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Derivative Instruments | 9 Months Ended
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Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | 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 and interest rates. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign exchange rate and interest rate movements. We do not use any of our derivative instruments for trading purposes. We use foreign currency exchange contracts to reduce the volatility of cash flows related to forecasted revenues, expenses, assets and liabilities, including intercompany balances denominated in foreign currencies. These contracts are generally one month to one year in duration but with maturities up to 24 months. The objective of the foreign exchange contracts is to better ensure that ultimately the U.S. dollar-equivalent cash flows are not adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. We evaluate the effectiveness of our foreign exchange contracts designated as cash flow or net investment hedges on a quarterly basis. During 2020, we began to hedge the variability of forecasted interest payments on anticipated debt issuance using forward-starting interest rate swaps. The total notional amount of these forward-starting interest rate swaps was $700 million as of September 30, 2020 with terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate. These interest rate swaps effectively fix the benchmark interest rate and have the economic effect of hedging the variability of forecasted interest payments for up to 10 years on an anticipated debt issuance in 2022, and they will be terminated upon issuance of the debt. Similar to other cash flow hedges, we record changes in the fair value of these interest rate swaps in accumulated other comprehensive income (loss) until the anticipated debt issuance. Upon debt issuance and termination of the derivative instruments, their fair value will be amortized over the term of the new debt to interest expense. We evaluate the effectiveness of interest rate swaps designated as cash flow hedges on a quarterly basis. During the second quarter of 2020, we began to hedge the variability of the cash flows in interest payments associated with our floating-rate debt using interest rate swaps. These interest rate swap agreements effectively convert our floating-rate debt that is based on London Interbank Offered Rate (“LIBOR”) to a fixed-rate basis, reducing the impact of interest-rate changes on future interest expense. The total notional amount of these interest swaps was $400 million as of September 30, 2020 with terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate. Our interest rate swap contracts have maturity dates in 2023. Similar to other cash flow hedges, we record changes in the fair value of these interest rate swaps in accumulated other comprehensive income (loss) and their fair value will be amortized over the term of the debt to interest expense. We used interest rate swaps to manage interest rate risk on our fixed rate notes issued in July 2014 and maturing in 2019, 2021 and 2024. These interest rate swaps had the economic effect of modifying the fixed interest obligations associated with $2.4 billion of these notes so that the interest payable on these senior notes effectively became variable based on LIBOR plus a spread. These interest rate swaps were terminated in 2019. Cash Flow Hedges For derivative instruments that are designated as cash flow hedges, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”) and subsequently reclassified into earnings in the same period the forecasted hedged transaction affects earnings. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Unrealized gains and losses in AOCI associated with such derivative instruments are immediately reclassified into earnings. As of September 30, 2020, we have estimated that approximately $35 million of net derivative losses related to our foreign exchange cash flow hedges and $1 million net derivative losses related to our interest rate cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months. We classify cash flows related to our cash flow hedges as operating activities in our condensed consolidated statement of cash flows. Net Investment Hedges For derivative instruments that are designated as net investment hedges, the derivative’s gain or loss is initially reported in the translation adjustments component of AOCI and is reclassified to net earnings in the period in which the hedged subsidiary is either sold or substantially liquidated. Fair Value Hedges We designated the interest rate swaps used to manage interest rate risk on our fixed rate notes issued in July 2014 and maturing in 2019, 2021 and 2024 as qualifying hedging instruments and accounted for them as fair value hedges. These transactions were designated as fair value hedges for financial accounting purposes because they protected us against changes in the fair value of certain of our fixed rate borrowings due to benchmark interest rate movements. In 2019, $1.15 billion related to our 2.200% senior notes due 2019 of the $2.4 billion aggregate notional amount matured. In addition, during 2019, we terminated the interest rate swaps related to $750 million of our 2.875% senior notes due July 2021 and $500 million of our 3.450% senior notes due July 2024. As a result of the early termination, hedge accounting was discontinued prospectively and the gain on termination was recorded as an increase to the long-term debt balance and is being recognized over the remaining life of the underlying debt as a reduction to interest expense. The gain recognized during the three and nine months ended September 30, 2020 was immaterial. Non-Designated Hedges Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets or liabilities, including intercompany balances denominated in non-functional currencies. The gains and losses on our derivatives not designated as hedging instruments are recorded in interest and other, net, which are offset by the foreign currency gains and losses on the related assets and liabilities that are also recorded in interest and other, net. We classify cash flows related to our non-designated hedging instruments as operating activities in our condensed consolidated statement of cash flows. Warrant We entered into a warrant agreement in conjunction with a commercial agreement with Adyen that, subject to meeting certain conditions, entitles us to acquire a fixed number of shares up to 5% of Adyen’s fully diluted issued and outstanding share capital at a specific date. The warrant has a term of seven years and will vest in a series of four tranches, at a specified price per share (fixed for the first two tranches) upon meeting processing volume milestone targets on a calendar year basis. If and when a relevant milestone is reached, the warrant becomes exercisable with respect to the corresponding tranche of warrant shares up until the warrant expiration date of January 31, 2025. The maximum number of tranches that can vest in one calendar year is two. The warrant is accounted for as a derivative under ASC Topic 815, Derivatives and Hedging. We report the warrant at fair value within other assets in our condensed consolidated balance sheets and changes in the fair value of the warrant are recognized in interest and other, net in our condensed consolidated statement of income. The day-one value attributable to the other side of the warrant, which was recorded as a deferred credit, is reported within other liabilities in our condensed consolidated balance sheets and will be amortized over the life of the commercial arrangement. Fair Value of Derivative Contracts The fair values of our outstanding derivative instruments were as follows (in millions):
