Financial Instruments

Derivative Financial Instruments

The Company is exposed to changes in foreign currency exchange rates, primarily relating to certain anticipated cash flows of its international operations. Consequently, the Company uses derivative financial instruments to manage such risks. The Company does not enter into derivative transactions for speculative or trading purposes.

The following table summarizes the Company's outstanding derivative instruments on a gross basis as recorded in its consolidated balance sheets as of September 27, 2014 and March 29, 2014:



	Notional Amounts				Derivative Assets						Derivative Liabilities
Derivative Instrument^(a)	September 27, 2014		March 29, 2014		September 27, 2014			March 29, 2014			September 27, 2014			March 29, 2014
					Balance Sheet Line^(b)	Fair Value		Balance Sheet Line^(b)	Fair Value		Balance Sheet Line^(b)	Fair Value		Balance Sheet Line^(b)	Fair Value
	(millions)
Designated Hedges:
FC — Inventory purchases	$	482	$	476	^(c)	$	25	^(d)	$	2	AE	$	3	AE	$	5
FC — Other^(e)	220		223		PP	8		—	—		AE	1		AE	2
Total Designated Hedges	$	702	$	699		$	33		$	2		$	4		$	7
Undesignated Hedges:
FC — Other^(f)	$	301	$	280	^(g)	$	11	^(h)	$	6	AE	$	1	—	$	—
Total Hedges	$	1,003	$	979		$	44		$	8		$	5		$	7


^(a)	FC = Forward foreign currency exchange contracts.


^(b)	PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities.


^(c)	$20 million included within prepaid expenses and other current assets and $5 million included within other non-current assets.


^(d)	$1 million included within prepaid expenses and other current assets and $1 million included within other non-current assets.


^(e)	Primarily designated hedges of foreign currency-denominated intercompany royalty payments, marketing contributions, and other operational exposures.


^(f)	Primarily related to undesignated hedges of foreign currency-denominated intercompany loans.


^(g)	$5 million included within prepaid expenses and other current assets and $6 million included within other non-current assets.


^(h)	$2 million included within prepaid expenses and other current assets and $4 million included within other non-current assets.

The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance sheets on a gross basis, even though they are subject to master netting arrangements. However, if the Company were to offset and record the asset and liability balances of all of its forward foreign currency exchange contracts on a net basis in accordance with the terms of each of its master netting arrangements, spread across eight separate counterparties, the amounts presented in the consolidated balance sheets as of September 27, 2014 and March 29, 2014 would be adjusted from the current gross presentation as detailed in the following table:



	September 27, 2014							March 29, 2014
Derivative Instrument	Gross Amounts Presented in the Balance Sheet		Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements			Net Amount		Gross Amounts Presented in the Balance Sheet		Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements			Net Amount
	(millions)
FC — Derivative assets	$	44	$	(5	)	$	39	$	8	$	(1	)	$	7
FC — Derivative liabilities	$	5	$	(5	)	$	—	$	7	$	(1	)	$	6

The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. Refer to Note 3 for further discussion of the Company's master netting arrangements.

The following tables summarize the pretax impact of the effective portion of gains and losses from the Company's derivative instruments on its unaudited interim consolidated financial statements for the three-month and six-month periods ended September 27, 2014 and September 28, 2013:



	Gains (Losses) Recognized in OCI
	Three Months Ended					Six Months Ended
Derivative Instrument	September 27, 2014		September 28, 2013			September 27, 2014		September 28, 2013
			(millions)
Designated Cash Flow Hedges:
FC — Inventory purchases	$	21	$	(7	)	$	22	$	(8	)
FC — Other	11		(1		)	9		(1		)
	$	32	$	(8	)	$	31	$	(9	)
Designated Hedge of Net Investment:
Euro Debt^(a)	$	—	$	1		$	—	$	—
Total Designated Hedges	$	32	$	(7	)	$	31	$	(9	)


^(a)	Relates to remeasurement of the Euro Debt, which was repaid in October 2013.



	Gains (Losses) Reclassified from AOCI to Earnings												Location of Gains (Losses) Reclassified from AOCI to Earnings
	Three Months Ended						Six Months Ended
Derivative Instrument	September 27, 2014			September 28, 2013			September 27, 2014			September 28, 2013
				(millions)
Designated Cash Flow Hedges:
FC — Inventory purchases	$	(1	)	$	1		$	(2	)	$	6		Cost of goods sold
FC — Other	7			(1		)	5			(1		)	Foreign currency gains (losses)
	$	6		$	—		$	3		$	5

During the six months ended September 28, 2013, the Company also recorded a foreign currency gain of $2 million associated with the discontinuance of certain cash flow hedges, as the related forecasted transactions were no longer probable of occurring.

As of September 27, 2014, it is expected that approximately $18 million of net gains deferred in AOCI related to derivative financial instruments will be recognized in earnings over the next twelve months. No material gains or losses relating to ineffective hedges were recognized during any of the fiscal periods presented.

The following table summarizes the impact of gains and losses from the Company's undesignated hedge contracts on its unaudited interim consolidated financial statements for the three-month and six-month periods ended September 27, 2014 and September 28, 2013:



	Gains (Losses) Recognized in Earnings								Location of Gains (Losses) Recognized in Earnings
	Three Months Ended				Six Months Ended
Derivative Instrument	September 27, 2014		September 28, 2013		September 27, 2014		September 28, 2013
	(millions)
Undesignated Hedges:
FC — Other	$	8	$	10	$	6	$	18	Foreign currency gains (losses)
Total Undesignated Hedges	$	8	$	10	$	6	$	18

Risk Management Strategies

The Company primarily enters into forward foreign currency exchange contracts as hedges to reduce its risk from exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, intercompany contributions to fund certain marketing efforts of its international operations, and other foreign currency-denominated operational cash flows. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily to changes in the value of the Euro, the Japanese Yen, the South Korean Won, the Australian Dollar, the Canadian Dollar, the British Pound Sterling, and the Hong Kong Dollar, the Company hedges a portion of its foreign currency exposures anticipated over a two-year period. In doing so, the Company uses foreign currency exchange forward contracts that generally have maturities of two months to two years to provide continuing coverage throughout the hedging period.

See Note 3 for further discussion of the Company's accounting policies relating to its derivative financial instruments.

Investments

The following table summarizes the Company's short-term and non-current investments recorded in its consolidated balance sheets as of September 27, 2014 and March 29, 2014:



	September 27, 2014						March 29, 2014
Type of Investment	Short-term		Non-current		Total		Short-term		Non-current		Total
					(millions)
Available-for-Sale:
Government bonds	$	—	$	—	$	—	$	1	$	—	$	1
Auction rate securities^(a)	—		2		2		—		2		2
Total available-for-sale investments	$	—	$	2	$	2	$	1	$	2	$	3
Other:
Time deposits	$	708	$	—	$	708	$	487	$	—	$	487
Total Investments	$	708	$	2	$	710	$	488	$	2	$	490


^(a)	Auction rate securities have characteristics similar to short-term investments. However, the Company has recorded these securities within other non-current assets in its consolidated balance sheets as current market conditions call into question its ability to redeem these investments for cash within the next twelve months.

No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded during the three-month and six-month periods ended September 27, 2014 and September 28, 2013. Refer to Note 16 for further detail.

See Note 3 to the Fiscal 2014 10-K for further discussion of the Company's accounting policies relating to its investments.