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Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

3. Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency exchange rate risk. Forward contracts against various foreign currencies are entered into to manage the foreign currency exchange rate risk on forecasted revenues and expenses denominated in currencies other than the functional currency of the operating unit (cash flow hedge). Other forward exchange contracts against various foreign currencies are entered into to manage the foreign currency exchange rate risk associated with certain firm commitments denominated in currencies other than the functional currency of the operating unit (fair value hedge). In addition, the Company will enter into non-designated forward contracts against various foreign currencies to manage the foreign currency exchange rate risk on recognized nonfunctional currency monetary accounts (non-designated hedge).

At December 31, 2014, the Company has determined that the fair value of its derivative financial instruments representing assets of $53 million and liabilities of $399 million (primarily currency related derivatives) are determined using level 2 inputs (inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the fair value is based on publicly available foreign exchange and interest rates at each financial reporting date. At December 31, 2014, the net fair value of the Company’s foreign currency forward contracts totaled a net liability of $346 million.

At December 31, 2014, the Company’s financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when the Company’s financial instruments are in net liability positions. We do not use derivative financial instruments for trading or speculative purposes.

Cash Flow Hedging Strategy

To protect against the volatility of forecasted foreign currency cash flows resulting from forecasted revenues and expenses, the Company has instituted a cash flow hedging program. The Company hedges portions of its forecasted revenues and expenses denominated in nonfunctional currencies with forward contracts. When the U.S. dollar strengthens against the foreign currencies, the decrease in present value of future foreign currency revenues and expenses is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is subject to a particular currency risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Other Comprehensive Income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are cash flows associated with forecasted revenues). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), or hedge components excluded from the assessment of effectiveness, is recognized in the Consolidated Statements of Income during the current period.

At December 31, 2014 and 2013, the Company had the following outstanding foreign currency forward contracts that were entered into to hedge nonfunctional currency cash flows from forecasted revenues and expenses (in millions):

 

     Currency Denomination  

Foreign Currency

    December 31,
2014		      December 31,
2013		  

Norwegian Krone

    NOK      10,781       NOK      10,503   

Euro

    €      462       €      406   

U.S. Dollar

    $      231       $      357   

Danish Krone

    DKK      227       DKK      278   

British Pound Sterling

    £      80       £      23   

Singapore Dollar

    SGD      44       SGD      17   

Canadian Dollar

    CAD      14       CAD      16   

 

Non-designated Hedging Strategy

The Company enters into forward exchange contracts to hedge certain nonfunctional currency monetary accounts. The purpose of the Company’s foreign currency hedging activities is to protect the Company from risk that the eventual U.S. dollar equivalent cash flows from the nonfunctional currency monetary accounts will be adversely affected by changes in the exchange rates.

For derivative instruments that are non-designated, the gain or loss on the derivative instrument subject to the hedged risk (i.e., nonfunctional currency monetary accounts) is recognized in other income (expense), net in current earnings.

The Company had the following outstanding foreign currency forward contracts that hedge the fair value of nonfunctional currency monetary accounts (in millions):

 

     Currency Denomination  

Foreign Currency

    December 31,
2014		      December 31,
2013		  

Norwegian Krone

    NOK      4,052       NOK      3,257   

U.S. Dollar

    $      1,092       $      715   

Euro

    €      401       €      310   

Danish Krone

    DKK      322       DKK      177   

Mexican Peso

    MXN      118       MXN      —     

Brazilian Real

    BRL      57       BRL      —     

British Pound Sterling

    £      19       £      14   

Singapore Dollar

    SGD      4       SGD      3   

Canadian Dollar

    CAD      4       CAD      3   

Swedish Krone

    SEK      3       SEK      4   

Russian Ruble

    RUB      —         RUB      2,149   

 

The Company has the following fair values of its derivative instruments and their balance sheet classifications (in millions):

 

    

Asset Derivatives

     

Liability Derivatives

  
    

Balance Sheet
Location

    Fair Value
December 31,		     

Balance Sheet
Location

    Fair Value
December 31,		  
        2014      2013         2014      2013  

Derivatives designated as hedging instruments under ASC Topic 815

                  

Foreign exchange contracts

   

Prepaid and other current
assets

    $ 18       $ 35       Accrued liabilities    $ 204       $ 18   

Foreign exchange contracts

    Other Assets      8         5       Other Liabilities      102         9   
     

 

 

     

 

 

        

 

 

     

 

 

  

Total derivatives designated as hedging instruments under ASC Topic 815

 $ 26    $ 40    $ 306    $ 27   
     

 

 

     

 

 

        

 

 

     

 

 

  

Derivatives not designated as hedging instruments under ASC Topic 815

Foreign exchange contracts

Prepaid and other current assets

 $ 27    $ 19    Accrued liabilities $ 93    $ 13   
     

 

 

     

 

 

        

 

 

     

 

 

  

Total derivatives not designated as hedging instruments under ASC Topic 815

 $ 27    $ 19    $ 93    $ 13   
     

 

 

     

 

 

        

 

 

     

 

 

  

Total derivatives

 $ 53    $ 59    $ 399    $ 40   
     

 

 

     

 

 

        

 

 

     

 

 

  

The Effect of Derivative Instruments on the Consolidated Statements of Income

($ in millions)

 

Derivatives Designated as
Hedging Instruments under

ASC Topic 815

    Amount of
Gain (Loss)
Recognized in
OCI on
Derivatives
(Effective
Portion) (a)		     Location of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)		      Amount of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)		    

Location of Gain (Loss) Recognized in
Income on Derivatives (Ineffective
Portion and Amount Excluded from
Effectiveness Testing)

    Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing) (b)		  
     Years Ended
December 31,		            Years Ended
December 31,		          Years Ended
December 31,		  
     2014     2013            2014     2013          2014      2013  
         Revenue         26        16           

Foreign exchange contracts

      (340 )      (42 )      Cost of revenue         (43 )      (6 )    Other income (expense), net      35         12   
  

 

 

    

 

 

          

 

 

    

 

 

       

 

 

     

 

 

  

Total

   (340 )    (42 )    (17 )    10      35      12   
  

 

 

    

 

 

          

 

 

    

 

 

       

 

 

     

 

 

  

Derivatives Not Designated as

Hedging Instruments under

ASC Topic 815

    Location of
Gain (Loss)
Recognized in
Income on
Derivatives		     Amount of
Gain (Loss)
Recognized in
Income on
Derivatives		                                 
           Years Ended
December 31,		                                 
           2014      2013                                 

Foreign exchange contracts

      Other income (expense), net        61         18                
      

 

 

     

 

 

               

Total

   61      18   
      

 

 

     

 

 

               

 

(a) The Company expects that $214 million of the Accumulated Other Comprehensive Income (Loss) will be reclassified into earnings within the next twelve months with an offset by gains from the underlying transactions resulting in no impact to earnings or cash flow.
(b) The amount of gain (loss) recognized in income represents nil related to the ineffective portion of the hedging relationships for the each of the years ended December 31, 2014 and 2013, and $35 million and $12 million related to the amount excluded from the assessment of the hedge effectiveness for the years ended December 31, 2014 and 2013, respectively.