NOTE 4. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial Risk Management and Derivative Instruments

The Company is exposed to certain commodity, interest rate and foreign currency risks related to its ongoing business operations and uses derivative instruments to mitigate its exposure to these risks.

Commodity Price Risk Management

The Company may use commodity exchange traded futures and over-the-counter swap contracts to fix the price of a portion of its forecasted raw material requirements. Contract maturities, which are generally no longer than 2 years, are matched to the length of the raw material purchase contracts. Commodity purchase contracts are measured at fair value using market quotations obtained from commodity futures exchanges or commodity derivative dealers.

As of March 31, 2016, the notional amount of commodity derivatives was $40, of which $21 related to jet fuel swaps and $19 related to soybean oil futures. As of June 30, 2015, the notional amount of commodity derivatives was $47, of which $27 related to jet fuel swaps and $20 related to soybean oil futures.

Interest Rate Risk Management

The Company may also enter into over-the-counter interest rate derivative instruments to fix a portion of the benchmark interest rate prior to an anticipated issuance of fixed rate debt or to manage the Company's level of fixed and floating rate debt. The interest rate derivative instruments are measured at fair value using information quoted by U.S. government bond dealers.

As of both March 31, 2016 and June 30, 2015, the Company had no interest rate derivative instruments.

Foreign Currency Risk Management

The Company may also enter into certain over-the-counter derivative contracts to manage a portion of the Company's forecasted foreign currency exposure associated with the purchase of inventory. These foreign currency contracts generally have durations of no longer than 2 years. The foreign exchange contracts are measured at fair value using information quoted by foreign exchange dealers.

The notional amount of outstanding foreign currency forward contracts used by the Company's subsidiaries in Canada, Australia and New Zealand were $58, $40 and $8, respectively, as of March 31, 2016, and $64, $35 and $6, respectively, as of June 30, 2015.

Counterparty Risk Management and Derivative Contract Requirements

The Company utilizes a variety of financial institutions as counterparties for over-the counter derivative instruments. The Company enters into agreements governing the use of over-the-counter derivative instruments and sets internal limits on the aggregate over-the-counter derivative instrument positions held with each counterparty. Certain terms of these agreements require the Company or the counterparty to post collateral when the fair value of the derivative instrument exceeds contractually defined counterparty liability position limits. Of the derivative instruments of $9 and $8 reflected in accrued liabilities and other liabilities as of March 31, 2016 and June 30, 2015, respectively, $8 and $8, respectively, contained such terms. As of both March 31, 2016 and June 30, 2015, neither the Company nor any counterparty was required to post any collateral as no counterparty liability position limits were exceeded.

Certain terms of the agreements governing the Company's over-the-counter derivative instruments require the credit ratings, as assigned by Standard & Poor's and Moody's to the Company and its counterparties, to remain at a level equal to or better than the minimum of an investment grade credit rating. If the Company's credit ratings were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions. As of both March 31, 2016 and June 30, 2015, the Company and each of its counterparties had been assigned investment grade credit ratings by both Standard & Poor's and Moody's.

Certain of the Company's exchange-traded futures contracts used for commodity price risk management include requirements for the Company to post collateral in the form of a cash margin account held by the Company's broker for trades conducted on that exchange. As of March 31, 2016 and June 30, 2015, the Company maintained cash margin balances related to exchange-traded futures contracts of $1 and $2, respectively, which are classified as other current assets on the condensed consolidated balance sheets.

Trust Assets

The Company has held interests in mutual funds and cash equivalents as part of trust assets related to certain of its nonqualified deferred compensation plans. The participants in the deferred compensation plans may select among certain mutual funds in which their compensation deferrals are invested in accordance with the terms of the plans and within the confines of the trusts which hold the marketable securities. These trusts represent variable interest entities for which the Company is considered the primary beneficiary, and therefore, trust assets are consolidated and included in other assets in the condensed consolidated balance sheets. The interests in mutual funds are measured at fair value using quoted market prices. The Company has designated these marketable securities as trading investments.

Fair Value Measurements

Financial assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets are required to be classified and disclosed in one of the following three categories of the fair value hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity's own assumptions.

