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Derivative instruments and hedging activities | 9 Months Ended
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Sep. 30, 2019
Derivative Instruments and Hedging Activities | NOTE 13 – Derivative instruments and hedging activities:
a. | Foreign exchange risk management:
In the first nine months of 2019, approximately 50% of Teva’s revenues were denominated in currencies other than the U.S. dollar. As a result, Teva is subject to significant foreign currency risks. The Company enters into forward exchange contracts, purchases and writes options in order to hedge the currency exposure on balance sheet items. In addition, the Company takes measures to reduce exposure by using natural hedging. The Company also acts to offset risks in opposite directions among the companies within the Teva group. The currency hedged items are usually denominated in the following main currencies: the new Israeli shekel (NIS), the euro (EUR), the Swiss franc (CHF), the Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD),the Polish zloty (PLN), the Indian rupee (INR) and other European and Latin American currencies. Depending on market conditions, foreign currency risk is also managed through the use of foreign currency debt. The Company hedges against possible fluctuations in foreign subsidiaries net assets (“net investment hedge”) and entered into cross-currency swaps and forward contracts in order to hedge such an exposure. Most of the counterparties to the derivatives are major banks and the Company is monitoring the associated inherent credit risks. The Company does not enter into derivative transactions for trading purposes.
b. | Interest risk management:
The Company raises capital through various debt instruments, including straight notes that bear a fixed or variable interest rate, bank loans, securitizations and convertible debentures. In some cases, the Company has swapped from a fixed to a floating interest rate (“fair value hedge”) and from a fixed to a fixed interest rate with an exchange from a currency other than the functional currency (“cash flow hedge”), thereby reducing overall interest expenses or hedging risks associated with interest rate fluctuations.
c. | Derivative instruments notional amounts
The following table summarizes the notional amounts for hedged items, when transactions are designated as hedge accounting:
|  | September 30, |  |  | December 31, |
|  | 2019 |  |  | 2018 |
|  | (U.S. $ in millions) |
Cross-currency swap — cash flow hedge |  | $ | 588 |  |  | $ | 588 |
Cross-currency swap—net investment hedge |  |  | 1,000 |  |  |  | 1,000 |
Interest rate swap — fair value hedge |  |  | — |  |  |  | 500 |
|  | $ | 1,588 |  |  | $ | 2,088 |
d. | Derivative instrument outstanding:
The following table summarizes the classification and fair values of derivative instruments:
|  | Fair value |
|  | Designated as hedging instruments |  |  | Not designated as hedging instruments |
|  | September 30, 2019 |  |  | December 31, 2018 |  |  | September 30, 2019 |  |  | December 31, 2018 |
Reported under |  | (U.S. $ in millions) |
Asset derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Option and forward contracts |  | $ | — |  |  | $ | — |  |  | $ | 40 |  |  | $ | 18 |
Other non-current assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross-currency swaps — cash flow hedge |  |  | 103 |  |  |  | 58 |  |  |  | — |  |  |  | — |
Cross-currency swaps— net investment hedge |  |  | 2 |  |  |  | — |  |  |  | — |  |  |  | — |
Liability derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Option and forward contracts |  |  | — |  |  |  | — |  |  |  | (18 | ) |  |  | (26 | )
Other taxes and long-term liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross-currency swaps — net investment hedge |  |  | — |  |  |  | (41 | ) |  |  | — |  |  |  | — |
Senior notes and loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps — fair value hedge |  |  | — |  |  |  | (9 | ) |  |  | — |  |  |  | — |
The table below provides information regarding the location and amount of pre-tax (gains) losses from derivatives designated in fair value or cash flow hedging relationships:
|  | Financial expenses, net |  |  | Other comprehensive income |
|  | Three months ended, |  |  | Three months ended, |
|  | September 30, 2019 |  |  | September 30, 2018** |  |  | September 30, 2019 |  |  | September 30, 2018** |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  | $ | 211 |  |  | $ | 229 |  |  | $ | 53 |  |  | $ | 84 |
Cross-currency swaps — cash flow hedge (1) |  |  | (1 | ) |  |  | (1 | ) |  |  | (33 | ) |  |  | (4 | )
Cross-currency swaps — net investment hedge (2) |  |  | (7 | ) |  |  | (6 | ) |  |  | (39 | ) |  | $ | (7 | )
Interest rate swaps — fair value hedge (3) |  | $ | * |  |  | $ | * |  |  | $ | — |  |  | $ | — |
* | Represents an amount less than $0.5 million.
** | Comparative figures are based on prior hedge accounting standard.
|  | Financial expenses, net |  |  | Other comprehensive income |
|  | Nine months ended, |  |  | Nine months ended, |
|  | September 30, 2019 |  |  | September 30, 2018** |  |  | September 30, 2019 |  |  | September 30, 2018** |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  | $ | 635 |  |  | $ | 736 |  |  | $ | (117 | ) |  | $ | 502 |
Cross-currency swaps—cash flow hedge (1) |  |  | (2 | ) |  |  | (1 | ) |  |  | (49 | ) |  |  | (18 | )
Cross-currency swaps — net investment hedge (2) |  |  | (22 | ) |  |  | (22 | ) |  |  | (46 | ) |  | $ | (36 | )
Interest rate swaps — fair value hedge (3) |  | $ | 2 |  |  | $ | * |  |  | $ | — |  |  | $ | — |
* | Represents an amount less than $0.5 million.
