Financial Instruments

Derivative Financial Instruments

The Company is exposed to changes in foreign currency exchange rates, primarily relating to certain anticipated cash flows and the value of reported net assets of its international operations, as well as changes in the fair value of its fixed-rate debt attributed to changes in the benchmark interest rate. Consequently, the Company uses derivative financial instruments to manage and mitigate 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 December 26, 2015 and March 28, 2015:



	Notional Amounts				Derivative Assets						Derivative Liabilities
Derivative Instrument^(a)	December 26, 2015		March 28, 2015		December 26, 2015			March 28, 2015			December 26, 2015			March 28, 2015
					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	$	597	$	587	^(e)	$	17	PP	$	49	AE	$	5	AE	$	9
FC — Other^(c)	104		118		PP	1		PP	5		AE	1		AE	1
IRS — 2.125% Senior Notes	300		—		—	—		—	—		ONCL	1		—	—
CCS — NI	307		—		—	—		—	—		ONCL	7		—	—
Total Designated Hedges	$	1,308	$	705		$	18		$	54		$	14		$	10
Undesignated Hedges:
FC — Other^(d)	$	580	$	464	^(f)	$	27	^(g)	$	33	^(h)	$	5	⁽ⁱ⁾	$	9
Total Hedges	$	1,888	$	1,169		$	45		$	87		$	19		$	19


^(a)	FC = Forward foreign currency exchange contracts; IRS = Interest rate swap contract; CCS = Cross-currency swap contract; NI = Net investment hedge.


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


^(c)	Primarily includes designated hedges of foreign currency-denominated intercompany royalty payments and other operational exposures.


^(d)	Primarily includes undesignated hedges of foreign currency-denominated intercompany loans and other intercompany balances.


^(e)	$16 million included within prepaid expenses and other current assets and $1 million included within other non-current assets.


^(f)	$2 million included within prepaid expenses and other current assets and $25 million included within other non-current assets.


^(g)	$11 million included within prepaid expenses and other current assets and $22 million included within other non-current assets.


^(h)	$3 million included within accrued expenses and other current liabilities and $2 million included within other non-current liabilities.


⁽ⁱ⁾	$8 million included within accrued expenses and other current liabilities and $1 million included within other non-current liabilities.

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 derivative instruments 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 December 26, 2015 and March 28, 2015 would be adjusted from the current gross presentation as detailed in the following table:



	December 26, 2015							March 28, 2015
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)
Derivative assets	$	45	$	(11	)	$	34	$	87	$	(14	)	$	73
Derivative liabilities	$	19	$	(11	)	$	8	$	19	$	(14	)	$	5

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 designated derivative instruments on its unaudited interim consolidated financial statements for the three-month and nine-month periods ended December 26, 2015 and December 27, 2014:



	Gains (Losses) Recognized in OCI
	Three Months Ended					Nine Months Ended
Derivative Instrument	December 26, 2015			December 27, 2014		December 26, 2015			December 27, 2014
				(millions)
Designated Cash Flow Hedges:
FC — Inventory purchases	$	5		$	11	$	7		$	33
FC — Other	(1		)	12		(3		)	21
	$	4		$	23	$	4		$	54
Designated Hedge of Net Investment:^(a)
CCS	$	6		$	—	$	(7	)	$	—
Total Designated Hedges	$	10		$	23	$	(3	)	$	54



	Gains (Losses) Reclassified from AOCI to Earnings									Location of Gains (Losses) Reclassified from AOCI to Earnings
	Three Months Ended				Nine Months Ended
Derivative Instrument	December 26, 2015		December 27, 2014		December 26, 2015		December 27, 2014
			(millions)
Designated Cash Flow Hedges:
FC — Inventory purchases	$	13	$	—	$	29	$	(2	)	Cost of goods sold
FC — Other	—		11		—		16			Foreign currency gains (losses)
	$	13	$	11	$	29	$	14


^(a)	Amounts recognized in OCI would be recognized in earnings only upon the sale or liquidation of the hedged net investment.

As of December 26, 2015, it is expected that approximately $20 million of net gains deferred in AOCI related to derivative instruments will be recognized in earnings over the next twelve months. No material gains or losses relating to ineffective cash flow hedges were recognized during any of the fiscal periods presented.

The following table summarizes the pretax impact of gains and losses from the Company's undesignated derivative instruments on its unaudited interim consolidated financial statements for the three-month and nine-month periods ended December 26, 2015 and December 27, 2014:



	Gains (Losses) Recognized in Earnings								Location of Gains (Losses) Recognized in Earnings
	Three Months Ended				Nine Months Ended
Derivative Instrument	December 26, 2015		December 27, 2014		December 26, 2015		December 27, 2014
	(millions)
Undesignated Hedges:
FC — Other	$	2	$	18	$	4	$	24	Foreign currency gains (losses)
Total Undesignated Hedges	$	2	$	18	$	4	$	24

Risk Management Strategies

Forward Foreign Currency Exchange Contracts

The Company primarily enters into forward foreign currency exchange contracts to reduce its risk related to 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 made to fund certain marketing efforts of its international operations, and other foreign currency-denominated operational and intercompany balances and 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 forward foreign currency exchange contracts that generally have maturities of two months to two years to provide continuing coverage throughout the hedging period.

Interest Rate Swap Contract

During the first quarter of Fiscal 2016, the Company entered into a pay-floating rate, receive-fixed rate interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate 2.125% Senior Notes attributed to changes in the benchmark interest rate (the "Interest Rate Swap"). The Interest Rate Swap, which matures on September 26, 2018, has a notional amount of $300 million and swaps the fixed interest rate on the Company's 2.125% Senior Notes for a variable interest rate based on the 3-month London Interbank Offered Rate ("LIBOR") plus a fixed spread. Changes in the fair value of the Interest Rate Swap were offset by changes in the fair value of the 2.125% Senior Notes attributed to changes in the benchmark interest rate, with no resulting ineffectiveness recognized in earnings during either of the three-month or nine-month periods ended December 26, 2015.

Cross-Currency Swap Contract

During the first quarter of Fiscal 2016, the Company entered into a €280 million notional amount pay-floating rate, receive-floating rate cross-currency swap contract which it designated as a hedge of its net investment in certain of its European subsidiaries (the "Cross-Currency Swap"). The Cross-Currency Swap, which matures on September 26, 2018, swaps the USD-based variable interest rate payment based on the 3-month LIBOR plus a fixed spread (as paid under the Interest Rate Swap described above) for a Euro-based variable interest rate payment based on the 3-month Euro Interbank Offered Rate plus a fixed spread. As a result, the Cross-Currency Swap, in conjunction with the Interest Rate Swap, economically converts the Company's $300 million fixed-rate 2.125% Senior Notes to a €280 million floating-rate Euro-denominated liability. No material gains or losses related to the ineffective portion, or the amount excluded from effectiveness testing, were recognized in earnings during either the three-month or nine-month periods ended December 26, 2015.

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

Investments

As of December 26, 2015, the Company's short-term and non-current investments consisted of $688 million of time deposits and $8 million of non-U.S. corporate bonds, respectively. As of March 28, 2015, the Company's short-term and non-current investments consisted of $644 million of time deposits and $8 million of non-U.S. corporate bonds, respectively.

No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded during any of the fiscal periods presented.

See Note 3 to the Fiscal 2015 10-K for further discussion of the Company's accounting policies relating to its investments.