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Derivative Instruments | 3 Months Ended
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Mar. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | DERIVATIVE INSTRUMENTS SUMMARY OF DERIVATIVE INSTRUMENTS Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions and by entering into collateral security arrangements. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. We do not use any derivative instruments for trading or speculative purposes. Cash flow hedges We have significant international revenues and costs denominated in foreign currencies, which subjects us to foreign currency risk. We have a foreign currency exposure management program in which we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues denominated in foreign currencies. The objective of the foreign currency exchange contracts is to help mitigate the risk that the U.S. dollar-equivalent cash flows are adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. We evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the derivative instruments with the critical terms of the forecasted cash flows of the hedged item; if the critical terms are the same, we conclude the hedge will be perfectly effective. We did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We report cash flows arising from derivative instruments consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as cash flow hedges are classified in cash flows from operating activities on our condensed consolidated statements of cash flows. As of March 31, 2021, we estimated that $132 million of net derivative losses related to our cash flow hedges included in AOCI are expected to be reclassified into earnings within the next 12 months. During the three months ended March 31, 2021 and 2020, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings prior to the occurrence of the hedged transaction. If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report the derivative’s gain or loss in AOCI until the forecasted transaction affects earnings, at which point we also reclassify it into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedges and gains and losses on derivative instruments that are not designated as cash flow hedges are recorded in the same financial statement line item to which the derivative relates. Net investment hedge We used a forward foreign currency exchange contract, which matured in 2020, to reduce the foreign currency exchange risk related to our investment in a foreign subsidiary. This derivative was designated as a net investment hedge and accordingly, the derivative’s gain and loss was recorded in AOCI as part of foreign currency translation. The accumulated gains and losses associated with this instrument will remain in AOCI until the foreign subsidiary is sold or substantially liquidated, at which point they will be reclassified into earnings. The cash flow associated with the derivative designated as a net investment hedge is classified in cash flows from investing activities on our condensed consolidated statements of cash flows. During the three months ended March 31, 2020, we recognized $71 million in unrealized gain on the foreign currency exchange contract designated as a net investment hedge within the foreign currency translation section of other comprehensive income. As of March 31, 2021, we did not have a net investment hedge. We have not reclassified any gains or losses related to the net investment hedge from AOCI into earnings during any of the periods presented. Foreign currency exchange contracts not designated as hedging instruments We have a foreign currency exposure management program in which we use foreign currency exchange contracts to offset the foreign currency exchange risk of our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities. The gains and losses due to remeasurement of certain foreign currency denominated monetary assets and liabilities are recorded in other income (expense), net, which are offset by the gains and losses on these foreign currency exchange contracts. The cash flows associated with our non-designated derivatives that hedge foreign currency denominated monetary assets and liabilities are classified in cash flows from operating activities on our condensed consolidated statements of cash flows. FAIR VALUE OF DERIVATIVE CONTRACTS The fair value of our outstanding derivative instruments as of March 31, 2021 and December 31, 2020 was as follows:
| Balance Sheet Location |  | March 31, 2021 |  | December 31, 2020
|  |  | (In millions)
Derivative Assets: |  |  |  |  |
Foreign currency exchange contracts designated as hedging instruments | Other current assets |  | $ | 40 |  |  | $ | — |
Foreign currency exchange contracts designated as hedging instruments | Other assets (non-current) |  | 15 |  |  | — |
Foreign currency exchange contracts not designated as hedging instruments | Other current assets |  | 116 |  |  | 42 |
Total derivative assets |  |  | $ | 171 |  |  | $ | 42 |
Derivative Liabilities: |  |  |  |  |
Foreign currency exchange contracts designated as hedging instruments | Other current liabilities |  | $ | 171 |  |  | $ | 287 |
Foreign currency exchange contracts designated as hedging instruments | Other long-term liabilities |  | 8 |  |  | 35 |
Foreign currency exchange contracts not designated as hedging instruments | Other current liabilities |  | 97 |  |  | 88 |
Total derivative liabilities |  |  | $ | 276 |  |  | $ | 410 |
MASTER NETTING AGREEMENTS - RIGHTS OF SETOFF Under master netting agreements with respective counterparties to our foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our condensed consolidated balance sheets. Rights of setoff associated with our foreign currency exchange contracts represented a potential offset to both assets and liabilities of $117 million as of March 31, 2021 and $34 million as of December 31, 2020. We have entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The following table provides the collateral exchanged:
|  | March 31, 2021 |  | December 31, 2020
|  | (In millions)
Cash collateral posted(1) |  | $ | 163 |  |  | $ | 340 |
Cash collateral received(2) |  | $ | 9 |  |  | $ | 1 |
(1) Right to reclaim cash collateral related to our derivative liabilities recognized in other current assets on our condensed consolidated balance sheets. (2) Obligation to return counterparty cash collateral related to our derivative assets recognized in other current liabilities on our condensed consolidated balance sheets. EFFECT OF DERIVATIVE CONTRACTS ON CONDENSED CONSOLIDATED STATEMENTS OF INCOME The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments designated as hedging instruments:
| Three Months Ended March 31, |  |
| 2021 |  | 2020 |  |  |  |
| (In millions)
| Net revenues
Total amounts presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded | $ | 6,033 |  |  | $ | 4,618 |  |  |  |  |
(Losses) gains on foreign exchange contracts designated as cash flow hedges reclassified from AOCI | $ | (59) |  |  | $ | 42 |  |  |  |  |
The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments not designated as hedging instruments:
| Three Months Ended March 31, |  |
| 2021 |  | 2020 |  |  |  |
| (In millions)
Gains on foreign exchange contracts recognized in other income (expense), net | $ | 41 |  |  | $ | 37 |  |  |  |  |
NOTIONAL AMOUNTS OF DERIVATIVE CONTRACTS Derivative transactions are measured in terms of the notional amount; however, this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, but is used only as the underlying basis on which the value of foreign currency exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:
| March 31, 2021 |  | December 31, 2020
| (In millions)
Foreign exchange contracts designated as hedging instruments | $ | 5,466 |  |  | $ | 5,335 |
Foreign exchange contracts not designated as hedging instruments | 17,169 |  |  | 16,098 |
Total | $ | 22,635 |  |  | $ | 21,433 |

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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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