange contracts | Other non-current assets |  | Level 2 |  | 264 |  |  | 230 |  |  | 254 |  |  | 215 |
Interest rate contracts | Other non-current assets |  | Level 2 |  | 25 |  |  | 14 |  |  | 24 |  |  | 6 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Other current assets |  | Level 2 |  | 2 |  |  | 7 |  |  | 2 |  |  | 5 |
Foreign exchange contracts | Other non-current assets |  | Level 2 |  | — |  |  | 1 |  |  | — |  |  | 1 |
Interest rate contracts | Other non-current assets |  | Level 2 |  | 17 |  |  | 18 |  |  | 16 |  |  | 18 |
Total Asset Derivatives |  |  |  |  | $ | 431 |  |  | $ | 361 |  |  | $ | 414 |  |  | $ | 329 |
|  |  | 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 |  |  | June 30, 2019 |  | December 31, 2018 |  | June 30, 2019 |  | December 31, 2018
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Other current liabilities |  | Level 2 |  | $ | 5 |  |  | $ | 7 |  |  | $ | — |  |  | $ | — |
Foreign exchange contracts | Other non-current liabilities |  | Level 2 |  | 10 |  |  | 15 |  |  | — |  |  | — |
Interest rate contracts | Other non-current liabilities |  | Level 2 |  | 12 |  |  | 41 |  |  | 11 |  |  | 33 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Other current liabilities |  | Level 2 |  | 1 |  |  | 3 |  |  | 1 |  |  | 1 |
Foreign exchange contracts | Other non-current liabilities |  | Level 2 |  | — |  |  | 1 |  |  | — |  |  | 1 |
Interest rate contracts | Other non-current liabilities |  | Level 2 |  | 2 |  |  | — |  |  | 1 |  |  | — |
Total Liability Derivatives |  |  |  |  | $ | 30 |  |  | $ | 67 |  |  | $ | 13 |  |  | $ | 35 |
Our foreign exchange, 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. Balance Sheet Location of Hedged Item in Fair Value Hedges The following table indicates the amounts that were recorded in the consolidated balance sheets related to cumulative basis adjustments for fair value hedges as of June 30, 2019 and December 31, 2018 (in millions).
|  | Carrying Amount of Hedged Liabilities |  | Cumulative Amount of Fair Value Hedge Adjustments |  | Carrying Amount of Hedged Liabilities |  | Cumulative Amount of Fair Value Hedge Adjustments
Line Item in the Consolidated Balance Sheet in Which the Hedged Item is Included |  | June 30, 2019 |  | June 30, 2019 |  | December 31, 2018 |  | December 31, 2018
Long-term debt and finance leases |  | 3,246 |  |  | 54 |  |  | 4,207 |  |  | 16 |
The cumulative amount of fair value hedging losses remaining for any hedged assets and liabilities for which hedge accounting has been discontinued as of June 30, 2019 is $24 million. These amounts will be recognized over the next 11 years. Income Statement and AOCI Recognition The following table indicates the amount of gains and losses that have been recognized in the income statement for the fair value and cash flow hedges, as well as the associated gain or (loss) for the underlying hedged item for fair value hedges for the three and six months ended June 30, 2019 and 2018 (in millions):
| Three Months Ended June 30, |  | Three Months Ended June 30,
| 2019 |  | 2018
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | Revenue |  | Interest Expense |  | Investment Income and Other |  | Revenue |  | Interest Expense |  | Investment Income and Other
Gain or (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |
Interest Contracts: |  |  |  |  |  |  |  |  |  |  |
Hedged items | $ | — |  |  | $ | (30 | ) |  | $ | — |  |  | $ | — |  |  | $ | 19 |  |  | $ | — |
Derivatives designated as hedging instruments | — |  |  | 30 |  |  | — |  |  | — |  |  | (19 | ) |  | — |
Gains or (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |
Interest Contracts: |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income | — |  |  | (3 | ) |  | — |  |  | — |  |  | (6 | ) |  | — |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | 39 |  |  | — |  |  | — |  |  | (20 | ) |  | — |  |  | — |
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded | $ | 39 |  |  | $ | (3 | ) |  | $ | — |  |  | $ | (20 | ) |  | $ | (6 | ) |  | $ | — |
| Six Months Ended June 30, |  | Six Months Ended June 30,
