Financial Instruments, Risk Management and Fair-Value Measurements

Our financial instruments include cash and cash equivalents, trade receivables, other current assets, certain receivables classified as other long-term assets, accounts payable, and amounts included in investments and accruals meeting the definition of financial instruments. The carrying value of these financial instruments approximates their fair value. Our other financial instruments include the following:



Financial Instrument		Valuation Method
Foreign exchange forward contracts		Estimated amounts that would be received or paid to terminate the contracts at the reporting date based on current market prices for applicable currencies.

Commodity forward and option contracts		Estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices for applicable commodities.

Debt		Our estimates and information obtained from independent third parties using market data, such as bid/ask spreads for the last business day of the reporting period.

The estimated fair value of the financial instruments in the above table have been determined using standard pricing models which take into account the present value of expected future cash flows discounted to the balance sheet date. These standard pricing models, utilize inputs derived from or corroborated by observable market data such as interest rate yield curves and currency and commodity spot and forward rates. In addition, we test a subset of our valuations against valuations received from the transaction's counterparty to validate the accuracy of our standard pricing models. Accordingly, the estimates presented may not be indicative of the amounts that we would realize in a market exchange at settlement date and do not represent potential gains or losses on these agreements. The estimated fair values of foreign exchange forward contracts and commodity forward and option contracts are included in the tables within this Note. The estimated fair value of debt is $2,155.8 million and $2,214.0 million and the carrying amount is $2,042.1 million and $2,148.9 million as of June 30, 2016 and December 31, 2015, respectively.

We enter into various financial instruments with off-balance-sheet risk as part of the normal course of business. These off-balance-sheet instruments include financial guarantees and contractual commitments to extend financial guarantees under letters of credit, and other assistance to customers see Note 17 for more information. Decisions to extend financial guarantees to customers, and the amount of collateral required under these guarantees is based on our evaluation of creditworthiness on a case-by-case basis.

Use of Derivative Financial Instruments to Manage Risk

We mitigate certain financial exposures, including currency risk, commodity purchase exposures and interest rate risk, through a program of risk management that includes the use of derivative financial instruments. We enter into foreign exchange contracts, including forward and purchased options contracts, to reduce the effects of fluctuating foreign currency exchange rates. A detailed description of these risks including a discussion on the concentration of credit risk is provided in Note 17 to our consolidated financial statements on our 2015 Form 10-K.

We formally document all relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes relating derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also assess both, at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If we determine that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we discontinue hedge accounting with respect to that derivative prospectively.

Accounting for Derivative Instruments and Hedging Activities

Cash Flow Hedges

We recognize all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, we generally designate the derivative as a hedge of the variability of cash flows to be received or paid related to a forecasted transaction (cash flow hedge). We record in AOCI changes in the fair value of derivatives that are designated as and meet all the required criteria for a cash flow hedge. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. In contrast, we immediately record in earnings changes in the fair value of derivatives that are not designated as cash flow hedges.

As of June 30, 2016, we had open foreign currency forward contracts in AOCI in a net after tax loss position of $3.2 million designated as cash flow hedges of underlying forecasted sales and purchases. Current open contracts hedge forecasted transactions until March 15, 2017. At June 30, 2016, we had open forward contracts designated as cash flow hedges with various expiration dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of approximately $310 million.

As of June 30, 2016, we had current open commodity contracts in AOCI in a net after tax loss position of $0.3 million designated as cash flow hedges of underlying forecasted purchases, primarily related to natural gas. Current open commodity contracts hedge forecasted transactions until December 31, 2017. At June 30, 2016, we had an equivalent of 1.3 million mmBTUs (millions of British Thermal Units) in aggregate notional volume of outstanding natural gas commodity forward contracts to hedge forecasted purchases.

Of the $3.5 million of net losses after-tax, representing both open foreign currency exchange contracts and commodity contracts, approximately $3.5 million of these losses would be realized in earnings during the twelve months ending June 30, 2017 and $0.0 million of net losses would be realized subsequent to June 30, 2017, if spot rates in the future are consistent with forward rates as of June 30, 2016. The actual effect on earnings will be dependent on the actual spot rates when the forecasted transactions occur.

Derivatives Not Designated As Hedging Instruments

We hold certain forward contracts that have not been designated as cash flow hedging instruments for accounting purposes. Contracts used to hedge the exposure to foreign currency fluctuations associated with certain monetary assets and liabilities are not designated as cash flow hedging instruments, and changes in the fair value of these items are recorded in earnings. We occasionally hold call options that are effective as economic hedges of a portion of our natural gas exposure and the change in fair value of this instrument is also recorded in earnings. We periodically hold soybean barter contracts which qualify as derivatives and we have entered into offsetting commodity contracts to hedge our exposure. Both the change in fair value of the soybean barter contracts and the offsetting commodity contracts are recorded in earnings.

