FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2019

Investments, All Other Investments [Abstract]

FINANCIAL INSTRUMENTS

FINANCIAL INSTRUMENTS

The following table summarizes the fair value of financial instruments at December 31, 2019 and 2018:

Fair Value of Financial Instruments at Dec 31 1	2019											2018
In millions	Cost			Gain		Loss			Fair Value			Cost			Gain		Loss			Fair Value
Cash equivalents:
Held to maturity securities 2	$	220		$	—	$	—		$	220		$	410		$	—	$	—		$	410
Money market funds	408			—		—			408			156			—		—			156
Total cash equivalents	$	628		$	—	$	—		$	628		$	566		$	—	$	—		$	566
Marketable securities	$	21		$	—	$	—		$	21		$	100		$	—	$	—		$	100
Other investments:
Debt securities:
Government debt 3	$	533		$	33	$	(11	)	$	555		$	714		$	9	$	(23	)	$	700
Corporate bonds	944			80		(10		)	1,014			1,026			20		(63		)	983
Total debt securities	$	1,477		$	113	$	(21	)	$	1,569		$	1,740		$	29	$	(86	)	$	1,683
Equity securities 4	10			6		(1		)	15			16			1		(1		)	16
Total other investments	$	1,487		$	119	$	(22	)	$	1,584		$	1,756		$	30	$	(87	)	$	1,699
Total cash equivalents, marketable securities and other investments	$	2,136		$	119	$	(22	)	$	2,233		$	2,422		$	30	$	(87	)	$	2,365
Long-term debt including debt due within one year 5	$	(16,410	)	$	7	$	(2,258	)	$	(18,661	)	$	(19,591	)	$	351	$	(972	)	$	(20,212	)
Derivatives relating to:
Interest rates 6	$	—		$	8	$	(283	)	$	(275	)	$	—		$	—	$	(64	)	$	(64	)
Foreign currency	—			101		(21		)	80			—			120		(43		)	77
Commodities 6	—			59		(115		)	(56		)	—			91		(178		)	(87		)
Total derivatives	$	—		$	168	$	(419	)	$	(251	)	$	—		$	211	$	(285	)	$	(74	)

1. Prior period amounts were updated to conform with the current year presentation.

2. The Company had held-to-maturity securities (primarily treasury bills and time deposits) classified as cash equivalents.

3. U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.

4. Equity securities with a readily determinable fair value.

5. Cost includes fair value hedge adjustment gains of $1 million at December 31, 2019 and losses of $18 million at December 31, 2018 on $3,490 million of debt at December 31, 2019 and $2,290 million of debt at December 31, 2018.

6. Presented net of cash collateral where master netting arrangements allow.

Cost approximates fair value for all other financial instruments.

Debt Securities

The Company’s investments in debt securities are primarily classified as available-for-sale. The following table provides the investing results from available-for-sale securities for the years ended December 31, 2019, 2018 and 2017.

Investing Results
In millions	2019		2018		2017
Proceeds from sales of available-for-sale securities	$	1,138	$	1,053	$	245
Gross realized gains	$	51	$	21	$	5
Gross realized losses	$	18	$	30	$	—

The following table summarizes the contractual maturities of the Company’s investments in debt securities:

Contractual Maturities of Debt Securities at Dec 31, 2019 1	Amortized Cost		Fair Value
In millions
Within one year	$	36	$	39
One to five years	391		406
Six to ten years	534		554
After ten years	516		570
Total	$	1,477	$	1,569

1. Includes marketable securities with maturities of less than one year.

Portfolio managers regularly review the Company’s holdings to determine if any investments in debt securities are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired.

The credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses in 2019, 2018 or 2017.

The following table provides the fair value and gross unrealized losses of the Company’s investments in debt securities that were deemed to be temporarily impaired at December 31, 2019 and 2018, aggregated by investment category:

Temporarily Impaired Debt Securities at Dec 31	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
In millions
2019
Government debt 1	$	55	$	(3	)	$	23	$	(8	)	$	78	$	(11	)
Corporate bonds	79		(3		)	52		(7		)	131		(10		)
Total temporarily impaired debt securities	$	134	$	(6	)	$	75	$	(15	)	$	209	$	(21	)
2018
Government debt 1	$	287	$	(17	)	$	187	$	(6	)	$	474	$	(23	)
Corporate bonds	724		(58		)	64		(5		)	788		(63		)
Total temporarily impaired debt securities	$	1,011	$	(75	)	$	251	$	(11	)	$	1,262	$	(86	)

1. U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations.

Equity Securities

The Company’s investments in equity securities with a readily determinable fair value totaled $15 million at December 31, 2019 ($16 million at December 31, 2018). The net unrealized gains recognized in earnings on readily determinable equity securities totaled $5 million for the year ended December 31, 2019 ($7 million for the year ended December 31, 2018). The aggregate carrying value of the Company's investments in equity securities where fair value is not readily determinable totaled $189 million at December 31, 2019 ($204 million at December 31, 2018), reflecting the carrying value of the investments. There were no material adjustments to the carrying value of the not readily determinable investments for impairment or observable price changes for the year ended December 31, 2019.

