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DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES | DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS Overview of Hedging Programs Eastman is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transactions and investments in foreign subsidiaries, the Company uses various derivative and non-derivative financial instruments, when appropriate, in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The Company does not enter into derivative transactions for speculative purposes. For further information on hedging programs, see Note 10, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2021 Annual Report on Form 10-K. Cash Flow Hedges Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative instruments that are designated and qualify as a cash flow hedge are reported on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The change in the hedge instrument is reported as a component of "Accumulated other comprehensive income (loss)" ("AOCI") on the Unaudited Consolidated Statements of Financial Position and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from cash flow hedges are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows. In third quarter 2022, the Company settled the notional amount of $75 million associated with the 2022 forward starting interest rate swap, resulting in a cash gain of $13 million which is included as part of operating activities in the Unaudited Consolidated Statements of Cash Flows. The recognized gain from cash flow hedges of $1 million is included within "Net interest expense" on the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and the unrecognized gain of $12 million from cash flow hedges is included in "Accumulated other comprehensive income" on the Unaudited Consolidated Statements of Financial Position. Fair Value Hedges Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. The derivative instruments that are designated and qualify as fair value hedges are reported as "Long-term borrowings" on the Unaudited Consolidated Statements of Financial Position at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated fair value of the underlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for qualifying fair value hedges is recognized in earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from fair value hedges are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows. Net Investment Hedges Net investment hedges are defined as derivative or non-derivative instruments designated as and used to hedge the foreign currency exposure of the net investments in certain foreign operations. The net of the change in the hedge instrument and item being hedged for qualifying net investment hedges is reported as a component of the "Cumulative Translation Adjustment" ("CTA") within AOCI on the Unaudited Consolidated Statements of Financial Position. Cash flows from the CTA component are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows. Recognition in earnings of amounts previously recognized in CTA is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. In the event of a complete or substantially complete liquidation of the net investment, cash flows from net investment hedges are classified as investing activities in the Unaudited Consolidated Statements of Cash Flows. For derivative cross-currency interest rate swap net investment hedges, gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in CTA within AOCI and recognized in earnings through the periodic swap interest accruals. The cross-currency interest rate swaps designated as net investment hedges are included as part of "Other long-term liabilities", "Other noncurrent assets", "Payables and other current liabilities", or "Other current assets" on the Unaudited Consolidated Statements of Financial Position. Cash flows from excluded components are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows. In second quarter 2022, the Company terminated fixed-to-fixed cross-currency swaps designated to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. The notional amount terminated was €266 million ($320 million) which was scheduled to mature in August 2022. The termination resulted in a $40 million gain recognized in CTA. The related cash flows were classified as investing activities in the Unaudited Consolidated Statements of Cash Flows. Summary of Financial Position and Financial Performance of Hedging Ins truments The following table presents the notional amounts outstanding at September 30, 2022 and December 31, 2021 associated with Eastman's hedging programs.
Notional Outstanding |  | September 30, 2022 |  | December 31, 2021
Derivatives designated as cash flow hedges: |  |  |  |
Foreign Exchange Forward and Option Contracts (in millions) |  |  |  |
| EUR/USD (in EUR) |  | €612 |  | €429
Commodity Forward and Collar Contracts |  |  |  |
| Feedstock (in million barrels) |  | 1 |  |  | 1 |
| Energy (in million british thermal units) |  | 5 |  |  | 13 |
Interest rate swaps for the future issuance of debt (in millions) |  | — |  |  | $75
Derivatives designated as fair value hedges: |  |  |  |
Fixed-for-floating interest rate swaps (in millions) |  | $75 |  | $75
Derivatives designated as net investment hedges: |  |  |  |
Cross-currency interest rate swaps (in millions) |  |  |  |
| EUR/USD (in EUR) |  | €587 |  | €853
Non-derivatives designated as net investment hedges: |  |  |  |
Foreign Currency Net Investment Hedges (in millions) |  |  |  |
| EUR/USD (in EUR) |  | €1,246 |  | €1,246
Fair Value Measurements All the Company's derivative assets and liabilities are currently classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs that are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. The fair value of commodity contracts is derived using forward curves supplied by an industry recognized and unrelated third party. In addition, on an ongoing basis, the Company tests a subset of its valuations against valuations received from transaction counterparties to validate the accuracy of its standard pricing models. The Company had no derivatives classified as Level 3 as of September 30, 2022 and December 31, 2021. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance, and the Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an ongoing basis. The Company did not recognize a credit loss during third quarter and first nine months 2022 or 2021. All the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company does not have any cash collateral due under such agreements. The Company has elected to present derivative contracts on a gross basis on the Unaudited Consolidated Statements of Financial Position. The following table presents the financial assets and liabilities valued on a recurring and gross basis and includes where the financial assets and liabilities are on the Unaudited Consolidated Statements of Financial Position as of September 30, 2022 and December 31, 2021.
