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Financial Instruments | 9 Months Ended
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Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Financial Instruments | Financial Instruments In its normal operations, Linde is exposed to market risks relating to fluctuations in interest rates, foreign currency exchange rates, energy and commodity costs. The objective of financial risk management at Linde is to minimize the negative impact of such fluctuations on the company’s earnings and cash flows. To manage these risks, among other strategies, Linde routinely enters into various derivative financial instruments (“derivatives”) including interest-rate swap and treasury rate lock agreements, currency-swap agreements, forward contracts, currency options, and commodity-swap agreements. These instruments are not entered into for trading purposes and Linde only uses commonly traded and non-leveraged instruments. There are three types of derivatives that the company enters into: (i) those relating to fair-value exposures, (ii) those relating to cash-flow exposures, and (iii) those relating to foreign currency net investment exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions; and net investment exposures relate to the impact of foreign currency exchange rate changes on the carrying value of net assets denominated in foreign currencies. When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge, cash-flow hedge, or a net investment hedge. Currently, Linde designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, cross-currency contracts are generally not designated as hedges for accounting purposes. Certain currency contracts related to forecasted transactions are designated as hedges for accounting purposes. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective through the use of a qualitative assessment, then hedge accounting will be discontinued prospectively. Counterparties to Linde's derivatives are major banking institutions with credit ratings of investment grade or better. The company has Credit Support Annexes ("CSAs") in place with their principal counterparties to minimize potential default risk and to mitigate counterparty risk. Under the CSAs, the fair values of derivatives for the purpose of interest rate and currency management are collateralized with cash on a regular basis. As of September 30, 2020, the impact of such collateral posting arrangements on the fair value of derivatives was insignificant. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial. The following table is a summary of the notional amount and fair value of derivatives outstanding at September 30, 2020 and December 31, 2019 for consolidated subsidiaries:
|  |  |  |  | Fair Value
| Notional Amounts |  | Assets (a) |  | Liabilities (a)
(Millions of dollars) | September 30, 2020 |  | December 31, 2019 |  | September 30, 2020 |  | December 31, 2019 |  | September 30, 2020 |  | December 31, 2019
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |
Currency contracts: |  |  |  |  |  |  |  |  |  |  |
Balance sheet items | $ | 6,714 |  |  | $ | 7,936 |  |  | $ | 30 |  |  | $ | 62 |  |  | $ | 97 |  |  | $ | 37 |
Forecasted transactions | 952 |  |  | 748 |  |  | 6 |  |  | 14 |  |  | 12 |  |  | 15 |
Cross-currency swaps | 427 |  |  | 1,029 |  |  | 45 |  |  | 35 |  |  | 6 |  |  | 40 |
Commodity contracts | N/A |  | N/A |  | 1 |  |  | — |  |  | — |  |  | — |
Total | $ | 8,093 |  |  | $ | 9,713 |  |  | $ | 82 |  |  | $ | 111 |  |  | $ | 115 |  |  | $ | 92 |
Derivatives Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |
Currency contracts: |  |  |  |  |  |  |  |  |  |  |
Balance sheet items | $ | — |  |  | $ | 27 |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |  |  | $ | 3 |
Forecasted transactions | 479 |  |  | 464 |  |  | 6 |  |  | 9 |  |  | 14 |  |  | 3 |
Commodity contracts | N/A |  | N/A |  | 1 |  |  | 6 |  |  | 2 |  |  | 1 |
Interest rate swaps | 1,839 |  |  | 1,908 |  |  | 59 |  |  | 39 |  |  | — |  |  | — |
Total Hedges | $ | 2,318 |  |  | $ | 2,399 |  |  | $ | 66 |  |  | $ | 56 |  |  | $ | 16 |  |  | $ | 7 |
Total Derivatives | $ | 10,411 |  |  | $ | 12,112 |  |  | $ | 148 |  |  | $ | 167 |  |  | $ | 131 |  |  | $ | 99 |
(a)Current assets of $47 million are recorded in prepaid and other current assets; long-term assets of $101 million are recorded in other long-term assets; current liabilities of $119 million are recorded in other current liabilities; and long-term liabilities of $12 million are recorded in other long-term liabilities. Balance Sheet Items Foreign currency contracts related to balance sheet items consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on recorded balance sheet assets and liabilities denominated in currencies other than the functional currency of the related operating unit. Certain forward currency contracts are entered into to protect underlying monetary assets and liabilities denominated in foreign currencies from foreign exchange risk and are not designated as hedging instruments. For balance sheet items that are not designated as hedging instruments, the fair value adjustments on these contracts are offset by the fair value adjustments recorded on the underlying monetary assets and liabilities. Forecasted Transactions Foreign currency contracts related to forecasted transactions consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on (1) forecasted purchases of capital-related equipment and services, (2) forecasted sales, or (3) other forecasted cash flows denominated in currencies other than the functional currency of the related operating units. For forecasted transactions that are designated as cash flow hedges, fair value adjustments are recorded to accumulated other comprehensive income ("AOCI") with deferred amounts reclassified to earnings over the same time period as the income statement impact of the associated purchase. For forecasted transactions that do not qualify for cash flow hedging relationships, fair value adjustments are recorded directly to earnings. Cross-Currency Swaps Cross-currency interest rate swaps are entered into to limit the foreign currency risk of future principal and interest cash flows associated with intercompany loans, and to a more limited extent bonds, denominated in non-functional currencies. The fair value adjustments on the cross-currency swaps are recorded to earnings, where they are offset by fair value adjustments on the underlying intercompany loan or bond. Commodity Contracts Commodity contracts are entered into to manage the exposure to fluctuations in commodity prices, which arise in the normal course of business from its procurement transactions. To reduce the extent of this risk, Linde enters into a limited number of electricity, natural gas, and propane gas derivatives. The fair value adjustments for the majority of these contracts are recorded to AOCI and are eventually offset by the income statement impact of the underlying commodity purchase. Net Investment Hedge As of September 30, 2020, Linde has €2.4 billion ($2.9 billion) intercompany Euro-denominated credit facility loans and intercompany loans which are designated as hedges of the net investment positions in foreign operations. Since hedge inception, exchange rate movements have increased the credit facility loan and intercompany loans by $244 million, with the offsetting loss shown within the cumulative translation component of AOCI in the condensed consolidated balance sheets and the consolidated statements of comprehensive income. Linde had previously designated Euro-denominated debt instruments as net investment hedges to reduce the company's exposure to changes in the currency exchange rate on investments in foreign subsidiaries with Euro functional currencies. Exchange rate movements of $206 million relating to the previously designated Euro-denominated debt incurred in the financial periods of 2019 and prior will remain in AOCI, until appropriate, such as upon sale or liquidation of the related foreign operations at which time amounts will be reclassified to the consolidated statement of income. Exchange rate movements related to the Euro-denominated debt occurring after de-designation are shown in the consolidated statement of income. Interest Rate Swaps Linde uses interest rate swaps to hedge the exposure to changes in the fair value of financial assets and financial liabilities as a result of interest rate changes. These interest rate swaps effectively convert fixed-rate interest exposures to variable rates; fair value adjustments are recognized in earnings along with an equally offsetting charge/benefit to earnings for the changes in the fair value of the underlying financial asset or financial liability. The notional value of outstanding interest rate swaps of Linde with maturity dates from 2021 through 2028 was $1,839 million at September 30, 2020 and $1,908 million at December 31, 2019 (see Note 4 for further information). Terminated Treasury Rate Locks The unrecognized aggregated losses related to terminated treasury rate lock contracts on the underlying $500 million 3.00% fixed-rate notes that mature in 2021 and the $500 million 2.20% fixed-rate notes that mature in 2022 at September 30, 2020 and December 31, 2019 were immaterial in both periods. The unrecognized gains / (losses) for the treasury rate locks are shown in AOCI and are being recognized on a straight line basis to interest expense – net over the term of the underlying debt agreements. Derivatives' Impact on Consolidated Statements of Income The following table summarizes the impact of the company’s derivatives on the consolidated statements of income:
| Amount of Pre-Tax Gain (Loss) Recognized in Earnings *
| Quarter Ended September 30, |  | Nine Months Ended September 30,
(Millions of dollars) | 2020 |  | 2019 |  | 2020 |  | 2019
Derivatives Not Designated as Hedging Instruments |  |  |  |  |  |  |
Currency contracts: |  |  |  |  |  |  |
Balance sheet items |  |  |  |  |  |  |
Debt-related | $ | (74) |  |  | $ | 213 |  |  | $ | (213) |  |  | $ | 282 |
Other balance sheet items | 3 |  |  | 28 |  |  | (48) |  |  | 30 |
Total | $ | (71) |  |  | $ | 241 |  |  | $ | (261) |  |  | $ | 312 |
* The gains (losses) on balance sheet items are offset by gains (losses) recorded on the underlying hedged assets and liabilities. Accordingly, the gains (losses) for the derivatives and the underlying hedged assets and liabilities related to debt items are recorded in the consolidated statements of income as interest expense-net. Other balance sheet items and anticipated net income gains (losses) are generally recorded in the consolidated statements of income as other income (expenses)-net. The amounts of gain or loss recognized in AOCI and reclassified to the consolidated statement of income was immaterial for both the quarter and nine months ended September 30, 2020. Net losses expected to be reclassified to earnings during the next twelve months are also not material. The gains (losses) on net investment hedges are recorded as a component of AOCI within foreign currency translation adjustments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. The gains (losses) on treasury rate locks are recorded as a component of AOCI within derivative instruments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. The gains (losses) on net investment hedges are reclassified to earnings only when the related currency translation adjustments are required to be reclassified, usually upon sale or liquidation of the investment. The gains (losses) for interest rate contracts are reclassified to earnings as interest expense –net on a straight-line basis over the remaining maturity of the underlying debt.

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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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