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DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT | 3 Months Ended
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Mar. 31, 2023
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. Where deemed appropriate, to manage the impact of these exposures on earnings and/or cash flows, we may enter into a variety of derivative financial instruments. 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. We seek to minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines. We may further manage credit risk through the use of zero threshold bilateral collateral provisions and/or early termination rights utilizing master netting arrangements, whereby cash is exchanged based on the net fair value of derivatives associated with each counterparty. As of March 31, 2023 and December 31, 2022, we held cash collateral of $375 and $534 million, respectively, under these agreements. This collateral is included in Cash and cash equivalents in the consolidated balance sheets and is unrestricted. As of March 31, 2023 and December 31, 2022, no collateral was required to be posted with our counterparties. Types of Hedges Commodity Risk Management Currently, the fuel surcharges that we apply in our domestic and international package businesses 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 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 generally designate and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue. We also hedge portions of our anticipated cash settlements of principal and interest on certain foreign currency denominated debt. We generally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions. We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. 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. 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 fair value hedges of the associated debt instruments. 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. We may 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. Outstanding Positions As of March 31, 2023 and December 31, 2022, the notional amounts of our outstanding derivative positions were as follows (in millions):
|  | March 31, 2023 |  | December 31, 2022
Currency hedges: |  |  |  |
Euro | EUR | 3,880 |  |  | 4,115 |
British Pound Sterling | GBP | 776 |  |  | 856 |
Canadian Dollar | CAD | 1,515 |  |  | 1,598 |
Hong Kong Dollar | HKD | 4,552 |  |  | 4,261 |
Interest rate hedges: |  |  |  |
Floating to Fixed Interest Rate Swaps | USD | 28 |  |  | 28 |
As of March 31, 2023 and December 31, 2022, 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. 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 as of March 31, 2023 and December 31, 2022 (in millions):
|  |  |  | 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 |  |  | March 31, 2023 |  | December 31, 2022 |  | March 31, 2023 |  | December 31, 2022
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Other current assets |  | Level 2 |  | $ | 143 |  |  | $ | 174 |  |  | $ | 135 |  |  | $ | 171 |
Foreign currency exchange contracts |  | Other non-current assets |  | Level 2 |  | 188 |  |  | 250 |  |  | 159 |  |  | 226 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Other current assets |  | Level 2 |  | — |  |  | 1 |  |  | — |  |  | 1 |
Total Asset Derivatives |  |  |  |  |  | $ | 331 |  |  | $ | 425 |  |  | $ | 294 |  |  | $ | 398 |
|  |  |  | 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 |  |  | March 31, 2023 |  | December 31, 2022 |  | March 31, 2023 |  | December 31, 2022
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Other current liabilities |  | Level 2 |  | $ | 8 |  |  | $ | 3 |  |  | $ | — |  |  | $ | — |
Foreign currency exchange contracts |  | Other non-current liabilities |  | Level 2 |  | 29 |  |  | 24 |  |  | — |  |  | — |
Interest rate contracts |  | Other non-current liabilities |  | Level 2 |  | 5 |  |  | 5 |  |  | 5 |  |  | 5 |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Other current liabilities |  | Level 2 |  | 1 |  |  | — |  |  | 1 |  |  | — |
Total Liability Derivatives |  |  |  |  |  | $ | 43 |  |  | $ | 32 |  |  | $ | 6 |  |  | $ | 5 |
Our foreign currency exchange rate, 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, foreign 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 March 31, 2023 and December 31, 2022 (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
| March 31, 2023 |  | March 31, 2023 |  | December 31, 2022 |  | December 31, 2022
Long-term debt and finance leases |  | $ | 280 |  |  | $ | 5 |  |  | $ | 280 |  |  | $ | 5 |
Income Statement and AOCI Recognition of Designated Hedges The following table indicates the amount of gains (losses) that have been recognized in the statements of consolidated income for fair value and cash flow hedges, as well as the associated gain (loss) for the underlying hedged item for fair value hedges for the three months ended March 31, 2023 and 2022 (in millions):
|  | Three Months Ended March 31,
|  | 2023 |  | 2022
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 (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Hedged items |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 8 |  |  | $ | — |
Derivatives designated as hedging instruments |  | — |  |  | — |  |  | — |  |  | — |  |  | (8) |  |  | — |
Gain (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain (loss) reclassified from accumulated other comprehensive income |  | — |  |  | (1) |  |  | — |  |  | — |  |  | (3) |  |  | — |
Foreign Currency Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain (loss) reclassified from accumulated other comprehensive income |  | 68 |  |  | — |  |  | — |  |  | 41 |  |  | — |  |  | — |
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 |  | $ | 68 |  |  | $ | (1) |  |  | $ | — |  |  | $ | 41 |  |  | $ | (3) |  |  | $ | — |
The following table indicates the amount of gains (losses) that have been recognized in AOCI for the three months ended March 31, 2023 and 2022 for those derivatives designated as cash flow hedges (in millions):
Three Months Ended March 31: |  |  |  |  |  |  |  |  |  |
Derivative Instruments in Cash Flow Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Derivatives |  |  |  |  |  |
| 2023 |  | 2022 |  |  |  |  |  |
Interest rate contracts |  | $ | — |  |  | $ | 3 |  |  |  |  |  |  |
Foreign currency exchange contracts |  | (34) |  |  | 92 |  |  |  |  |  |  |
Total |  | $ | (34) |  |  | $ | 95 |  |  |  |  |  |  |
As of March 31, 2023, there were $130 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 March 31, 2024. 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 9 years. The following table indicates the amount of gains (losses) that have been recognized in AOCI within foreign currency translation adjustment for the three months ended March 31, 2023 and 2022 for those instruments designated as net investment hedges (in millions):
Three Months Ended March 31: |  |  |  |
Non-derivative Instruments in Net Investment Hedging Relationships |  | Amount of Gain (Loss) Recognized in AOCI on Debt
| 2023 |  | 2022
Foreign currency denominated debt |  | $ | (73) |  |  | $ | 46 |
Total |  | $ | (73) |  |  | $ | 46 |
Income Statement Recognition of Non-Designated Derivative Instruments Derivative instruments that are not designated as hedges are recorded at fair value with unrealized gains and losses reported in earnings each period. Cash flows from the settlement of derivative instruments appear in the statement of consolidated cash flows within the same categories as the cash flows of the hedged item. We may periodically terminate interest rate swaps and foreign currency exchange forward contracts or enter into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original hedge relationship. Amounts recorded in the statements of consolidated income related to fair value changes and settlements of interest rate swaps and foreign currency forward contracts not designated as hedges for the three months ended March 31, 2023 and 2022 (in millions) were as follows:
Derivative Instruments Not Designated in Hedging Relationships |  | Location of Gain (Loss) Recognized in Income |  | Amount of Gain (Loss) Recognized in Income
|  | 2023 |  | 2022
Three Months Ended March 31: |  |  |  |  |  |
Foreign currency exchange contracts |  | Investment income and other |  | $ | 4 |  |  | $ | (28) |
Total |  |  |  | $ | 4 |  |  | $ | (28) |

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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/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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