The Financial Position and Fair Value Measurements of Hedging Instruments on a Gross Basis
(Dollars in millions) |  |  |  |  |  |
Derivative Type |  | Statements of Financial Position Classification |  | September 30, 2022 Level 2 |  | December 31, 2021 Level 2
Derivatives designated as cash flow hedges: |  |  |  |  |  |
Commodity contracts |  | Other current assets |  | $ | 15 |  |  | $ | 16 |
Commodity contracts |  | Other noncurrent assets |  | — |  |  | 2 |
Foreign exchange contracts |  | Other current assets |  | 49 |  |  | 12 |
Foreign exchange contracts |  | Other noncurrent assets |  | 26 |  |  | 6 |
Forward starting interest rate swap contracts |  | Other current assets |  | — |  |  | 5 |
Derivatives designated as fair value hedges: |  |  |  |  |  |
Fixed-for-floating interest rate swap |  | Other current assets |  | — |  |  | 1 |
Fixed-for-floating interest rate swap |  | Other noncurrent assets |  | — |  |  | 1 |
Derivatives designated as net investment hedges: |  |  |  |  |  |
Cross-currency interest rate swaps |  | Other current assets |  | — |  |  | 20 |
Cross-currency interest rate swaps |  | Other noncurrent assets |  | 120 |  |  | 35 |
Total Derivative Assets |  |  |  | $ | 210 |  |  | $ | 98 |
Derivatives designated as cash flow hedges: |  |  |  |  |  |
Commodity contracts |  | Payables and other current liabilities |  | $ | 3 |  |  | $ | 1 |
Commodity contracts |  | Other long-term liabilities |  | — |  |  | 1 |
Foreign exchange contracts |  | Payables and other current liabilities |  | — |  |  | 1 |
Derivatives designated as fair value hedges: |  |  |  |  |  |
Fixed-for-floating interest rate swap |  | Long-term borrowings |  | 5 |  |  | — |
Derivatives designated as net investment hedges: |  |  |  |  |  |
Cross-currency interest rate swaps |  | Other long-term liabilities |  | 1 |  |  | 5 |
Total Derivative Liabilities |  |  |  | $ | 9 |  |  | $ | 8 |
Total Net Derivative Assets (Liabilities) |  |  |  | $ | 201 |  |  | $ | 90 |
In addition to the fair value associated with derivative instruments designated as cash flow hedges, fair value hedges, and net investment hedges, the Company had non-derivative instruments designated as foreign currency net investment hedges with a carrying value of $1.2 billion at September 30, 2022 and $1.4 billion at December 31, 2021. The designated foreign currency-denominated borrowings are included as part of "Borrowings due within one year" and "Long-term borrowings" on the Unaudited Consolidated Statements of Financial Position. For additional fair value measurement information, see Note 1, "Significant Accounting Policies", and Note 10, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2021 Annual Report on Form 10-K. As of September 30, 2022 and December 31, 2021, the following amounts were included on the Unaudited Consolidated Statements of Financial Position related to cumulative basis adjustments for fair value hedges.
(Dollars in millions) |  | Carrying amount of the hedged liabilities |  | Cumulative amount of fair value hedging loss adjustment included in the carrying amount of the hedged liability
Line item on the Unaudited Consolidated Statements of Financial Position in which the hedged item is included |  | September 30, 2022 |  | December 31, 2021 |  | September 30, 2022 |  | December 31, 2021
Borrowings due within one year |  | $ | — |  |  | $ | 697 |  |  | $ | — |  |  | $ | (2) |
Long-term borrowings |  | 70 |  |  | 76 |  |  | (5) |  |  | 1 |
The following table presents the effect of the Company's hedging instruments on "Other comprehensive income (loss), net of tax" ("OCI") and financial performance for third quarter and first nine months 2022 and 2021.
|  | Change in amount of after tax gain (loss) recognized in OCI on derivatives |  | Pre-tax amount of gain (loss) reclassified from OCI into earnings
(Dollars in millions) |  | Third Quarter |  | First Nine Months |  | Third Quarter |  | First Nine Months
Hedging Relationships |  | 2022 |  | 2021 |  | 2022 |  | 2021 |  | 2022 |  | 2021 |  | 2022 |  | 2021
Derivatives in cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | (4) |  |  | $ | 40 |  |  | $ | (5) |  |  | $ | 55 |  |  | $ | 1 |  |  | $ | 9 |  |  | $ | 38 |  |  | $ | 4 |
Foreign exchange contracts |  | 22 |  |  | 11 |  |  | 43 |  |  | 33 |  |  | 18 |  |  | — |  |  | 33 |  |  | (10) |
Forward starting interest rate and treasury lock swap contracts |  | (1) |  |  | 2 |  |  | 9 |  |  | 8 |  |  | — |  |  | (2) |  |  | (5) |  |  | (7) |
Non-derivatives in net investment hedging relationships (pre-tax): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net investment hedges |  | 17 |  |  | 36 |  |  | 199 |  |  | 86 |  |  | — |  |  | — |  |  | — |  |  | — |
Derivatives in net investment hedging relationships (pre-tax): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross-currency interest rate swaps |  | 39 |  |  | 23 |  |  | 74 |  |  | 55 |  |  | — |  |  | — |  |  | — |  |  | — |
Cross-currency interest rate swaps excluded component |  | (1) |  |  | (2) |  |  | (6) |  |  | (7) |  |  | — |  |  | — |  |  | — |  |  | — |
The following table presents the effect of fair value and cash flow hedge accounting in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for third quarter 2022 and 2021.
