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Derivative Instruments | 6 Months Ended
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Jun. 30, 2022
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 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. In the second quarter of 2022, 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 $150 million as of June 30, 2022 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 by the second quarter of 2023, and they will be terminated upon issuance of the debt. Additionally in 2020, we began to hedge the variability of forecasted interest payments on anticipated debt issuance using forward-starting interest rate swaps and recorded changes in the fair value of these interest rate swaps in AOCI until the anticipated debt issuance. In May 2021, we issued $2.5 billion of senior unsecured notes, which consisted of notes maturing in 2026, 2031 and 2051. As a result, we terminated the interest rate swaps and the gain associated with the termination of approximately $45 million is amortized to interest expense over the terms of our notes due in May 2026 and May 2031. Similar to other cash flow hedges, we record changes in the fair value of these interest rate swaps in accumulated other comprehensive income (loss) (“AOCI”) 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 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 rate swaps was $400 million as of June 30, 2022 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 AOCI and their fair value is amortized over the term of the debt to interest expense. 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 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 June 30, 2022, we have estimated that approximately $122 million of net derivative gains related to our foreign exchange cash flow hedges and $11 million net derivative gains related to our interest rate cash flow hedges included in AOCI 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. 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 and equity investments 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 in the same line item as the cash flows of the related assets or liabilities, which is generally within operating activities in our condensed consolidated statement of cash flows. Cash flows related to the settlement of non-designated hedging instruments related to equity investments are classified within investing 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 vests 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. When or if 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. In 2021, we met the processing volume milestone target to vest the first tranche of the warrant. Upon vesting of the first tranche, we exercised the option to purchase shares of Adyen valued at approximately $1.1 billion in exchange for approximately $110 million in cash. Our equity investment in Adyen is accounted for as an equity investment with a readily determinable fair value. Refer to “Note 6 — Investments” for more information about our equity investments. The warrant is accounted for as a derivative under ASC Topic 815, Derivatives and Hedging. We report the warrant at fair value within warrant asset in our condensed consolidated balance sheets and changes in the fair value of the warrant are recognized in gain (loss) on equity investments and warrant, 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 is amortized over the life of the commercial arrangement. See “Note 8 — Fair Value Measurements” for information about the fair value measurement of the warrant. Fair Value of Derivative Contracts The following table presents fair values of our outstanding derivative instruments as of the dates indicated (in millions):
| Balance Sheet Location |  | June 30, 2022 |  | December 31, 2021
Derivative Assets: |  |  |  |  |
Foreign exchange contracts designated as cash flow hedges | Other current assets |  | $ | 142 |  |  | $ | 63 |
Foreign exchange contracts not designated as hedging instruments | Other current assets |  | 55 |  |  | 22 |
Interest rate contracts designated as cash flow hedges | Other current assets |  | 7 |  |  | — |
Warrant | Other assets |  | 225 |  |  | 444 |
Foreign exchange contracts designated as cash flow hedges | Other assets |  | 25 |  |  | 24 |
Total derivative assets |  |  | $ | 454 |  |  | $ | 553 |
Derivative Liabilities: |  |  |  |  |
Foreign exchange contracts designated as cash flow hedges | Other current liabilities |  | $ | 36 |  |  | $ | — |
Foreign exchange contracts not designated as hedging instruments | Other current liabilities |  | — |  |  | 17 |
Total derivative liabilities |  |  | $ | 36 |  |  | $ | 17 |
Total fair value of derivative instruments |  |  | $ | 418 |  |  | $ | 536 |
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 June 30, 2022, the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities by $33 million, resulting in net derivative assets of $188 million and net derivative liabilities of $2 million. As of June 30, 2022, there was no potential effect of rights of set-off associated with the interest rate contracts, as there were only asset positions of $7 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 June 30, 2022 and December 31, 2021, and the impact of these derivative contracts on AOCI for the periods indicated (in millions):
| December 31, 2021 |  | Amount of Gain (Loss) Recognized in Other Comprehensive Income |  | Less: Amount of Gain (Loss) Reclassified From AOCI to Earnings |  | June 30, 2022
Foreign exchange contracts designated as cash flow hedges | $ | 25 |  |  | $ | 140 |  |  | $ | 16 |  |  | $ | 149 |
Interest rate contracts designated as cash flow hedges | 30 |  |  | — |  |  | (2) |  |  | 32 |
Total | $ | 55 |  |  | $ | 140 |  |  | $ | 14 |  |  | $ | 181 |
| December 31, 2020 |  | Amount of Gain (Loss) Recognized in Other Comprehensive Income |  | Less: Amount of Gain (Loss) Reclassified From AOCI to Earnings |  | June 30, 2021
Foreign exchange contracts designated as cash flow hedges | $ | (95) |  |  | $ | (6) |  |  | $ | (44) |  |  | $ | (57) |
Interest rate contracts designated as cash flow hedges | 10 |  |  | 22 |  |  | — |  |  | 32 |
Total | $ | (85) |  |  | $ | 16 |  |  | $ | (44) |  |  | $ | (25) |
Effect of Derivative Contracts on Condensed Consolidated Statement of Income The following table summarizes the total gain (loss) recognized in the condensed consolidated statement of income from our foreign exchange derivative contracts by location for the periods indicated (in millions):
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Foreign exchange contracts designated as cash flow hedges recognized in net revenues | $ | 9 |  |  | $ | (18) |  |  | $ | 15 |  |  | $ | (46) |
Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues | — |  |  | 1 |  |  | — |  |  | 2 |
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net | 25 |  |  | — |  |  | 40 |  |  | (6) |
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income | $ | 34 |  |  | $ | (17) |  |  | $ | 55 |  |  | $ | (50) |
The following table summarizes the total gain (loss) recognized in the condensed consolidated statement of income from our interest rate derivative contracts by location for the periods indicated (in millions):
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Gain (loss) from interest rate contracts designated as cash flow hedges recognized in interest and other, net | $ | (2) |  |  | $ | 1 |  |  | $ | (1) |  |  | $ | — |
The following table summarizes the total gain (loss) recognized in the condensed consolidated statement of income due to changes in the fair value of the warrant for the periods indicated (in millions):
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Gain (loss) attributable to changes in the fair value of warrant recognized in gain (loss) on equity investments and warrant, net | $ | (104) |  |  | $ | 108 |  |  | $ | (219) |  |  | $ | 72 |
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 presents the notional amounts of our outstanding derivatives as of the dates indicated (in millions):
| June 30, 2022 |  | December 31, 2021
Foreign exchange contracts designated as cash flow hedges | $ | 1,688 |  |  | $ | 2,066 |
Foreign exchange contracts not designated as hedging instruments | 2,436 |  |  | 3,159 |
Interest rate contracts designated as cash flow hedges | 550 |  |  | 400 |
Total | $ | 4,674 |  |  | $ | 5,625 |
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 https://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 https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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