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Derivative Instruments and Hedging Activities | 9 Months Ended
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Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | Derivative Instruments and Hedging Activities The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, stock-based compensation liabilities and interest rates. Under Company policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs. In addition, refer to Note 18, "Fair Value Measurements," of the notes to consolidated financial statements for information related to the fair value measurements and valuation methods utilized by the Company for each derivative type. Cash Flow Hedges The Company has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in foreign currency exchange rates. The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The Company hedges 70% to 90% of the notional amount of each of its known foreign exchange transactional exposures. The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Company’s purchases of copper and aluminum in cases where commodity price risk cannot be naturally offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. The maturities of the commodity hedge contracts coincide with the expected purchase of the commodities. As cash flow hedges under ASC 815, "Derivatives and Hedging," the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates during the three and nine months ended June 30, 2021 and 2020. The Company had the following outstanding contracts to hedge forecasted commodity purchases (in metric tons):
|  | Volume Outstanding as of
Commodity |  | June 30, 2021 |  | September 30, 2020
Copper |  | 2,452 |  |  | 2,497 |
Aluminum |  | 2,415 |  |  | 3,036 |
In April 2021, the Company entered into two interest rate swaps with a combined notional amount of $500 million to reduce the market risk associated with changes in interest rates. The interest rate swaps are designated as cash flow hedges. The fair value of each interest rate swap, or the difference between the swap's reference rate and the fixed rate when notes are issued, will be amortized to interest expense over the life of the respective note issuance. Net Investment Hedges The Company enters into foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effects of the debt obligations are reflected in the AOCI account within shareholders’ equity attributable to Johnson Controls ordinary shareholders where they offset currency gains and losses recorded on its net investments globally. At June 30, 2021 the Company had 853 million euro, 500 million euro, 500 million euro, 423 million euro and 54 million euro in bonds designated as net investment hedges of a portion of its net investment in European subsidiaries and 25 billion yen of foreign denominated debt designated as net investment hedge of a portion of its net investment in Japanese subsidiaries. At September 30, 2020, the Company had 888 million euro, 500 million euro, 500 million euro, 423 million euro and 54 million euro in bonds designated as net investment hedges of a portion of its net investment in European subsidiaries and 25 billion yen of foreign denominated debt designated as net investment hedge of a portion of its net investment in Japanese subsidiaries. Derivatives Not Designated as Hedging Instruments The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. These equity compensation liabilities increase as the Company’s stock price increases and decrease as the Company’s stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. The Company hedged approximately 0.3 million of its ordinary shares, which have a cost basis of $23 million, as of June 30, 2021 and 1.4 million ordinary shares, which have a cost basis of $60 million, as of September 30, 2020. The Company also holds certain foreign currency forward and option contracts not designated as hedging instruments under ASC 815. The change in fair value of these foreign currency exchange derivatives are recorded in the consolidated statements of income in the period in which they occur. Fair Value of Derivative Instruments The following table presents the location and fair values of derivative instruments and hedging activities included in the Company’s consolidated statements of financial position (in millions):
| Derivatives and Hedging Activities Designated as Hedging Instruments under ASC 815 |  | Derivatives and Hedging Activities Not Designated as Hedging Instruments under ASC 815
| June 30, |  | September 30, |  | June 30, |  | September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Other current assets |  |  |  |  |  |  |
Foreign currency exchange derivatives | $ | 11 |  |  | $ | 10 |  |  | $ | 10 |  |  | $ | 17 |
Commodity derivatives | 4 |  |  | 2 |  |  | — |  |  | — |
Other noncurrent assets |  |  |  |  |  |  |
Equity swap | — |  |  | — |  |  | 23 |  |  | 58 |
Total assets | $ | 15 |  |  | $ | 12 |  |  | $ | 33 |  |  | $ | 75 |
Other current liabilities |  |  |  |  |  |  |
Foreign currency exchange derivatives | $ | 4 |  |  | $ | 10 |  |  | $ | 5 |  |  | $ | — |
Interest rate swaps | 13 |  |  | — |  |  | — |  |  | — |
Commodity derivatives | 1 |  |  | — |  |  | — |  |  | — |
Long-term debt |  |  |  |  |  |  |
Foreign currency denominated debt | 2,999 |  |  | 3,010 |  |  | — |  |  | — |
Total liabilities | $ | 3,017 |  |  | $ | 3,020 |  |  | $ | 5 |  |  | $ | — |
Counterparty Credit Risk The use of derivative financial instruments exposes the Company to counterparty credit risk. The Company has established policies and procedures to limit the potential for counterparty credit risk, including establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. As a matter of practice, the Company deals with major banks worldwide having strong investment grade long-term credit ratings. To further reduce the risk of loss, the Company generally enters into International Swaps and Derivatives Association ("ISDA") master netting agreements with substantially all of its counterparties. The Company enters into ISDA master netting agreements with counterparties that permit the net settlement of amounts owed under the derivative contracts. The master netting agreements generally provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company has not elected to offset the fair value positions of the derivative contracts recorded in the consolidated statements of financial position. The Company's derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by the Company or the counterparties. The Company's exposure to credit risk associated with its derivative instruments is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. The Company does not anticipate any non-performance by any of its counterparties, and the concentration of risk with financial institutions does not present significant credit risk to the Company. The gross and net amounts of derivative assets and liabilities were as follows (in millions):
|  | Fair Value of Assets |  |  |  | Fair Value of Liabilities |  |
|  | June 30, |  | September 30, |  |  |  | June 30, |  | September 30, |  |
|  | 2021 |  | 2020 |  |  |  | 2021 |  | 2020 |  |
Gross amount recognized |  | $ | 48 |  |  | $ | 87 |  |  |  |  | $ | 3,022 |  |  | $ | 3,020 |  |  |
Gross amount eligible for offsetting |  | (8) |  |  | (10) |  |  |  |  | (8) |  |  | (10) |  |  |
Net amount |  | $ | 40 |  |  | $ | 77 |  |  |  |  | $ | 3,014 |  |  | $ | 3,010 |  |  |
Derivatives Impact on the Statements of Income and Statements of Comprehensive Income The following table presents the pre-tax gains (losses) recorded in other comprehensive income (loss) related to cash flow hedges for the three and nine months ended June 30, 2021 and 2020 (in millions):
Derivatives in ASC 815 Cash Flow Hedging Relationships |  | Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Foreign currency exchange derivatives |  | $ | 1 |  |  | $ | — |  |  | $ | 14 |  |  | $ | 2 |
Commodity derivatives |  | 10 |  |  | 5 |  |  | 11 |  |  | 2 |
Interest rate swaps |  | (13) |  |  | — |  |  | (13) |  |  | — |
Total |  | $ | (2) |  |  | $ | 5 |  |  | $ | 12 |  |  | $ | 4 |
The following table presents the location and amount of the pre-tax gains (losses) on cash flow hedges reclassified from AOCI into the Company’s consolidated statements of income for the three and nine months ended June 30, 2021 and 2020 (in millions):
Derivatives in ASC 815 Cash Flow Hedging Relationships |  | Location of Gain (Loss) Reclassified from AOCI into Income |  | Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Foreign currency exchange derivatives |  | Cost of sales |  | $ | 7 |  |  | $ | (4) |  |  | $ | 10 |  |  | $ | (1) |
Commodity derivatives |  | Cost of sales |  | 10 |  |  | 2 |  |  | 7 |  |  | 1 |
Total |  |  |  | $ | 17 |  |  | $ | (2) |  |  | $ | 17 |  |  | $ | — |
The following table presents the location and amount of pre-tax gains (losses) on derivatives not designated as hedging instruments recognized in the Company’s consolidated statements of income for the three and nine months ended June 30, 2021 and 2020 (in millions):
|  |  |  | Amount of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments under ASC 815 |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Foreign currency exchange derivatives |  | Cost of sales |  | $ | (3) |  |  | $ | (2) |  |  | $ | (7) |  |  | $ | 2 |
Foreign currency exchange derivatives |  | Selling, general and administrative |  | (2) |  |  | — |  |  | (1) |  |  | — |
Foreign currency exchange derivatives |  | Net financing charges |  | (17) |  |  | 19 |  |  | 128 |  |  | 68 |
Equity swap |  | Selling, general and administrative |  | 4 |  |  | 10 |  |  | 28 |  |  | (14) |
Total |  |  |  | $ | (18) |  |  | $ | 27 |  |  | $ | 148 |  |  | $ | 56 |
Pre-tax gains (losses) on net investment hedges recorded in CTA within other comprehensive income (loss) were $(39) million and $(46) million for the three months ended June 30, 2021 and 2020, respectively. Pre-tax gains (losses) on net investment hedges recorded in CTA within other comprehensive income (loss) were $(30) million and $(58) million for the nine months ended June 30, 2021 and 2020, respectively. For the three and nine months ended June 30, 2021 and 2020, no gains or losses were reclassified from CTA into income.

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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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