Financial instruments

12 Months Ended

Aug. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial instruments

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, 2017 and 2016 were as follows (in millions):

2017	Notional1		Fair value		Location in Consolidated Balance Sheets
Derivatives designated as hedges:
Interest rate swaps	$	250	$	—	Other non-current assets
Foreign currency forwards	24		—		Other current assets
Derivatives not designated as hedges:
Foreign currency forwards	221		—		Other current assets
Foreign currency forwards	2,816		19		Other current liabilities

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

2016	Notional1		Fair value		Location in Consolidated Balance Sheets
Derivatives designated as 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.

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 uses forward starting interest rates swaps to hedge its interest rate exposure of some of its anticipated debt issuance.

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

The Company holds interest rate swap converting $250 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. All swap termination dates coincide with the notes maturity date, January 15, 2019. These swaps were designated as fair value hedges.

The gains and losses due to changes in fair value on the swaps and on the hedged notes attributable to interest rate risk 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 long-term debt on the Consolidated Balance Sheets (see note 8, borrowings). No material gain or losses were recorded for ineffectiveness during fiscal 2017, 2016, or 2015.                                                        

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. The gains and (losses) due to changes in fair value of these derivative instruments were recognized in earnings as follows (in millions):

	Location in Consolidated Statements of Earnings	2017			2016			2015
Interest rate swaps	Interest expense, net	$	—		$	—		$	1
Foreign currency forwards	Selling, general and administrative expense	11			19			78
Second Step Transaction foreign currency forwards	Other income (expense)	—			—			(166		)
Foreign currency forwards	Other income (expense)	(48		)	(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 for further information.

The Company reported its warrants at fair value. 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	2017		2016			2015
Warrants	Other income (expense)	$	—	$	(546	)	$	759

The Company held no warrants to purchase AmerisourceBergen common stock on August 31, 2017 and 2016.

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 Sheets.