Financial Instruments

12 Months Ended

Aug. 31, 2016

Financial Instruments [Abstract]

Financial Instruments

10. Financial Instruments

The Company uses derivative instruments to manage its exposure to interest rate and foreign currency exchange risks.

The notional amounts, fair value and balance sheet presentation of derivative instruments outstanding as of August 31, 2016 and 2015 were as follows (in millions):

2016	Notional(1)		Fair Value		Location in Consolidated Balance Sheets
Derivatives designated as fair value hedges:
Interest rate swaps	$	250	$	3	Other non-current assets
Derivatives not designated as hedges:
Foreign currency forwards		1,177		16	Other current assets
Foreign currency forwards		41		-	Other current liabilities
Basis swap		2		1	Other current liabilities

⁽¹⁾ Amounts are presented in U.S. dollar equivalents, as applicable.

2015	Notional(1)		Fair Value		Location in Consolidated Balance Sheets
Derivatives designated as fair value hedges:
Interest rate swaps	$	250	$	2	Other non-current assets
Derivatives designated as cash flow hedges:
Foreign Currency Forwards		1,205		34	Other current assets
Foreign Currency Forwards		495		9	Other current liabilities
Basis Swap		1		-	Other current assets

⁽¹⁾ Amounts are presented in U.S. dollar equivalents, as applicable.

The Company uses interest rate swaps to manage the interest rate exposure associated with some of its fixed-rate borrowings and designates them as fair value hedges.

The Company utilizes foreign currency forward contracts and other foreign currency derivatives to hedge significant committed and highly probable future transactions and cash flows denominated in currencies other than the functional currency of the Company or its subsidiaries. The Company has significant non-US dollar denominated net investments and uses foreign currency denominated financial instruments, specifically foreign currency derivatives and foreign currency denominated debt, to hedge its foreign currency risk.

Fair Value Hedges

In fiscal 2015, 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. These swaps were designated as fair value hedges. On August 10, 2015, the Company terminated $500 million of the six-month LIBOR in arrears swaps and all of the one-month LIBOR in arrears swaps in connection with the repayment of the associated debt.

The gains and losses due to changes in fair value on the swaps and on the hedged notes attributable to interest rate risk and did not have a material impact on the Company’s financial statements.

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 short-term and long-term debt on the Consolidated Balance Sheets (see Note 9, Borrowings). At August 31, 2016 and 2015, the cumulative fair value adjustments resulted in an increase in long-term debt of $2 million and $1 million, respectively. No material gains or losses were recorded from ineffectiveness during fiscal 2016, 2015 or 2014.

Derivatives not Designated as Hedges

The Company enters into derivative transactions that are not designated as accounting hedges. These derivative instruments are economic hedges of interest rate and foreign currency risks. Income or expense due to changes in fair value of these derivative instruments were recognized in earnings as follows (in millions):

	Location in Consolidated Statements of Earnings	2016			2015			2014
Interest rate swaps	Interest expense, net	$	-		$	1		$	-
Foreign currency forwards	Selling, general and administrative expense		19			78			-
Second Step Transaction foreign currency forwards	Other income (expense)		-			(166	)		-
Foreign currency forwards	Other income (expense)		(12	)		72			-

Warrants

On March 18, 2016, the Company exercised warrants to purchase 22,696,912 shares of AmerisourceBergen common stock at an exercise price of $51.50 per share for an aggregate exercise price payment of $1.17 billion. On August 25, 2016, the Company exercised additional warrants to purchase 22,696,912 shares of AmerisourceBergen common stock at an exercise price of $52.50 per share for an aggregate exercise price payment of $1.19 billion. See Note 5, Equity Method Investments and Note 6, Available-for-Sale Investments for further information.

As of August 31, 2016, the Company holds no warrants to purchase AmerisourceBergen common stock.

The Company reports its warrants at fair value. The fair value and balance sheet presentation of warrants was as follows (in millions):

	Location in Consolidated Balance Sheets	August 31, 2016		August 31, 2015
Asset derivatives not designated as hedges:
Warrants	Other non-current assets	$	-	$	2,140

The gains and losses due to changes in fair value of the warrants recognized in earnings were as follows (in millions):

	Location in Consolidated Statements of Earnings	2016			2015		2014
Warrants	Other income (expense)	$	(546	)	$	759	$	366

Derivatives Credit Risk

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

Derivatives Offsetting

The Company does not offset the fair value amounts of derivative instruments subject to master netting agreements in the Consolidated Balance Sheet.