As of March 31, 2016 and June 30, 2015, the Company's financial assets and liabilities that were measured at fair value on a recurring basis during the applicable periods included derivative financial instruments, which were classified as either Level 1 or Level 2, and trust assets to fund certain of the Company's nonqualified deferred compensation plans, which were classified as Level 1.

The following table summarizes the fair value of the Company's financial assets and liabilities for which disclosure of fair value is required:

			3/31/2016				6/30/2015
	Balance sheet classification	Fair value hierarchy level	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Investments including money market	Cash and cash
funds	equivalents ^(a)	1	$	232	$	232	$	212	$	212
	Cash and cash
Time deposits	equivalents ^(a)	2		86		86		84		84
Commodity purchase derivative contracts	Other current assets	1		3		3		-		-
Foreign exchange derivative contracts	Other current assets	2		-		-		1		1
Trust assets for nonqualified deferred	Other assets	1		50		50		38		38
compensation plans
			$	371	$	371	$	335	$	335

Liabilities
	Notes and loans
Notes and loans payable	payable ^(b)	2	$	432	$	432	$	95	$	95
Commodity purchase derivative contracts	Accrued liabilities	2		5		5		8		8
Foreign exchange derivative contracts	Accrued liabilities	2		3		3		-		-
Foreign exchange derivative contracts	Other liabilities	2		1		1		-		-

	Current maturities of
Current maturities of long-term	long-term debt and
debt and Long-term debt	Long-term debt ^(c)	2		1,796		1,885		2,096		2,137

			$	2,237	$	2,326	$	2,199	$	2,240

____________________

(a)	Cash and cash equivalents are composed of time deposits and other interest bearing investments including money market funds with original maturity dates of 90 days or less. Cash and cash equivalents are recorded at cost, which approximates fair value.
(b)	Notes and loans payable is composed of U.S. commercial paper and/or other similar short-term debts issued by non-U.S. subsidiaries, all of which are recorded at cost, which approximates fair value.
(c)	Current maturities of long-term debt and Long-term debt are recorded at cost. The fair value of long-term debt, including current maturities, is determined using secondary market prices quoted by corporate bond dealers, and is classified as Level 2.

Commodity, Interest Rate and Foreign Exchange Derivatives

The Company designates its commodity forward and future contracts for forecasted purchases of raw materials, interest rate forward contracts for forecasted interest payments, and foreign currency forward contracts for forecasted purchases of inventory as cash flow hedges.

The effects of derivative instruments designated as hedging instruments on comprehensive income and net earnings were as follows:

	Gains (losses) recognized in comprehensive income
	Three Months Ended						Nine Months Ended
	3/31/2016			3/31/2015			3/31/2016			3/31/2015
Commodity purchase derivative contracts	$	3		$	-		$	(4	)	$	(16	)
Interest rate derivative contracts		-			-			-			(12	)
Foreign exchange derivative contracts		(9	)		2			(4	)		7
Total	$	(6	)	$	2		$	(8	)	$	(21	)

	Gains (losses) reclassified from accumulated other comprehensive loss and recognized in net earnings
	Three Months Ended						Nine Months Ended
	3/31/2016			3/31/2015			3/31/2016			3/31/2015
Commodity purchase derivative contracts	$	(4	)	$	(3	)	$	(9	)	$	(3	)
Interest rate derivative contracts		(2	)		-			(5	)		(3	)
Foreign exchange derivative contracts		1			-			1			-
Total	$	(5	)	$	(3	)	$	(13	)	$	(6	)

The gains (losses) reclassified from accumulated other comprehensive loss and recognized in net earnings during the three and nine months ended March 31, 2016 and 2015, for commodity purchase and foreign exchange contracts were included in cost of products sold, and for interest rate contracts were included in interest expense.

The estimated amount of the existing net gain (loss) in accumulated other comprehensive losses as of March 31, 2016, that is expected to be reclassified into net earnings within the next twelve months is $(16). Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During the three and nine months ended March 31, 2016 and 2015, hedge ineffectiveness was not significant.