We had open forward contracts not designated as cash flow hedging instruments for accounting purposes with various expiration dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of approximately $1,630 million at June 30, 2016.

Fair-Value of Derivative Instruments

The following tables provide the gross fair value and net balance sheet presentation of our derivative instruments.



	June 30, 2016
	Gross Amount of Derivatives
(in Millions)	Designated as Cash Flow Hedges			Not Designated as Hedging Instruments			Total Gross Amounts			Gross Amounts Offset in the Consolidated Balance Sheet ⁽³⁾			Net Amounts
Derivatives
Foreign exchange contracts	$	9.7		$	1.9		$	11.6		$	(10.1	)	$	1.5
Energy contracts	0.2			—			0.2			(0.1		)	0.1
Total derivative assets⁽¹⁾	9.9			1.9			11.8			(10.2		)	1.6

Foreign exchange contracts	(14.8		)	(20.2		)	(35.0		)	10.1			(24.9		)
Energy contracts	(0.6		)	—			(0.6		)	0.1			(0.5		)
Total derivative liabilities⁽²⁾	(15.4		)	(20.2		)	(35.6		)	10.2			(25.4		)

Net derivative assets/(liabilities)	$	(5.5	)	$	(18.3	)	$	(23.8	)	$	—		$	(23.8	)

	December 31, 2015
	Gross Amount of Derivatives
(in Millions)	Designated as Cash Flow Hedges			Not Designated as Hedging Instruments			Total Gross Amounts			Gross Amounts Offset in the Consolidated Balance Sheet ⁽³⁾			Net Amounts
Derivatives
Foreign exchange contracts	$	6.1		$	5.2		$	11.3		$	(11.3	)	$	—
Energy contracts	—			—			—			—			—
Total derivative assets⁽¹⁾	6.1			5.2			11.3			(11.3		)	—

Foreign exchange contracts	(15.4		)	(7.3		)	(22.7		)	11.3			(11.4		)
Energy contracts	(2.0		)	—			(2.0		)	—			(2.0		)
Total derivative liabilities⁽²⁾	(17.4		)	(7.3		)	(24.7		)	11.3			(13.4		)

Net derivative assets/(liabilities)	$	(11.3	)	$	(2.1	)	$	(13.4	)	$	—		$	(13.4	)

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(1)	Net balance is included in “Prepaid and other current assets” in the condensed consolidated balance sheets.


(2)	Net balance is included in “Accrued and other liabilities” in the condensed consolidated balance sheets.


(3)	Represents net derivatives positions subject to master netting arrangements.

The tables below summarize the gains or losses related to our cash flow hedges and derivatives not designated as hedging instruments.

Derivatives in Cash Flow Hedging Relationships



	Three Months Ended June 30
	Contracts
	Foreign Exchange						Energy					Total
(in Millions)	2016			2015			2016		2015			2016			2015
Unrealized hedging gains (losses) and other, net of tax	$	(2.2	)	$	3.2		$	0.6	$	(0.3	)	$	(1.6	)	$	2.9
Reclassification of deferred hedging (gains) losses, net of tax ⁽¹⁾
Effective portion ⁽¹⁾	1.0			(0.9		)	0.7		0.8			1.7			(0.1		)
Ineffective portion ⁽¹⁾	—			—			—		—			—			—
Total derivative instrument impact on comprehensive income, net of tax	$	(1.2	)	$	2.3		$	1.3	$	0.5		$	0.1		$	2.8

	Six Months Ended June 30
	Contracts
	Foreign Exchange						Energy					Total
(in Millions)	2016			2015			2016		2015			2016			2015
Unrealized hedging gains (losses) and other, net of tax	$	0.7		$	3.5		$	—	$	1.7		$	0.7		$	5.2
Reclassification of deferred hedging (gains) losses, net of tax⁽¹⁾
Effective portion ⁽¹⁾	3.0			(3.5		)	1.1		1.6			4.1			(1.9		)
Ineffective portion ⁽¹⁾	—			—			—		—			—			—
Total derivative instrument impact on comprehensive income, net of tax	$	3.7		$	—		$	1.1	$	3.3		$	4.8		$	3.3

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(1)	See Note 13 for classification of amounts within the condensed consolidated statements of income (loss).

