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DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT | 9 Months Ended
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Sep. 30, 2020
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 and we actively monitor these exposures. To manage the impact of these exposures, we may 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 September 30, 2020 and December 31, 2019, we held cash collateral of $319 and $495 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 each of September 30, 2020 and December 31, 2019, respectively, no 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 September 30, 2020 and December 31, 2019 there were no instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions. 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. 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 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 these 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, 2020 and December 31, 2019, the notional amounts of our outstanding derivative positions were as follows (in millions):
| September 30, 2020 |  | December 31, 2019
Currency hedges: |  |  |  |  |
Euro | EUR | 3,711 |  |  | EUR | 4,571 |
British Pound Sterling | GBP | 1,345 |  |  | GBP | 1,494 |
Canadian Dollar | CAD | 1,269 |  |  | CAD | 1,402 |
Hong Kong Dollar | HKD | 3,479 |  |  | HKD | 3,327 |
Interest rate hedges: |  |  |  |  |
Fixed to Floating Interest Rate Swaps | USD | 3,250 |  |  | USD | 3,674 |
Floating to Fixed Interest Rate Swaps | USD | 778 |  |  | USD | 778 |
As of September 30, 2020 and December 31, 2019, we had no outstanding commodity hedge positions. Balance Sheet Recognition 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). 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 |  |  | September 30, 2020 |  | December 31, 2019 |  | September 30, 2020 |  | December 31, 2019
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Other current assets |  | Level 2 |  | $ | 121 |  |  | $ | 138 |  |  | $ | 116 |  |  | $ | 131 |
Interest rate contracts |  | Other current assets |  | Level 2 |  | 11 |  |  | 2 |  |  | 11 |  |  | 2 |
Foreign exchange contracts |  | Other non-current assets |  | Level 2 |  | 138 |  |  | 252 |  |  | 124 |  |  | 236 |
Interest rate contracts |  | Other non-current assets |  | Level 2 |  | 33 |  |  | 21 |  |  | 30 |  |  | 20 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Other current assets |  | Level 2 |  | 2 |  |  | 7 |  |  | 2 |  |  | 7 |
Interest rate contracts |  | Other current assets |  | Level 2 |  | 7 |  |  | — |  |  | 6 |  |  | — |
Interest rate contracts |  | Other non-current assets |  | Level 2 |  | — |  |  | 12 |  |  | — |  |  | 11 |
Total Asset Derivatives |  |  |  |  |  | $ | 312 |  |  | $ | 432 |  |  | $ | 289 |  |  | $ | 407 |
|  |  |  | 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, 2020 |  | December 31, 2019 |  | September 30, 2020 |  | December 31, 2019
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Other current liabilities |  | Level 2 |  | $ | 5 |  |  | $ | 7 |  |  | $ | — |  |  | $ | — |
Foreign exchange contracts |  | Other non-current liabilities |  | Level 2 |  | 14 |  |  | 16 |  |  | — |  |  | — |
Interest rate contracts |  | Other non-current liabilities |  | Level 2 |  | 14 |  |  | 11 |  |  | 11 |  |  | 10 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Other current liabilities |  | Level 2 |  | 1 |  |  | — |  |  | 1 |  |  | — |
Interest rate contracts |  | Other current liabilities |  | Level 2 |  | 4 |  |  | — |  |  | 3 |  |  | — |
Interest rate contracts |  | Other non- current liabilities |  | Level 2 |  | — |  |  | 3 |  |  | — |  |  | 2 |
Total Liability Derivatives |  |  |  |  |  | $ | 38 |  |  | $ | 37 |  |  | $ | 15 |  |  | $ | 12 |
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. At September 30, 2020 and December 31, 2019 we did not have any derivatives that were classified as Level 1 (valued using quoted prices in active markets for identical assets) or Level 3 (valued using significant unobservable inputs). 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 September 30, 2020 and December 31, 2019 (in millions):
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included |  | Carrying Amount of Hedged Liabilities |  | Cumulative Amount of Fair Value Hedge Adjustments |  | Carrying Amount of Hedged Liabilities |  | Cumulative Amount of Fair Value Hedge Adjustments
| September 30, 2020 |  | September 30, 2020 |  | December 31, 2019 |  | December 31, 2019
Long-term debt and finance leases |  | $ | 2,828 |  |  | $ | 55 |  |  | $ | 3,234 |  |  | $ | 40 |
