The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. AbbVie'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 and nonderivative instruments to reduce its exposure to foreign currency exchange rates. AbbVie also periodically enters into interest rate swaps 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.

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 $1.1 billion at December 31, 2021 and $1.5 billion at December 31, 2020, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than 18 months. Accumulated gains and losses as of December 31, 2021 will be reclassified from AOCI and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement.

In the third quarter of 2019, the company entered into treasury rate lock agreements with notional amounts totaling $10.0 billion to hedge exposure to variability in future cash flows resulting from changes in interest rates related to the issuance of long-term debt in connection with the acquisition of Allergan. The treasury rate lock agreements were designated as cash flow hedges and recorded at fair value. The agreements were net settled upon issuance of the senior notes in November 2019 resulting in a pre-tax gain of $383 million recognized in other comprehensive income (loss). This gain is reclassified to interest expense, net over the term of the related debt.

The company is a party to interest rate swap contracts designed as cash flow hedges with notional amounts totaling $750 million at December 31, 2021 and $2.3 billion at December 31, 2020. The effect of the hedge contracts is to change a floating-rate interest obligation to a fixed rate for that portion of the floating-rate debt. Realized and unrealized gains or losses are included in AOCI and are reclassified to interest expense, net over the lives of the floating-rate debt.

The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange loss in the consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $8.2 billion at December 31, 2021 and $8.6 billion at December 31, 2020.

The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. The company had an aggregate principal amount of senior Euro notes designated as net investment hedges of €5.9 billion at December 31, 2021 and €6.6 billion at December 31, 2020. In addition, the company had foreign currency forward exchange contracts designated as net investment hedges with notional amounts totaling €4.3 billion at December 31, 2021 and €971 million at December 31, 2020. The company uses the spot method of assessing hedge effectiveness for derivative instruments designated as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI and the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in interest expense, net over the life of the hedging instrument.

The company is a party to interest rate swap contracts designated as fair value hedges with notional amounts totaling $4.5 billion at December 31, 2021 and $4.8 billion at December 31, 2020. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts 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 on the consolidated balance sheets:


	Fair value - Derivatives in asset position					Fair value - Derivatives in liability position
as of December 31 (in millions)	Balance sheet caption	2021		2020		Balance sheet caption	2021		2020
Foreign currency forward exchange contracts
Designated as cash flow hedges	Prepaid expenses and other	$	51	$	2	Accounts payable and accrued liabilities	$	2	$	82

Designated as cash flow hedges	Other assets	—		—		Other long-term liabilities	—		6
Designated as net investment hedges	Prepaid expenses and other	149		—		Accounts payable and accrued liabilities	—		11
Designated as net investment hedges	Other assets	15		—		Other long-term liabilities	—		—
Not designated as hedges	Prepaid expenses and other	26		49		Accounts payable and accrued liabilities	13		33
Interest rate swap contracts
Designated as cash flow hedges	Prepaid expenses and other	—		—		Accounts payable and accrued liabilities	7		14
Designated as cash flow hedges	Other assets	—		—		Other long-term liabilities	—		20
Designated as fair value hedges	Prepaid expenses and other	—		7		Accounts payable and accrued liabilities	—		—
Designated as fair value hedges	Other assets	26		131		Other long-term liabilities	15		—
Total derivatives		$	267	$	189		$	37	$	166

The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive income (loss):


years ended in December 31 (in millions)	2021		2020		2019
Foreign currency forward exchange contracts
Designated as cash flow hedges	$	82	$	(71)	$	(5)
Designated as net investment hedges	341		(95)		33
Interest rate swap contracts designated as cash flow hedges	2		(53)		4
Treasury rate lock agreements designated as cash flow hedges	—		—		383

Assuming market rates remain constant through contract maturities, the company expects to reclassify pre-tax gains of $65 million into cost of products sold for foreign currency cash flow hedges, pre-tax losses of $7 million into interest expense, net for interest rate swap cash flow hedges and pre-tax gains of $24 million into interest expense, net for treasury rate lock agreement cash flow hedges during the next 12 months.

Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized in other comprehensive income (loss) pre-tax gains of $577 million in 2021, pre-tax losses of $907 million in 2020 and pre-tax gains of $90 million in 2019.

The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the consolidated statements of earnings, including the net gains (losses) reclassified out of AOCI into net earnings. See Note 13 for the amount of net gains (losses) reclassified out of AOCI.


years ended December 31 (in millions)	Statement of earnings caption	2021		2020		2019
Foreign currency forward exchange contracts
Designated as cash flow hedges	Cost of products sold	$	(87)	$	23	$	167
Designated as net investment hedges	Interest expense, net	26		18		27
Not designated as hedges	Net foreign exchange loss	(100)		58		(70)
Treasury rate lock agreements designated as cash flow hedges	Interest expense, net	24		24		3
Interest rate swap contracts
Designated as cash flow hedges	Interest expense, net	(24)		(17)		1
Designated as fair value hedges	Interest expense, net	(127)		365		418
Debt designated as hedged item in fair value hedges	Interest expense, net	127		(365)		(418)