| Balance Sheet Location |  | September 30, 2020 |  | December 31, 2019
Derivative Assets: |  |  |  |  |
Foreign exchange contracts designated as cash flow hedges | Other Current Assets |  | $ | 29 |  |  | $ | 36 |
Foreign exchange contracts designated as net investment hedges | Other Current Assets |  | 1 |  |  | — |
Foreign exchange contracts not designated as hedging instruments | Other Current Assets |  | 9 |  |  | 13 |
Warrant | Other Assets |  | 777 |  |  | 281 |
Foreign exchange contracts designated as cash flow hedges | Other Assets |  | 16 |  |  | 15 |
Interest rate contracts designated as cash flow hedges | Other Assets |  | 4 |  |  | — |
Total derivative assets |  |  | $ | 836 |  |  | $ | 345 |
Derivative Liabilities: |  |  |  |  |
Foreign exchange contracts designated as cash flow hedges | Other Current Liabilities |  | $ | 12 |  |  | $ | 2 |
Foreign exchange contracts designated as net investment hedges | Other Current Liabilities |  | 2 |  |  | 2 |
Foreign exchange contracts not designated as hedging instruments | Other Current Liabilities |  | 11 |  |  | 16 |
Interest rate contracts designated as cash flow hedges | Other Current Liabilities |  | 1 |  |  | — |
Interest rate contracts designated as cash flow hedges | Other Liabilities |  | 3 |  |  | — |
Total derivative liabilities |  |  | $ | 29 |  |  | $ | 20 |
Total fair value of derivative instruments |  |  | $ | 807 |  |  | $ | 325 |
Under the master netting agreements with the respective counterparties to our derivative 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 sheet. As of September 30, 2020, the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities by $15 million, resulting in net derivative assets of $41 million and net derivative liabilities of $11 million. As of September 30, 2020, the potential effect of rights of set-off associated with the interest rate contracts would be an offset to both assets and liabilities by $2 million, resulting in net derivative assets of $2 million and net derivative liabilities of $1 million. Effect of Derivative Contracts on Accumulated Other Comprehensive Income The following tables present the activity of derivative instruments designated as cash flow hedges as of September 30, 2020 and December 31, 2019, and the impact of these derivative contracts on AOCI for the nine months ended September 30, 2020 and 2019 (in millions):
| December 31, 2019 |  | Amount of Gain (Loss) Recognized in Other Comprehensive Income |  | Less: Amount of Gain (Loss) Reclassified From AOCI to Earnings |  | September 30, 2020
Foreign exchange contracts designated as cash flow hedges | $ | (9) |  |  | $ | (17) |  |  | $ | 23 |  |  | $ | (49) |
The impact of interest rate contracts designated as cash flow hedges on AOCI for the nine months ended September 30, 2020 was immaterial.
| December 31, 2018 |  | Amount of Gain (Loss) Recognized in Other Comprehensive Income |  | Less: Amount of Gain (Loss) Reclassified From AOCI to Earnings |  | September 30, 2019
Foreign exchange contracts designated as cash flow hedges | $ | 68 |  |  | $ | 58 |  |  | $ | 53 |  |  | $ | 73 |
Effect of Derivative Contracts on Condensed Consolidated Statement of Income The following table provides a summary of the total gain (loss) recognized in the condensed consolidated statement of income from our foreign exchange derivative contracts by location (in millions):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Foreign exchange contracts designated as cash flow hedges recognized in net revenues | $ | 6 |  |  | $ | 19 |  |  | $ | 23 |  |  | $ | 52 |
Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues | — |  |  | — |  |  | — |  |  | 1 |
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net | (17) |  |  | 28 |  |  | (10) |  |  | (3) |
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income | $ | (11) |  |  | $ | 47 |  |  | $ | 13 |  |  | $ | 50 |
The following table provides a summary of the total gain (loss) recognized in the condensed consolidated statement of income from our interest rate derivative contracts by location (in millions):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net | $ | — |  |  | $ | (5) |  |  | $ | — |  |  | $ | 34 |
Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net | — |  |  | 5 |  |  | — |  |  | (34) |
Gain (loss) from interest rate contracts designated as cash flow hedges recognized in interest and other, net | — |  |  | — |  |  | — |  |  | — |
Total gain (loss) recognized from interest rate derivative contracts in the condensed consolidated statement of income | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
The following table provides a summary of the total gain (loss) recognized in the condensed consolidated statement of income due to changes in the fair value of the warrant (in millions):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Gain (loss) attributable to changes in the fair value of warrant recognized in interest and other, net | $ | 191 |  |  | $ | (49) |  |  | $ | 496 |  |  | $ | 56 |
Notional Amounts of Derivative Contracts Derivative transactions are measured in terms of the notional amount, but 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 instruments. The notional amount is generally not exchanged, but is used only as the basis on which the value of foreign exchange payments under these contracts are determined. The following table provides the notional amounts of our outstanding derivatives (in millions):
| September 30, 2020 |  | December 31, 2019
Foreign exchange contracts designated as cash flow hedges | $ | 2,039 |  |  | $ | 1,983 |
Foreign exchange contracts designated as net investment hedges | 204 |  |  | 200 |
Foreign exchange contracts not designated as hedging instruments | 2,273 |  |  | 2,276 |
Interest rate contracts designated as cash flow hedges | 1,100 |  |  | — |
Total | $ | 5,616 |  |  | $ | 4,459 |
Credit Risk Our derivatives expose us to credit risk to the extent that the 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. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. To further limit credit risk, we also enter into collateral security arrangements related to certain interest rate derivative instruments whereby collateral is posted between counterparties if the fair value of the derivative instrument exceeds certain thresholds. Additional collateral would be required in the event of a significant credit downgrade by either party. We are not required to pledge, nor are we entitled to receive, collateral related to our foreign exchange derivative transactions.

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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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