Note 8Financial Instruments and Fair Value Measures

Risk Management Policy

The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs. The company uses derivative instruments to reduce its exposure to foreign currency exchange rates. The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company periodically enters into interest rate swaps, based on judgment, to manage interest costs in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities, and none of the company’s outstanding derivative instruments contain credit risk related contingent features; collateral is generally not required.

Financial Instruments

Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $98 million and $1.4 billion at September 30, 2015 and December 31, 2014, respectively, are designated as cash flow hedges and are recorded at fair value. Accumulated gains and losses as of September 30, 2015 will be included in cost of products sold at the time the products are sold, generally not exceeding twelve months.

The company enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed. At September 30, 2015 and December 31, 2014, AbbVie held notional amounts of $6.2 billion and $6.8 billion, respectively, of such foreign currency forward exchange contracts.

AbbVie is a party to interest rate hedge contracts, designated as fair value hedges, totaling $11 billion and $8.0 billion at September 30, 2015 and December 31, 2014, respectively. The effect of the hedge is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie recorded the contracts at fair value and adjusted the carrying amount of the fixed-rate debt by an offsetting amount.

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of September 30, 2015:

	Fair value – Derivatives in asset position		Fair value – Derivatives in liability position
(in millions)	Balance sheet caption	Amount	Balance sheet caption	Amount
Foreign currency forward exchange contracts —
Hedging instruments	Prepaid expenses and other	$ 7	Accounts payable and accrued liabilities	$—
Others not designated as hedges	Prepaid expenses and other	23	Accounts payable and accrued liabilities	17
Interest rate swaps designated as fair value hedges	Prepaid expenses and other	62	Other long-term liabilities	6

Total derivatives		$ 92		$ 23

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of December 31, 2014:

	Fair value – Derivatives in asset position		Fair value – Derivatives in liability position
(in millions)	Balance sheet caption	Amount	Balance sheet caption	Amount
Foreign currency forward exchange contracts —
Hedging instruments	Prepaid expenses and other	$ 141	Accounts payable and accrued liabilities	$—
Others not designated as hedges	Prepaid expenses and other	70	Accounts payable and accrued liabilities	63
Interest rate swaps designated as fair value hedges	n/a	—	Other long-term liabilities	180

Total derivatives		$ 211		$ 243

While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.

The unrealized gains/(losses) for the effective portions of the derivative instruments designated as cash flow hedges recognized in other comprehensive income were $2 million and $112 million for the three months ended September 30, 2015 and 2014, respectively, and $78 million and $142 million, respectively, for the nine months ended September 30, 2015 and 2014. The amount of hedge ineffectiveness was not significant for the three and nine months ended September 30, 2015 or 2014.

The following table summarizes the location in the condensed consolidated statements of earnings and the amount of gain/(loss) recognized into net earnings for derivative instruments, including the effective portions of the gain/(loss) reclassified out of accumulated other comprehensive loss into net earnings:

		Three months ended September 30,				Nine months ended September 30,
(in millions)	Income statement caption	2015		2014		2015		2014
Foreign currency forward exchange contracts —
Designated as cash flow hedges	Cost of products sold	$ 89		$ (23	)	$ 171		$ (59	)
Not designated as hedges	Net foreign exchange loss	(5	)	(215	)	(170	)	(233	)
Interest rate swaps designated as fair value hedges	Interest expense, net	235		(9	)	236		163

Total		$ 319		$ (247	)	$ 237		$ (129	)

The gain/(loss) related to fair value hedges is recognized in interest expense, net and directly offsets the (loss)/gain on the underlying hedged item, the fixed-rate debt, resulting in no net impact to interest expense, net for the three and nine months ended September 30, 2015 and 2014.

Fair Value Measures

The fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;

Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and

Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability.

