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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
11. Derivative Financial Instruments

ASC Topic 815, “Derivatives and Hedging” requires a company to recognize all of its derivative instruments as either assets or liabilities in the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

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). 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).

The Company records all derivative financial instruments at their fair value in its Consolidated Balance Sheet. Except for certain non-designated hedges discussed below, all derivative financial instruments that the Company holds are designated as cash flow hedges and are highly effective in offsetting movements in the underlying risks. Such arrangements typically have terms between 2 and 24 months, but may have longer terms depending on the underlying cash flows being hedged, typically related to the projects in our backlog. The Company may also use interest rate contracts to mitigate its exposure to changes in interest rates on anticipated long-term debt issuances.

At March 31, 2015, the Company has determined that the fair value of its derivative financial instruments representing assets of $56 million and liabilities of $519 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 March 31, 2015, the net fair value of the Company’s foreign currency forward contracts totaled a net liability of $463 million.

At March 31, 2015, the Company did not have any interest rate swaps and its 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 or weakens against the foreign currencies, the change in present value of future foreign currency revenues and expenses is offset by changes in the fair value of the forward contracts designated as hedges.

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.

 

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

    March 31,
2015		      December 31,
2014		  

Norwegian Krone

    NOK  9,832       NOK  10,781   

Euro

    € 359       € 462   

U.S. Dollar

    $ 280       $ 231   

Danish Krone

    DKK  161       DKK  227   

British Pound Sterling

    £ 56       £ 80   

Singapore Dollar

    SGD  34       SGD  44   

Canadian Dollar

    CAD  10       CAD  14   

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

    March 31,
2015		      December 31,
2014		  

Norwegian Krone

    NOK  4,663       NOK  4,052   

Russian Ruble

    RUB  3,086       RUB  —     

U.S. Dollar

    $ 942       $ 1,092   

Danish Krone

    DKK  531       DKK  322   

Euro

    € 448       € 401   

Mexican Peso

    MXN  152       MXN  118   

Brazilian Real

    BRL  117       BRL  57   

British Pound Sterling

    £ 33       £ 19   

Canadian Dollar

    CAD  9       CAD  4   

Singapore Dollar

    SGD  9       SGD  4   

Swedish Krone

    SEK  4       SEK  3   

 

The Company has the following gross fair values of its derivative instruments and their balance sheet classifications:

 

   

Asset Derivatives

    

Liability Derivatives

  
        Fair Value         Fair Value  
    Balance Sheet   March 31,     December 31,     Balance Sheet   March 31,     December 31,  
   

Location

   2015     2014    

Location

   2015     2014  

Derivatives designated as hedging instruments under ASC Topic 815

            

Foreign exchange contracts

   Prepaid and other current assets   $ 21      $ 18      Accrued liabilities   $ 275      $ 204   

Foreign exchange contracts

   Other Assets     6        8      Other Liabilities     98        102   
   

 

 

    

 

 

      

 

 

    

 

 

  

Total derivatives designated as hedging instruments under ASC Topic 815

 $ 27    $ 26    $ 373    $ 306   
   

 

 

    

 

 

      

 

 

    

 

 

  

Derivatives not designated as hedging instruments under ASC Topic 815

Foreign exchange contracts

 Prepaid and other current assets $ 29    $ 27    Accrued liabilities $ 145    $ 93   

Foreign exchange contracts

 Other Assets   —        —      Other Liabilities   1      —     
   

 

 

    

 

 

      

 

 

    

 

 

  

Total derivatives not designated as hedging instruments under ASC Topic 815

 $ 29    $ 27    $ 146    $ 93   
   

 

 

    

 

 

      

 

 

    

 

 

  

Total derivatives

 $ 56    $ 53    $ 519    $ 399   
   

 

 

    

 

 

      

 

 

    

 

 

  

The Effect of Derivative Instruments on the Consolidated Statements of Income

($ in millions)

 

Derivatives in ASC Topic 815 Cash Flow Hedging
Relationships

   Amount of Gain
(Loss) Recognized in
OCI on Derivative
(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
Derivative
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)

   Amount of Gain (Loss)
Recognized in
Income
on Derivative
(Ineffective Portion
and Amount
Excluded
from Effectiveness
Testing) (b)		  
    Three Months Ended
March 31,		         Three Months Ended
March 31,		         Three Months Ended
March 31,		  
    2015     2014         2015     2014         2015     2014  
      Revenue     (65 )      13         

Foreign exchange contracts

     (152 )      35      Cost of revenue     1        (3 )    Other income (expense), net     (1 )      13   
 

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

  

Total

   (152 )    35      (64 )    10      (1 )    13   
 

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

  

 

Derivatives Not Designated as Hedging Instruments under ASC
Topic 815

   

Location of Gain (Loss)
Recognized in Income
on Derivative

    Amount of Gain (Loss)
Recognized in Income on
Derivative		  
          Three Months Ended
March 31,		  
          2015      2014  

Foreign exchange contracts

    Other income (expense), net      (76 )       11   
     

 

 

     

 

 

  

Total

   (76 )    11   
     

 

 

     

 

 

  

 

(a) The Company expects that $305 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 $(2) million and $1 million related to the ineffective portion of the hedging relationships for each of the three months ended March 31, 2015 and 2014, respectively, and $1 million and $12 million related to the amount excluded from the assessment of the hedge effectiveness for the three months ended March 31, 2015 and 2014, respectively.