The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2021:


			Basis of fair value measurement
(in millions)	Total		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	$	9,746	$	4,451	$	5,295	$	—
Money market funds and time deposits	45		—		45		—
Debt securities	46		—		46		—
Equity securities	121		100		21		—
Interest rate swap contracts	26		—		26		—
Foreign currency contracts	241		—		241		—

Total assets	$	10,225	$	4,551	$	5,674	$	—
Liabilities
Interest rate swap contracts	$	22	$	—	$	22	$	—
Foreign currency contracts	15		—		15		—
Contingent consideration	14,887		—		—		14,887
Total liabilities	$	14,924	$	—	$	37	$	14,887

The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2020:


			Basis of fair value measurement
(in millions)	Total		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	$	8,449	$	2,758	$	5,691	$	—
Money market funds and time deposits	12		—		12		—
Debt securities	50		—		50		—
Equity securities	159		149		10		—
Interest rate swap contracts	138		—		138		—
Foreign currency contracts	51		—		51		—
Total assets	$	8,859	$	2,907	$	5,952	$	—
Liabilities
Interest rate swap contracts	$	34	$	—	$	34	$	—
Foreign currency contracts	132		—		132		—
Contingent consideration	12,997		—		—		12,997
Total liabilities	$	13,163	$	—	$	166	$	12,997

Equity securities primarily consist of investments for which the fair values were determined by using the published market prices per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company were valued using observable market inputs including published interest rate curves and both forward and spot prices for foreign currencies.

The fair value measurements of the contingent consideration liabilities were determined based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products. The potential contingent consideration payments are estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which are then discounted to present value. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones

and estimated future sales. Significant judgment is employed in determining the appropriateness of certain of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period.

The fair value of the company's contingent consideration liabilities was calculated using the following significant unobservable inputs:


	2021		2020
years ended December 31 (in millions)	Range	Weighted Average(a)	Range	Weighted Average(a)
Discount rate	0.2% - 2.6%	1.7%	0.1% - 2.2%	1.1	%
Probability of payment for unachieved milestones	89% - 100%	90%	56% - 92%	64	%
Probability of payment for royalties by indication(b)	56% - 100%	96%	56% - 100%	91	%

Projected year of payments	2022 - 2034	2027	2021 - 2034	2027

There have been no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy. The following table presents the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs:


years ended December 31 (in millions)	2021		2020		2019
Beginning balance	$	12,997	$	7,340	$	4,483
Additions(a)	—		225		—
Change in fair value recognized in net earnings	2,679		5,753		3,091
Payments	(789)		(321)		(234)
Ending balance	$	14,887	$	12,997	$	7,340

The change in fair value recognized in net earnings is recorded in other expense, net in the consolidated statements of earnings. During the year-ended December 31, 2021, the company recorded a $2.7 billion increase in the Skyrizi contingent consideration liability due to higher estimated sales driven by stronger market share uptake, favorable clinical trial results and the passage of time, partially offset by higher discount rates. During the year-ended December 31, 2020, the company recorded a $5.7 billion increase in the Skyrizi contingent consideration liability due to higher estimated future sales driven by stronger market share uptake, lower discount rates, the passage of time and favorable clinical trial results. During the second quarter of 2019, the company recorded a $2.3 billion increase in the Skyrizi contingent consideration liability due to higher probabilities of success, higher estimated future sales and lower discount rates. The higher probabilities of success resulted from the April 2019 regulatory approvals of Skyrizi for the treatment of moderate to severe plaque psoriasis. During the third quarter of 2019, the company recorded a $91 million decrease in the Stemcentrx contingent consideration liability due to the termination of the Rova-T R&D program.

Certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2021 are shown in the table below:


					Basis of fair value measurement
(in millions)	Book value		Approximate fair values		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Liabilities
Short-term borrowings	$	14	$	14	$	—	$	14	$	—
Current portion of long-term debt and finance lease obligations, excluding fair value hedges	12,455		11,830		11,329		501		—
Long-term debt and finance lease obligations, excluding fair value hedges	64,113		71,810		70,757		1,053		—
Total liabilities	$	76,582	$	83,654	$	82,086	$	1,568	$	—

The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2020 are shown in the table below:


					Basis of fair value measurement
(in millions)	Book value		Approximate fair values		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Liabilities
Short-term borrowings	$	34	$	34	$	—	$	34	$	—
Current portion of long-term debt and finance lease obligations, excluding fair value hedges	$	8,461	$	8,542	$	8,249	$	293	$	—
Long-term debt and finance lease obligations, excluding fair value hedges	77,283		87,761		86,137		1,624		—
Total liabilities	$	85,778	$	96,337	$	94,386	$	1,951	$	—

AbbVie also holds investments in equity securities that do not have readily determinable fair values. The company records these investments at cost and remeasures them to fair value based on certain observable price changes or impairment events as they occur. The carrying amount of these investments was $149 million as of December 31, 2021 and $102 million as of December 31, 2020. No significant cumulative upward or downward adjustments have been recorded for these investments as of December 31, 2021.