| 2019 |  | 2018
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | Revenue |  | Interest Expense |  | Investment Income and Other |  | Revenue |  | Interest Expense |  | Investment Income and Other
Gain or (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |
Interest Contracts: |  |  |  |  |  |  |  |  |  |  |
Hedged items | $ | — |  |  | $ | (45 | ) |  | $ | — |  |  | $ | — |  |  | $ | 73 |  |  | $ | — |
Derivatives designated as hedging instruments | — |  |  | 45 |  |  | — |  |  | — |  |  | (73 | ) |  | — |
Gains or (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |
Interest Contracts: |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income | — |  |  | (9 | ) |  | — |  |  | — |  |  | (12 | ) |  | — |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | 62 |  |  | — |  |  | — |  |  | (62 | ) |  | — |  |  | — |
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded | $ | 62 |  |  | $ | (9 | ) |  | $ | — |  |  | $ | (62 | ) |  | $ | (12 | ) |  | $ | — |
The following table indicates the amount of gains and (losses) that have been recognized in AOCI for the three and six months ended June 30, 2019 and 2018 for those derivatives designated as cash flow hedges (in millions):
Three Months Ended June 30: |  |  |  |
Derivative Instruments in Cash Flow Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Derivative
| 2019 |  | 2018
Interest rate contracts |  | $ | (2 | ) |  | $ | 1 |
Foreign exchange contracts |  | 22 |  |  | 411 |
Total |  | $ | 20 |  |  | $ | 412 |
Six Months Ended June 30: |  |  |  |
Derivative Instruments in Cash Flow Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
| 2019 |  | 2018
Interest rate contracts |  | $ | 11 |  |  | $ | 2 |
Foreign exchange contracts |  | 126 |  |  | 275 |
Total |  | $ | 137 |  |  | $ | 277 |
As of June 30, 2019, there are $133 million of pre-tax gains related to cash flow hedges that are currently deferred in AOCI that are expected to be reclassified to income over the 12 month period ending June 30, 2020. 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 flows is approximately 13 years. 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 six months ended June 30, 2019 and 2018 for those instruments designated as net investment hedges (in millions):
Three Months Ended June 30: |  |  |  |
Non-derivative Instruments in Net Investment Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Debt
| 2019 |  | 2018
Foreign denominated debt |  | $ | (67 | ) |  | $ | 218 |
Total |  | $ | (67 | ) |  | $ | 218 |
Six Months Ended June 30: |  |  |  |
Non-derivative Instruments in Net Investment Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
| 2019 |  | 2018
Foreign denominated debt |  | $ | 6 |  |  | 138 |
Total |  | $ | 6 |  |  | $ | 138 |
Additionally, we maintain some interest rate swaps, foreign exchange 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 portions of our outstanding debt. The 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 exchange 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 exchange 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 six months ended June 30, 2019 and 2018 (in millions):
Derivative Instruments Not Designated in Hedging Relationships | Location of Gain (Loss) Recognized in Income |  | Amount of Gain (Loss) Recognized in Income
| 2019 |  | 2018
Three Months Ended June 30: |  |  |  |  |
Interest rate contracts | Interest expense |  | $ | (2 | ) |  | $ | (2 | )
Foreign exchange contracts | Investment income and other |  | (19 | ) |  | (67 | )
Total |  |  | $ | (21 | ) |  | $ | (69 | )
Six Months Ended June 30: |  |  |  |  |
Interest rate contracts | Interest expense |  | $ | (4 | ) |  | $ | (4 | )
Foreign exchange contracts | Investment income and other |  | (20 | ) |  | $ | (59 | )
Investment market price contracts | Investment income and other |  | — |  |  | 16 |
Total |  |  | $ | (24 | ) |  | $ | (47 | )

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- 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 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration