RISK MANAGEMENT AND FINANCIAL INSTRUMENTS


a)	Risk Management

The company`s activities expose it to a variety of financial risks, including market risk (i.e., commodity price risk, interest rate risk, and foreign currency risk), credit risk and liquidity risk. We use financial instruments primarily to manage these risks.

There have been no other material changes to the company’s financial risk exposure or risk management activities since December 31, 2019. Please refer to Note 26 of the December 31, 2019 audited consolidated financial statements for a detailed description of the company’s financial risk exposure and risk management activities.


b)	Financial Instruments

The following table lists the company’s financial instruments by their respective classification as at June 30, 2020 and December 31, 2019:



	2020				2019
AS AT JUN. 30, 2020 AND DEC. 31, 2019 (MILLIONS)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets
Cash and cash equivalents	$	9,523	$	9,523	$	6,778	$	6,778
Other financial assets
Government bonds	2,227		2,227		2,403		2,403
Corporate bonds	3,857		3,857		3,267		3,267
Fixed income securities and other	1,590		1,590		1,750		1,750
Common shares and warrants	4,833		4,833		3,189		3,189
Loans and notes receivable	1,846		1,846		1,859		1,859
	14,353		14,353		12,468		12,468
Accounts receivable and other	12,925		12,925		14,035		14,035
	$	36,801	$	36,801	$	33,281	$	33,281
Financial liabilities
Corporate borrowings	$	8,051	$	9,078	$	7,083	$	7,933
Non-recourse borrowings of managed entities
Property-specific borrowings	126,869		128,280		127,869		129,728
Subsidiary borrowings	9,493		9,694		8,423		8,632
	136,362		137,974		136,292		138,360
Accounts payable and other	35,548		35,548		36,724		36,724
Subsidiary equity obligations	4,201		4,201		4,132		4,139
	$	184,162	$	186,801	$	184,231	$	187,156

c) Fair Value Hierarchy Levels

The following table categorizes financial assets and liabilities, which are carried at fair value, based upon the fair value hierarchy levels:



	2020						2019
AS AT JUN. 30, 2020 AND DEC. 31, 2019 (MILLIONS)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial assets
Other financial assets
Government bonds	$	4	$	2,223	$	—	$	—	$	2,403	$	—
Corporate bonds	62		3,017		258		—		2,682		275
Fixed income securities and other	379		728		483		419		851		480
Common shares and warrants	3,493		398		942		1,966		421		802
Loans and notes receivables	—		—		83		—		51		4
Accounts receivable and other	11		1,764		92		1		1,737		219
	$	3,949	$	8,130	$	1,858	$	2,386	$	8,145	$	1,780
Financial liabilities
Accounts payable and other	$	7	$	3,962	$	616	$	93	$	3,749	$	686
Subsidiary equity obligations	—		28		1,948		—		40		1,856
	$	7	$	3,990	$	2,564	$	93	$	3,789	$	2,542

During the three and six months ended June 30, 2020, there were no transfers between Level 1, 2 or 3.

Fair values of financial instruments are determined by reference to quoted bid or ask prices, as appropriate. If bid and ask prices are unavailable, the closing price of the most recent transaction of that instrument is used. In the absence of an active market, fair values are determined based on prevailing market rates for instruments with similar characteristics and risk profiles or internal or external valuation models, such as option pricing models and discounted cash flow analysis, using observable market inputs.

The following table summarizes the valuation techniques and key inputs used in the fair value measurement of Level 2 financial instruments:



(MILLIONS) Type of Asset/Liability	Carrying Value Jun. 30, 2020			Valuation Techniques and Key Inputs
Derivative assets/Derivative liabilities (accounts receivable/accounts payable)	$	1,764	/	Foreign currency forward contracts – discounted cash flow model – forward exchange rates (from observable forward exchange rates at the end of the reporting period) and discounted at credit adjusted rate Interest rate contracts – discounted cash flow model – forward interest rates (from observable yield curves) and applicable credit spreads discounted at a credit adjusted rate Energy derivatives – quoted market prices, or in their absence internal valuation models, corroborated with observable market data
	(3,962		)
Other financial assets	6,366			Valuation models based on observable market data
Redeemable fund units (subsidiary equity obligations)	(28		)	Aggregated market prices of underlying investments

Fair values determined using valuation models requiring the use of unobservable inputs (Level 3 financial assets and liabilities) include assumptions concerning the amount and timing of estimated future cash flows and discount rates. In determining those unobservable inputs, the company uses observable external market inputs such as interest rate yield curves, currency rates and price and rate volatilities, as applicable, to develop assumptions regarding those unobservable inputs.

The following table summarizes the valuation techniques and significant unobservable inputs used in the fair value measurement of Level 3 financial instruments:



(MILLIONS) Type of Asset/Liability	Carrying Value Jun. 30, 2020			Valuation Techniques	Significant Unobservable Inputs	Relationship of Unobservable Inputs to Fair Value
Fixed income securities and other	$	483		Discounted cash flows	• Future cash flows	• Increases (decreases) in future cash flows increase (decrease) fair value
					• Discount rate	• Increases (decreases) in discount rate decrease (increase) fair value
Corporate bonds	258			Discounted cash flows	• Future cash flows	• Increases (decreases) in future cash flows increase (decrease) fair value
					• Discount rate	• Increases (decreases) in discount rate decrease (increase) fair value
Common shares	942			Discounted cash flows	• Future cash flows	• Increases (decreases) in future cash flows increase (decrease) fair value
					• Discount rate	• Increases (decreases) in discount rate decrease (increase) fair value
				Black-Scholes model	• Volatility	• Increases (decreases) in volatility increase (decreases) fair value
					• Term to maturity	• Increases (decreases) in term to maturity increase (decrease) fair value
Limited-life funds (subsidiary equity obligations)	(1,948		)	Discounted cash flows	• Future cash flows	• Increases (decreases) in future cash flows increase (decrease) fair value
					• Discount rate	• Increases (decreases) in discount rate decrease (increase) fair value
					• Terminal capitalization rate	• Increases (decreases) in terminal capitalization rate decrease (increase) fair value
					• Investment horizon	• Increases (decreases) in the investment horizon decrease (increase) fair value
Derivative assets/Derivative liabilities (accounts receivable/payable)	92		/	Discounted cash flows	• Future cash flows	• Increases (decreases) in future cash flows increase (decrease) fair value
	(616		)	Discounted cash flows	• Future cash flows
					• Discount rate	• Increases (decreases) in discount rate decrease (increase) fair value

The following table presents the changes in the balance of financial assets and liabilities classified as Level 3 for the periods ended June 30, 2020:



	Three Months Ended						Six Months Ended
AS AT AND FOR THE PERIODS ENDED JUN. 30, 2020 (MILLIONS)	Financial Assets			Financial Liabilities			Financial Assets			Financial Liabilities
Balance, beginning of period	$	1,769		$	2,549		$	1,780		$	2,542
Fair value changes in net income	(182		)	(48		)	(210		)	(47		)
Fair value changes in other comprehensive income¹	—			(33		)	(21		)	(67		)
Additions, net of disposals	271			96			309			136
Balance, end of period	$	1,858		$	2,564		$	1,858		$	2,564


1.	Includes foreign currency translation.