The cumulative amount of fair value hedging losses remaining for any hedged assets and liabilities for which hedge accounting has been discontinued as of September 30, 2020 is $9 million. These amounts will be recognized over the next 10 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 nine months ended September 30, 2020 and 2019 (in millions):
|  | Three Months Ended September 30,
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships |  | 2020 |  |  |  | 2019
| Revenue |  | Interest Expense |  |  |  | Revenue |  | Interest Expense |  |
Gain or (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Hedged items |  | $ | — |  |  | $ | 13 |  |  |  |  | $ | — |  |  | $ | (2) |  |  |
Derivatives designated as hedging instruments |  | — |  |  | (13) |  |  |  |  | — |  |  | 2 |  |  |
Gain or (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income |  | — |  |  | (3) |  |  |  |  | — |  |  | (3) |  |  |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income |  | 38 |  |  | — |  |  |  |  | 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 |  | $ | 38 |  |  | $ | (3) |  |  |  |  | $ | 62 |  |  | $ | (3) |  |  |
|  | Nine Months Ended September 30,
|  | 2020 |  | 2019
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships |  | Revenue |  | Interest Expense |  |  | Revenue |  | Interest Expense |
Gain or (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |
Interest Contracts: |  |  |  |  |  |  |  |  |  |
Hedged items |  | $ | — |  |  | $ | (21) |  |  |  | $ | — |  |  | $ | (47) |  |
Derivatives designated as hedging instruments |  | — |  |  | 21 |  |  |  | — |  |  | 47 |  |
Gain 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 |  | 173 |  |  | — |  |  |  | 124 |  |  | — |  |
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 |  | $ | 173 |  |  | $ | (9) |  |  |  | $ | 124 |  |  | $ | (12) |  |
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, 2020 and 2019 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 Derivatives |  |  |  |  |  |
| 2020 |  | 2019 |  |  |  |  |  |
Interest rate contracts |  | $ | (3) |  |  | $ | (1) |  |  |  |  |  |  |
Foreign exchange contracts |  | (218) |  |  | 331 |  |  |  |  |  |  |
Total |  | $ | (221) |  |  | $ | 330 |  |  |  |  |  |  |
Nine Months Ended September 30: |  |  |  |  |  |  |  |  |  |
Derivative Instruments in Cash Flow Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Derivatives |  |  |  |  |  |
| 2020 |  | 2019 |  |  |  |  |  |
Interest rate contracts |  | $ | (6) |  |  | $ | 10 |  |  |  |  |  |  |
Foreign exchange contracts |  | 49 |  |  | 457 |  |  |  |  |  |  |
Total |  | $ | 43 |  |  | $ | 467 |  |  |  |  |  |  |
As of September 30, 2020, there were $139 million of pre-tax gains related to cash flow hedges deferred in AOCI that are expected to be reclassified to income over the 12 month period ending September 30, 2021. 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 12 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 nine months ended September 30, 2020 and 2019 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
| 2020 |  | 2019
Foreign denominated debt |  | $ | (139) |  |  | $ | 191 |
Total |  | $ | (139) |  |  | $ | 191 |
Nine Months Ended September 30: |  |  |  |
Non-derivative Instruments in Net Investment Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Debt
| 2020 |  | 2019
Foreign denominated debt |  | $ | (92) |  |  | $ | 197 |
Total |  | $ | (92) |  |  | $ | 197 |
Additionally, we maintain interest rate swaps, foreign exchange forwards and investment market price forward contracts that are not designated as hedges. The 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. The 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 forward contracts 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 nine months ended September 30, 2020 and 2019 (in millions):
Derivative Instruments Not Designated in Hedging Relationships |  | Location of Gain (Loss) Recognized in Income |  | Amount of Gain (Loss) Recognized in Income
|  | 2020 |  | 2019
Three Months Ended September 30: |  |  |  |  |  |
Interest rate contracts |  | Interest expense |  | $ | (2) |  |  | $ | (2) |
Foreign exchange contracts |  | Investment income and other |  | 34 |  |  | (39) |
Total |  |  |  | $ | 32 |  |  | $ | (41) |
Nine Months Ended September 30: |  |  |  |  |  |
Interest rate contracts |  | Interest expense |  | $ | (6) |  |  | $ | (6) |
Foreign exchange contracts |  | Investment income and other |  | (15) |  |  | (59) |
Total |  |  |  | $ | (21) |  |  | $ | (65) |

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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 + Details
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