Financial Instruments, Derivatives and Fair Value Measures

12 Months Ended

Dec. 31, 2014

Financial Instruments, Derivatives and Fair Value Measures

Financial Instruments, Derivatives and Fair Value Measures

Note 11 — Financial Instruments, Derivatives and Fair Value Measures

        Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, totaling $1.5 billion at December 31, 2014, and $137 million at December 31, 2013, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value. Contracts totaling $1.0 billion were transferred to AbbVie as part of the separation on January 1, 2013. Accumulated gains and losses as of December 31, 2014 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months. The amount of hedge ineffectiveness was not significant in 2014, 2013 and 2012.

        Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity. For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, in exchange for primarily U.S. dollars and other European currencies. For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar, European currencies and Japanese yen. At December 31, 2014, 2013 and 2012, Abbott held $14.1 billion, $13.8 billion and $18.2 billion, respectively, of such foreign currency forward exchange contracts. Contracts totaling $4.3 billion were transferred to AbbVie as part of the separation on January 1, 2013.

        Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $445 million, $505 million and $615 million as of December 31, 2014, 2013 and 2012, respectively. Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.

        Abbott is a party to interest rate hedge contracts totaling $1.5 billion at December 31, 2014 and December 31, 2013, and $9.5 billion at December 31, 2012, to manage its exposure to changes in the fair value of fixed-rate debt. $8.0 billion of the contracts outstanding at December 31, 2012 related to debt issued by AbbVie Inc. in the fourth quarter of 2012 and were transferred to AbbVie as part of the separation on January 1, 2013. These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt. Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount. No hedge ineffectiveness was recorded in income in 2014, 2013 and 2012 for these hedges.

        Gross unrealized holding gains (losses) on available-for-sale equity securities totaled $3 million, $22 million and $51 million at December 31, 2014, 2013 and 2012, respectively.

        The following table summarizes the amounts and location of certain derivative financial instruments as of December 31:

	Fair Value — Assets					Fair Value — Liabilities
	2014		2013		Balance Sheet Caption	2014		2013		Balance Sheet Caption
					(in millions)
Interest rate swaps designated as fair value hedges	$	101	$	87	Deferred income taxes and other assets	$	—	$	—	Post-employment obligations and other long-term liabilities
Foreign currency forward exchange contracts —
Hedging instruments		107		14	Other prepaid expenses and receivables		—		—	Other accrued liabilities
Others not designated as hedges		150		70			130		75
Debt designated as a hedge of net investment in a foreign subsidiary		—		—	n/a		445		505	Short-term borrowings
	$	358	$	171		$	575	$	580

        The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative financial instruments. The amount of hedge ineffectiveness was not significant in 2014, 2013 and 2012 for these hedges.

	Gain (loss) Recognized in Other Comprehensive Income (loss)							Income (expense) and Gain (loss) Reclassified into Income
	2014			2013		2012		2014		2013			2012		Income Statement Caption
	(in millions)
Foreign currency forward exchange contracts designated as cash flow hedges	$	105		$	35	$	13	$	11	$	44		$	113	Cost of products sold
Debt designated as a hedge of net investment in a foreign subsidiary		(60	)		110		65		—		—			—	n/a
Interest rate swaps designated as fair value hedges		n/a			n/a		n/a		14		(98	)		62	Interest expense
Foreign currency forward exchange contracts not designated as hedges		n/a			n/a		n/a		122		84			125	Net foreign exchange (gain) loss

        The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.

        The carrying values and fair values of certain financial instruments as of December 31 are shown in the table below. The carrying values of all other financial instruments approximate their estimated fair values. The counterparties to financial instruments consist of select major international financial institutions. Abbott does not expect any losses from nonperformance by these counterparties.

	2014						2013
	Carrying Value			Fair Value			Carrying Value			Fair Value
	(in millions)
Long-term Investment Securities:
Equity securities	$	212		$	212		$	93		$	93
Other		17			17			26			24
Total Long-term Debt		(3,463	)		(4,113	)		(3,397	)		(3,930	)
Foreign Currency Forward Exchange Contracts:
Receivable position		263			263			84			84
(Payable) position		(135	)		(135	)		(75	)		(75	)
Interest Rate Hedge Contracts:
Receivable position		101			101			87			87

        The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

			Basis of Fair Value Measurement
	Outstanding Balances		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(in millions)
December 31, 2014:
Equity securities	$	9	$	9	$	—	$	—
Interest rate swap financial instruments		101		—		101		—
Foreign currency forward exchange contracts		263		—		263		—
Total Assets	$	373	$	9	$	364	$	—
Fair value of hedged long-term debt	$	1,637	$	—	$	1,637	$	—
Foreign currency forward exchange contracts		135		—		135		—
Contingent consideration related to business combinations		243		—		—		243
Total Liabilities	$	2,015	$	—	$	1,772	$	243
December 31, 2013:
Equity securities	$	26	$	26	$	—	$	—
Interest rate swap financial instruments		87		—		87		—
Foreign currency forward exchange contracts		84		—		84		—
Total Assets	$	197	$	26	$	171	$	—
Fair value of hedged long-term debt	$	1,623	$	—	$	1,623	$	—
Foreign currency forward exchange contracts		75		—		75		—
Contingent consideration related to business combinations		208		—		—		208
Total Liabilities	$	1,906	$	—	$	1,698	$	208

        The fair value of the debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis using significant other observable inputs.

        The fair value of the contingent consideration was determined based on independent appraisals adjusted for the time value of money, exchange and other changes in fair value. The contingent consideration results from two acquisitions and the maximum amount due is $450 million, which is dependent upon attaining certain sales thresholds or based on the occurrence of certain events, such as regulatory approvals. The increase in contingent consideration during the current year is due to a recent acquisition partially offset by the payment of contingent consideration.