Derivatives Not Designated as Hedging Instruments



	Location of Gain or (Loss) Recognized in Income on Derivatives	Amount of Pre-tax Gain or (Loss) Recognized in Income on Derivatives ⁽¹⁾
		Three Months Ended June 30					Six Months Ended June 30
(in Millions)		2016		2015			2016		2015
Foreign exchange contracts	Cost of sales and services	$	11.7	$	(3.3	)	$	28.3	$	(7.8	)
	Selling, general & administrative ⁽²⁾	—		8.0			—		(172.1		)
Total		$	11.7	$	4.7		$	28.3	$	(179.9	)

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(1)	Amounts in the columns represent the gain or loss on the derivative instrument offset by the gain or loss on the hedged item.


(2)	Charges represent a loss on the Cheminova acquisition hedge. See Note 3 within these condensed consolidated financial statements for more information.

Fair-Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are defined as buyers or sellers in the principle or most advantageous market for the asset or liability that are independent of the reporting entity, knowledgeable and able and willing to transact for the asset or liability.

Fair-Value Hierarchy

We have categorized our assets and liabilities that are recorded at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair-value hierarchy. The fair-value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair-value measurement of the instrument.

Recurring Fair-Value Measurements

The following tables present our fair-value hierarchy for those assets and liabilities measured at fair-value on a recurring basis in the condensed consolidated balance sheets. During the periods presented there were no transfers between fair-value hierarchy levels.



(in Millions)	June 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Derivatives – Commodities:
Energy contracts ⁽¹⁾	$	0.1	$	—	$	0.1	$	—
Derivatives – Foreign exchange⁽¹⁾	1.5		—		1.5		—
Other⁽²⁾	24.8		24.8		—		—
Total assets	$	26.4	$	24.8	$	1.6	$	—

Liabilities
Derivatives – Commodities:
Energy contracts ⁽¹⁾	$	0.5	$	—	$	0.5	$	—
Derivatives – Foreign exchange ⁽¹⁾	24.9		—		24.9		—
Other⁽³⁾	29.6		29.2		0.4		—
Total liabilities	$	55.0	$	29.2	$	25.8	$	—

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(1)	See the Fair Value of Derivative Instruments table within this Note for classifications on the condensed consolidated balance sheet.


(2)	Consists of a deferred compensation arrangement, through which we hold various investment securities, recognized on our balance sheet. Both the asset and liability are recorded at fair value. Asset amounts included in “Other assets” in the condensed consolidated balance sheets.


(3)	Consists of a deferred compensation arrangement recognized on our balance sheet. Both the asset and liability are recorded at fair value. Liability amounts due are included in “Other long-term liabilities” in the condensed consolidated balance sheets. Level 2 liabilities represent liability-based awards associated with non-employees.



(in Millions)	December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Derivatives – Commodities:
Energy contracts ⁽¹⁾	$	—	$	—	$	—	$	—
Derivatives – Foreign exchange ⁽¹⁾	—		—		—		—
Other⁽²⁾	25.4		25.4		—		—
Total assets	$	25.4	$	25.4	$	—	$	—

Liabilities
Derivatives – Commodities:
Energy contracts ⁽¹⁾	$	2.0	$	—	$	2.0	$	—
Derivatives – Foreign exchange⁽¹⁾	11.4		—		11.4		—
Other ⁽³⁾	29.1		29.1		—		—
Total liabilities	$	42.5	$	29.1	$	13.4	$	—

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(1)	See the Fair -Value of Derivative Instruments table within this Note for classification on the condensed consolidated balance sheet.


(2)	Consists of a deferred compensation arrangement, through which we hold various investment securities, recognized on our balance sheet. Both the asset and liability are recorded at fair value. Asset amounts included in “Other assets” in the condensed consolidated balance sheets.


(3)	Consist of a deferred compensation arrangement recognized on our balance sheet. Both the asset and liability are recorded at fair value. Liability amounts included in “Other long-term liabilities” in the condensed consolidated balance sheets.

Nonrecurring Fair -Value Measurements

The following table presents our fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis in the condensed consolidated balance sheets during the year ended December 31, 2015. There were no non-recurring fair value measurements in the condensed consolidated balance sheets during the six months ended June 30, 2016.



(in Millions)	December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) (Year Ended December 31, 2015)
Assets
Long-lived assets associated with exit activities⁽¹⁾	$	35.4	$	—	$	—	$	35.4	$	(70.5	)
Total assets	$	35.4	$	—	$	—	$	35.4	$	(70.5	)

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(1)	We recorded charges, within our FMC Health and Nutrition segment, to write down the value of certain long-lived assets of approximately $70.5 million to salvage value in the case of fixed assets and fair value in the case of indefinite lived intangible assets.