Fair value measurements

3 Months Ended

Nov. 30, 2023

The Company measures certain assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, which defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In addition, it establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2 - Observable inputs other than quoted prices in active markets.

Level 3 - Unobservable inputs for which there is little or no market data available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Assets and liabilities measured at fair value on a recurring basis were as follows (in millions):


	November 30, 2023		Level 1		Level 2		Level 3
Assets:
Money market funds 1	$	5	$	5	$	—	$	—
Cross currency interest rate swaps 2	31		—		31		—
Foreign currency forwards 3	1		—		1		—
Investments in equity securities 4	18		18		—		—
Investments in debt securities 5	109		—		109		—

Total return swaps	8		—		8		—

Liabilities:
Variable prepaid forward 6	$	3,338	$	—	$	—	$	3,338
Foreign currency forwards 3	24		—		24		—


Cross currency interest rate swaps 2	1		—		1		—


	August 31, 2023		Level 1		Level 2		Level 3
Assets:
Money market funds 1	$	11	$	11	$	—	$	—
Cross currency interest rate swaps 2	28		—		28		—
Foreign currency forwards 3	6		—		6		—
Investments in equity securities 4	17		17		—		—
Investments in debt securities 5	15		—		15		—
Total return swaps	1		—		1		—
Liabilities:
Variable prepaid forward 6	$	2,548	$	—	$	—	$	2,548
Foreign currency forwards 3	5		—		5		—
Total return swaps	1		—		1		—
Cross currency interest rate swaps 2	2		—		2		—

1Money market funds are valued at the closing price reported by the fund sponsor and classified as Cash and cash equivalents within the Consolidated Condensed Balance Sheets.

2The fair value of cross currency interest rate swaps is calculated by discounting the estimated future cash flows based on the applicable observable yield curves. See Note 8. Financial instruments, for additional information.

3The fair value of forward currency contracts is estimated by discounting the difference between the contractual forward price and the current available forward price for the residual maturity of the contract using observable market rates. See Note 8. Financial instruments, for additional information.

4Fair values of quoted investments are based on current bid prices as of November 30, 2023 and August 31, 2023.

5Includes investments in Treasury debt securities.

6The fair value of the derivative was derived from a Black-Scholes valuation. The inputs used in valuing the derivative included observable inputs such as the floor and cap prices of the VPF, dividend yield of Cencora shares, risk free interest rate, and contractual term of the instrument, as well as unobservable inputs such as implied volatility of Cencora shares. The implied volatility ranged from 24.7% - 27.8% for the lower strike and 19.3% - 20.8% for the upper strike as of November 30, 2023, and 23.2% - 24.7% for the lower strike and 18.1% - 19.1% for the upper strike as of August 31, 2023.

There were no transfers between Levels for the three months ended November 30, 2023.

The roll forward of the fair value of the VPF derivatives associated with the forward sale of shares of Cencora common stock, classified as Level 3, is as follows (in millions):


	Three months ended November 30,
	2023
Opening balance	$	(2,548)
VPF derivative additions	(424)
Unrealized losses recorded in Other (expense) income, net	(366)
Ending balance	$	(3,338)

The Company reports its debt instruments under the guidance of ASC Topic 825, Financial Instruments, which requires disclosure of the fair value of the Company’s debt in the footnotes to the Consolidated Condensed Financial Statements. As of November 30, 2023 the carrying amounts and estimated fair values of long term notes outstanding including the current portion were $6.7 billion and $5.8 billion, respectively. The fair values of the notes outstanding are Level 1 fair value measures and determined based on quoted market price and translated at the November 30, 2023 rate, as applicable. The fair values and carrying values of these issuances do not include notes that have been redeemed or repaid as of November 30, 2023. The carrying value of the Company's commercial paper, credit facilities, accounts receivable and trade accounts payable approximated their respective fair values due to their short-term nature.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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