The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheet as of September 30, 2015:

		Basis of fair value measurement
(in millions)	Balance at September 30, 2015	Quoted prices in active markets for identical assets (Level 1)	Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)
Assets
Cash and equivalents	$ 9,223	$ 910	$ 8,313	$—
Time deposits	8	—	8	—
Equity securities	33	33	—	—
Interest rate hedges	62	—	62	—
Foreign currency contracts	30	—	30	—

Total assets	$ 9,356	$ 943	$ 8,413	$—

Liabilities
Interest rate hedges	$ 6	$—	$ 6	$—
Foreign currency contracts	17	—	17	—

Total liabilities	$ 23	$—	$ 23	$—

		Basis of fair value measurement
(in millions)	Balance at December 31, 2014	Quoted prices in active markets for identical assets (Level 1)	Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)
Assets
Cash and equivalents	$ 8,348	$ 1,214	$ 7,134	$—
Time deposits	9	—	9	—
Equity securities	13	13	—	—
Foreign currency contracts	211	—	211	—

Total assets	$ 8,581	$ 1,227	$ 7,354	$—

Liabilities
Interest rate hedges	$ 180	$—	$ 180	$—
Foreign currency contracts	63	—	63	—

Total liabilities	$ 243	$—	$ 243	$—

The fair values for time deposits included in cash and equivalents and short-term investments are determined based on a discounted cash flow analysis reflecting quoted market rates for the same or similar instruments. The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. Available-for-sale equity securities consists of investments for which the fair values are determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company are valued using publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts.

Cumulative net unrealized holding (losses) gains on available-for-sale equity securities totaled $(1) million and $3 million at September 30, 2015 and December 31, 2014, respectively.

There have been no transfers of assets or liabilities between the fair value measurement levels.

In addition to the financial instruments that the company is required to recognize at fair value on the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. The carrying values and fair values of certain financial instruments as of September 30, 2015 and December 31, 2014 are shown in the table below:

	Book values		Approximate fair values
(in millions)	September 30, 2015	December 31, 2014	September 30, 2015	December 31, 2014
Assets
Investments	$ 58	$ 95	$ 96	$ 145
Liabilities
Short-term borrowings	760	425	760	425
Current portion of long-term debt and lease obligations	8	4,014	24	4,026
Long-term debt and lease obligations, excluding fair value hedges	31,303	10,718	31,023	10,803

The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of September 30, 2015:

		Basis of fair value measurement
(in millions)	Fair Value at September 30, 2015	Quoted prices in active markets for identical assets (Level 1)	Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)
Assets
Investments	$ 96	$ 51	$ 17	$ 28

Total assets	$ 96	$ 51	$ 17	$ 28

Liabilities
Short-term borrowings	$ 760	$—	$ 760	$—
Current portion of long-term debt and lease obligations	24	—	24	—
Long-term debt and lease obligations, excluding fair value hedges	31,023	30,929	94	—

Total liabilities	$ 31,807	$ 30,929	$ 878	$—

The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of December 31, 2014:

		Basis of fair value measurement
(in millions)	Fair Value at December 31, 2014	Quoted prices in active markets for identical assets (Level 1)	Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)
Assets
Investments	$ 145	$ 68	$ 13	$ 64

Total assets	$ 145	$ 68	$ 13	$ 64

Liabilities
Short-term borrowings	$ 425	$—	$ 425	$—
Current portion of long-term debt and lease obligations	4,026	4,005	21	—
Long-term debt and lease obligations, excluding fair value hedges	10,803	10,710	93	—

Total liabilities	$ 15,254	$ 14,715	$ 539	$—

Investments consist of cost method investments and held-to-maturity debt securities. Cost method investments include certain investments for which the fair value is determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. To determine the fair value of other cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair values of held-to-maturity debt securities were estimated based upon the quoted market prices for the same or similar debt instruments. The fair values of short-term and current borrowings approximate the carrying values due to the short maturities of these instruments.

The fair values of long-term debt, excluding fair value hedges, were determined by using the published market price for the debt instruments, without consideration of transaction costs, which represents a Level 1 basis of fair value measurement. The counterparties to financial instruments consist of select major international financial institutions.

Concentrations of Risk

The company invests excess cash in time deposits, money market funds, and U.S. Treasury securities and diversifies the concentration of cash among different financial institutions. The company monitors concentrations of credit risk associated with deposits with financial institutions. Credit exposure limits have been established to limit a concentration with any single issuer or institution.

