Financial Instruments

3 Months Ended

Nov. 30, 2014

Financial Instruments [Abstract]

Financial Instruments

Note 9.  Financial Instruments

The Company uses derivative instruments to manage its interest rate and foreign currency exposures associated with some of its fixed-rate borrowings.  The Company does not use derivative instruments for trading or speculative purposes.  All derivative instruments are recognized in the Consolidated Condensed Balance Sheets at fair value.  The Company designates interest rate swaps as fair value hedges of fixed-rate borrowings.  For derivatives designated as fair value hedges, the change in the fair value of both the derivative instrument and the hedged item are recognized in earnings in the current period.  The Company’s forward starting interest rate swaps entered in fiscal 2014 were used to hedge its anticipated debt issuance for debt obtained in November 2014 and were designated as cash flow hedges.  Changes in the fair value of cash flow hedges deemed effective are recognized in other comprehensive income.  At the inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge.  In addition, it assesses both at inception of the hedge and on an ongoing basis whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value of the hedged item and whether the derivative is expected to continue to be highly effective.  The impact of any ineffectiveness is recognized currently in earnings.

Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of nonperformance, but the Company regularly monitors the creditworthiness of each counterparty.

Fair Value Hedges

In prior fiscal years, the Company entered into a series of interest rate swaps converting $750 million of its 5.250% fixed rate notes to a floating interest rate based on the six-month LIBOR in arrears plus a constant spread and an interest rate swap converting $250 million of its 5.250% fixed rate notes to a floating interest rate based on the one-month LIBOR in arrears plus a constant spread.  All swap termination dates coincide with the notes maturity date, January 15, 2019.  The changes in fair value of the notes attributable to the hedged risk are included in short-term and long-term debt on the Consolidated Condensed Balance Sheets (see Note 8).  For the three months ended November 30, 2014 and 2013, no material gains or losses were recorded from ineffectiveness.

Cash Flow Hedges

In fiscal 2014, the Company entered into a series of forward starting interest rate swap transactions locking in the then current three-month LIBOR interest rate on $1.5 billion of anticipated debt issuance, with expected maturity tenures of 10 and 30 years.  The swap transactions were designated as cash flow hedges where the changes in fair value were recorded in other comprehensive income.  Any ineffectiveness was recognized in interest expense on the Consolidated Condensed Statements of Earnings.  The Company’s cash flow hedges were terminated upon issuance of the hedged debt in November 2014, resulting in $63 million, $39 million net of tax, of loss recorded within other comprehensive income.  The loss is amortized through interest expense to the related debt using the effective interest method.

The notional amounts of derivative instruments designated as hedges outstanding as of November 30, 2014, August 31, 2014 and November 30, 2013 were as follows (In millions):

	November 30, 2014		August 31, 2014		November 30, 2013
Derivatives designated as fair value hedges:
Interest rate swaps	$	1,000	$	1,000	$	1,000
Derivatives designated as cash flow hedges:
Forward interest rate swaps		-		1,500		-

The changes in fair value of the Company's debt that was swapped from fixed to variable rate and designated as fair value hedges are included in long-term debt on the Consolidated Condensed Balance Sheets (see Note 8).  At November 30, 2014, August 31, 2014 and November 30, 2013, the cumulative fair value adjustments resulted in an increase in long-term debt of $22 million, $12 million and $21 million, respectively.

The fair value and balance sheet presentation of derivative instruments at November 30, 2014, August 31, 2014 and November 30, 2013, were as follows (in millions):

	Location in Consolidated Condensed Balance Sheets	November 30, 2014			August 31, 2014			November 30, 2013
Asset derivatives designated as fair value hedges:
Interest rate swaps	Other non-current assets		$	26		$	16		$	23
Liability derivatives designated as cash flow hedges:
Forward interest rate swaps	Other non-current liabilities			-			44			-

Warrants

The Company, Alliance Boots and AmerisourceBergen entered into a Framework Agreement dated as of March 18, 2013, pursuant to which (1) Walgreens and Alliance Boots together were granted the right to purchase a minority equity position in AmerisourceBergen, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of AmerisourceBergen common stock (approximately 7 percent of the then fully diluted equity of AmerisourceBergen, assuming the exercise in full of the warrants described below) in open market transactions; (2) the Company and Alliance Boots were each  issued (a) a warrant to purchase up to 11,348,456  shares of AmerisourceBergen common stock at an exercise price of $51.50 per share exercisable during a six-month period beginning in March 2016, and (b) a warrant to purchase up to 11,348,456 shares of AmerisourceBergen common stock at an exercise price of $52.50 per share exercisable during a six-month period beginning in March 2017.  The parties and affiliated entities also entered into certain related agreements governing relations between and among the parties thereto, including the Shareholders Agreement, the Transaction Rights Agreement and the Limited Liability Company Agreement of WAB Holdings LLC, a limited liability company jointly-owned by the Company and Alliance Boots for the purpose of acquiring and holding AmerisourceBergen common stock, described in the Company’s Current Report on Form 8-K filed on March 20, 2013.

Foreign Currency Forwards

In fiscal 2015, the Company entered into a series of foreign currency forward contracts in anticipation of delivering the required currency needed to execute the second step transaction. At November 30, 2014, the notional amounts on these forwards were approximately £4.0 billion and €600 million.  The Company did not elect hedge accounting on these instruments.

The Company reports its warrants and foreign currency forwards at fair value.  See Note 10 for additional fair value measurement disclosures.  The fair value and balance sheet presentation of derivative instruments not designated as hedges at November 30, 2014, August 31, 2014 and November 30, 2013, were as follows (In millions):

	Location in Consolidated Condensed Balance Sheets	November 30, 2014			August 31, 2014			November 30, 2013
Asset derivatives not designated as hedges:
Warrants	Other non-current assets		$	844		$	553		$	408
Liability derivatives not designated as hedges:
Foreign currency forwards	Other current liabilities			96			-			-