Location and Amount of Gain or (Loss) Recognized in Earnings from Fair Value and Cash Flow Hedging Relationships
|  | Third Quarter
|  | 2022 |  | 2021
(Dollars in millions) |  | Sales |  | Cost of Sales |  | Net Interest Expense |  | Sales |  | Cost of Sales |  | Net Interest Expense
Total amounts of income and expense line items presented in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in which the effects of fair value or cash flow hedges are recognized |  | $ | 2,709 |  |  | $ | 2,168 |  |  | $ | 43 |  |  | $ | 2,720 |  |  | $ | 2,058 |  |  | $ | 49 |
The effects of fair value and cash flow hedging: |  |  |  |  |  |  |  |  |  |  |  |
Gain or (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest contracts (fixed-for-floating interest rate swaps): |  |  |  |  |  |  |  |  |  |  |  |
Hedged items |  |  |  |  |  | 1 |  |  |  |  |  |  | — |
Derivatives designated as hedging instruments |  |  |  |  |  | (1) |  |  |  |  |  |  | — |
Gain or (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest contracts (forward starting interest rate and treasury lock swap contracts): |  |  |  |  |  |  |  |  |  |  |  |
Amount reclassified from AOCI into earnings |  |  |  |  |  | — |  |  |  |  |  |  | (2) |
Commodity Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount reclassified from AOCI into earnings |  |  |  | 1 |  |  |  |  |  |  | 9 |  |  |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount reclassified from AOCI into earnings |  | 18 |  |  |  |  |  |  | — |  |  |  |  |
The following table presents the effect of fair value and cash flow hedge accounting in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for first nine months 2022 and 2021.
Location and Amount of Gain or (Loss) Recognized in Earnings from Fair Value and Cash Flow Hedging Relationships
|  | First Nine Months
|  | 2022 |  | 2021
(Dollars in millions) |  | Sales |  | Cost of Sales |  | Net Interest Expense |  | Sales |  | Cost of Sales |  | Net Interest Expense
Total amounts of income and expense line items presented in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in which the effects of fair value or cash flow hedges are recognized |  | $ | 8,207 |  |  | $ | 6,446 |  |  | $ | 134 |  |  | $ | 7,782 |  |  | $ | 5,841 |  |  | $ | 150 |
The effects of fair value and cash flow hedging: |  |  |  |  |  |  |  |  |  |  |  |
Gain or (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest contracts (fixed-for-floating interest rate swaps): |  |  |  |  |  |  |  |  |  |  |  |
Hedged items |  |  |  |  |  | 2 |  |  |  |  |  |  | 1 |
Derivatives designated as hedging instruments |  |  |  |  |  | (2) |  |  |  |  |  |  | (1) |
Gain or (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Interest contracts (forward starting interest rate and treasury lock swap contracts): |  |  |  |  |  |  |  |  |  |  |  |
Amount reclassified from AOCI into earnings |  |  |  |  |  | (5) |  |  |  |  |  |  | (7) |
Commodity Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount reclassified from AOCI into earnings |  |  |  | 38 |  |  |  |  |  |  | 4 |  |  |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount reclassified from AOCI into earnings |  | 33 |  |  |  |  |  |  | (10) |  |  |  |  |
The Company enters into foreign exchange derivatives denominated in multiple currencies which are transacted and settled in the same quarter. These derivatives are not designated as hedges due to the short-term nature and the gains or losses on these derivatives are marked-to-market in line item "Other (income) charges, net" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. As a result of these derivatives, the Company recognized a net loss of $5 million and $11 million during third quarter and first nine months 2022, respectively, and recognized a net gain of $5 million during both third quarter 2021 and first nine months 2021. Pre-tax monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in AOCI included net gains of $362 million and net losses of $7 million at September 30, 2022 and December 31, 2021, respectively. Gains in AOCI increased between December 31, 2021 and September 30, 2022 primarily as a result of an increase in euro to U.S. dollar exchange rates. If recognized, approximately $59 million in pre-tax gains, as of September 30, 2022, would be reclassified into earnings during the next 12 months.

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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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