At September 30, 2015, AbbVie had approximately $306 million of net monetary assets denominated in the Venezuelan bolivar (converted at a rate of 6.3 VEF/USD) in its Venezuelan entity, which had net revenues of $52 million and $149 million for the three and nine months ended September 30, 2015, respectively. If AbbVie’s net monetary assets denominated in the Venezuelan bolivar had been converted at a rate of 13.5 VEF/USD at September 30, 2015, it would have resulted in a devaluation loss of $163 million for both the three and nine months ended September 30, 2015, respectively. The company cannot predict whether there will be devaluations of the Venezuelan currency or whether the use of the official rate of 6.3 will continue to be supported by evolving facts and circumstances. If circumstances change such that the company concludes it would be appropriate to use a different exchange rate, or if a devaluation of the official rate occurs, it could result in a significant change to AbbVie’s results of operations.

Three U.S. wholesalers accounted for 50 percent and 49 percent of total net accounts receivable as of September 30, 2015 and December 31, 2014, respectively, and substantially all of AbbVie’s sales in the United States are to these three wholesalers. In addition, net governmental receivables outstanding in Greece, Portugal, Italy, and Spain totaled $607 million at September 30, 2015 and $446 million at December 31, 2014.

HUMIRA® (adalimumab) is AbbVie’s single largest product and accounted for approximately 63 percent of AbbVie’s total net revenues for both the nine months ended September 30, 2015 and 2014, respectively.

Debt and Credit Facilities

On September 25, 2015, AbbVie entered into a $2 billion three-year term loan credit agreement and a $2 billion 364 - day term loan credit agreement. As of September 30, 2015, AbbVie had not drawn on these facilities. In November 2015, AbbVie drew on these term facilities and used the proceeds to refinance its $4 billion of senior notes maturing in 2015. As a result of this refinancing, the $4 billion of senior notes maturing in 2015 were classified as long-term debt in the condensed consolidated balance sheet as of September 30, 2015. The margin with respect to the borrowings under the term loan facilities will be based on AbbVie’s public debt rating. The term loan facilities contains customary covenants, all of which the company remains in compliance with as of September 30, 2015.

In May 2015, the company issued $16.7 billion aggregate principal amount of unsecured senior notes, consisting of $3.0 billion aggregate principal amount of its 1.8% senior notes due 2018, $3.75 billion aggregate principal amount of its 2.5% senior notes due 2020, $1.0 billion aggregate principal amount of its 3.2% senior notes due 2022, $3.75 billion aggregate principal amount of its 3.6% senior notes due 2025, $2.5 billion aggregate principal amount of its 4.5% senior notes due 2035 and $2.7 billion aggregate principal amount of its 4.7% senior notes due 2045. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium. Debt issuance costs incurred in connection with the offering totaled $93 million and are being amortized over the respective terms of the notes to interest expense, net in the condensed consolidated statements of earnings. The senior notes contain customary covenants, all of which the company remains in compliance with as of September 30, 2015.

Approximately $11.5 billion of the net proceeds were used to finance the acquisition of Pharmacyclics and approximately $5.0 billion of the net proceeds were used to finance the accelerated share repurchase agreement with Morgan Stanley. Refer to Notes 4 and 10 for additional information related to the acquisition of Pharmacyclics and the ASR, respectively.

In March 2015, AbbVie entered into an $18 billion, 364-Day Bridge Term Loan Credit Agreement (the bridge loan) in support of the planned acquisition of Pharmacyclics. No amounts were drawn under the bridge loan, which was terminated in the second quarter of 2015 as a result of the company’s May 2015 issuance of the senior notes. Interest expense, net includes $86 million of costs related to the bridge loan, which were incurred in the first half of 2015.

Short-term borrowings include commercial paper borrowings of $760 million and $416 million as of September 30, 2015 and December 31, 2014, respectively. The weighted-average interest rate on outstanding commercial paper borrowings for the nine months ended September 30, 2015 and 2014 was 0.2 percent and 0.2 percent, respectively.

As of September 30, 2015, AbbVie was in compliance with the financial covenants of its $3 billion unsecured credit facility. No amounts were outstanding under this facility as of September 30, 2015 and December 31, 2014.