** | Comparative figures are based on prior hedge accounting standard.
The table below provides information regarding the location and amount of pre-tax (gains) losses from derivatives not designated as hedging instruments:
|  | Financial expenses, net |  |  | Net revenues |
|  | Three months ended, |  |  | Three months ended, |
|  | September 30, 2019 |  |  | September 30, 2018 |  |  | September 30, 2019 |  |  | September 30, 2018 |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  |  | 211 |  |  |  | 229 |  |  |  | (4,264 | ) |  |  | (4,529 | )
Option and forward contracts (4) |  | $ | (35 | ) |  | $ | (6 | ) |  | $ | — |  |  | $ | — |
Option and forward contracts Economic hedge (5) |  |  | — |  |  |  | — |  |  |  | (4 | ) |  |  | 1 |
|  | Financial expenses, net |  |  | Net revenues |
|  | Nine months ended, |  |  | Nine months ended, |
|  | September 30, 2019 |  |  | September 30, 2018 |  |  | September 30, 2019 |  |  | September 30, 2018 |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  |  | 635 |  |  |  | 736 |  |  |  | (12,896 | ) |  |  | (14,295 | )
Option and forward contracts (4) |  | $ | (42 | ) |  | $ | (11 | ) |  | $ | — |  |  | $ | — |
Option and forward contracts Economic hedge (5) |  |  | — |  |  |  | — |  |  |  | * |  |  |  | * |
* | Represents an amount less than $0.5 million.
(1) | With respect to cross-currency swap agreements, Teva recognized gains which mainly reflect the differences between the fixed interest rate and the floating interest rate.
(2) | In each of the first and second quarters of 2017, Teva entered into a cross currency swap agreement with a notional amount of $500 million maturing in 2020. These cross currency swaps were designated as a net investment hedge of Teva’s foreign subsidiaries euro denominated net assets, in order to reduce the risk of adverse exchange rate fluctuations. With respect to these cross currency swap agreements, Teva recognized gains which mainly reflect the differences between the float-for-float interest rates paid and received. No amounts were reclassified from accumulated other comprehensive income into income related to the sale of a subsidiary.
(3) | In the fourth quarter of 2016, Teva entered into an interest rate swap agreement designated as fair value hedge relating to its 2.8% senior notes due 2023 with respect to $500 million notional amount of outstanding debt. With respect to this interest rate swap agreement, Teva recognized a loss which mainly reflects the differences between the fixed interest rate and the floating interest rate. In the third quarter of 2 019, Teva terminated this interest rate swap agreement. The settlement of these transactions resulted in a gain position of $10 million. The fair value hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financial expenses-net over the life of the debt as additional interest ex pense .
(4) | Teva uses foreign exchange contracts (mainly option and forward contracts) to hedge balance sheet items from currency exposure. These foreign exchange contracts are not designated as hedging instruments for accounting purposes. In connection with these foreign exchange contracts, Teva recognizes gains or losses that offset the revaluation of the balance sheet items also recorded under financial expenses—net.
(5) | Teva entered into option and forward contracts designed to limit the exposure of foreign exchange fluctuations on the e uro (EUR), the British p ound (GBP), the Russian r uble (RUB) and some other currencies denominated revenues with respect to the quarter for which such instruments are purchased. These derivative instruments do not meet the criteria for hedge accounting, however, they are accounted for as economic hedge. These derivative instruments are recognized on the balance sheet at their fair value, with changes in the fair value recognized under the same line item in the statements of income as the underlying exposure being hedged. The cash flows associated with these derivatives are reflected as cash flows from operating activities in the consolidated statements of cash flows .
e. | Matured forward starting interest rate swaps and treasury lock agreements:
Commencing in the third quarter of 2015, Teva entered into forward starting interest rate swap and treasury lock agreements designated as cash flow hedges of the U.S. dollar debt issuance in July 2016, with respect to $3.75 billion and $1.5 billion notional amounts, respectively. These agreements hedged the variability in anticipated future interest payments due to possible changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. dollar debt issuance in July 2016 (in connection with the closing of the Actavis Generics acquisition). Certain of the forward starting interest rate swaps and treasury lock agreements matured during the first half of 2016. In July 2016, in connection with the debt issuances, Teva terminated the remaining forward starting interest rate swaps and treasury lock agreements. The termination of these transactions resulted in a loss position of $ 493 million, of which $ 242 million were settled on October 7, 2016 and the remaining amount was settled in January 2017. The change in fair value of these instruments recorded in other comprehensive income (loss) will be amortized under financial expenses-net over the life of the debt. Such losses mainly reflect the changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. debt issuance in July 2016. With respect to the forward starting interest rate swaps and treasury lock agreements, losses of $7 million were recognized under financial expenses, net for the three months ended September 30, 2019 and 2018, and losses of $22 million and $21 million were recognized under financial expenses, net for the nine months ended September 30, 2019 and 2018 , respectively . In the third quarter of 2016, Teva terminated interest rate swap agreements designated as fair value hedge relating to its 2.95% senior notes due 2022 with respect to $844 million notional amount and its 3.65% senior notes due 2021 with respect to $450 million notional amount. Settlement of these transactions resulted in a gain position of $41 million. The fair value hedge accounting adjustments of these instruments, which were recorded under senior notes and loans, are amortized under financial expenses , net over the life of the debt as additional interest expense. With respect to the interest rate swap agreements, terminated in 2016 and in 2019 as described above, gains of $3 million and $2 million were recognized under financial expenses, net for the three months ended September 30, 2019 and 2018, respectively , and gains of $6 million and $5 million were recognized under financial expenses, net for the nine months ended September 30, 2019 and 2018 , respectively .

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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 http://asc.fasb.org/topic&trid=2229140 + Details
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