Repurchase and Reverse Repurchase Agreement Transactions

The Company enters into repurchase and reverse repurchase agreements. These transactions are accounted for as collateralized borrowings and lending transactions bearing a specified rate of interest and are short-term in nature with original maturities of 30 days or less. The underlying collateral is typically treasury bills with longer maturities than the repurchase agreement. The impact of these transactions is not material to the Company’s results. There were no repurchase or reverse repurchase agreements outstanding at December 31, 2019 and 2018.

Risk Management

The Company’s business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies that enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per the accounting guidance related to derivatives and

hedging activities, where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not material to the Company’s results. Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value.

The Company’s risk management program for interest rate, foreign currency and commodity risks is based on fundamental, mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments and the mark-to-market valuations of positions are strictly monitored at all times, using value-at-risk and stress tests. Counterparty credit risk arising from these contracts is not significant because the Company minimizes counterparty concentration, deals primarily with major financial institutions of solid credit quality, and the majority of its hedging transactions mature in less than three months. In addition, the Company minimizes concentrations of credit risk through its global orientation by transacting with large, internationally diversified financial counterparties. It is the Company’s policy to not have credit risk-related contingent features in its derivative instruments. No significant concentration of counterparty credit risk existed at December 31, 2019. The Company does not anticipate losses from credit risk, and the net cash requirements arising from counterparty risk associated with risk management activities are not expected to be material in 2020.

The Company revises its strategies as market conditions dictate and management reviews its overall financial strategies and the impacts from using derivatives in its risk management program with the Company’s senior leadership who also reviews these strategies with the Dow Inc. Board and/or relevant committees thereof.

The notional amounts of the Company's derivative instruments presented on a net basis at December 31, 2019 and 2018, were as follows:

Notional Amounts - Net	Dec 31, 2019		Dec 31, 2018
In millions
Derivatives designated as hedging instruments:
Interest rate contracts	$	922	$	2,049
Foreign currency contracts	$	6,253	$	4,457
Derivatives not designated as hedging instruments:
Interest rate contracts	$	145	$	5
Foreign currency contracts	$	5,567	$	19,285

The notional amounts of the Company's commodity derivatives at December 31, 2019 and 2018, were as follows:

Commodity Notionals - Net	Dec 31, 2019	Dec 31, 2018	Notional Volume Unit
Derivatives designated as hedging instruments:
Hydrocarbon derivatives	6.1	39.9	million barrels of oil equivalent
Derivatives not designated as hedging instruments:
Hydrocarbon derivatives	0.1	1.2	million barrels of oil equivalent
Power derivatives	87.5	73.9	thousands of megawatt hours

Maturity Dates of Derivatives Designated as Hedges	Year
Interest rate contracts	2021
Foreign currency contracts 1	2020
Commodity contracts	2022

1. The Company had foreign currency contracts primarily through 2020 with a nominal impact into the first quarter of 2021.

Interest Rate Risk Management

The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. To achieve this objective, the Company hedges using interest rate swaps, “swaptions,” and exchange-traded instruments.

Foreign Currency Risk Management

The global nature of the Company's business requires active participation in the foreign exchange markets. The Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company's foreign currency risk management is to optimize the U.S. dollar value of net assets and cash flows. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities.

Commodity Risk Management

The Company has exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases.

Derivatives Not Designated in Hedging Relationships

Foreign Currency Contracts

The Company also uses foreign exchange forward contracts, options and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency exposure.

Commodity Contracts

The Company utilizes futures, options and swap instruments that are effective as economic hedges of commodity price exposures, but do not meet hedge accounting criteria for derivatives and hedging, to reduce exposure to commodity price fluctuations on purchases of raw materials and inventory.

Interest Rate Contracts

The Company uses swap instruments that are not designated as hedging instruments to manage interest rate exposures. The Company uses interest rate swaps, "swaptions," and exchange-traded instruments to accomplish this objective.

Accounting for Derivative Instruments and Hedging Activities

Cash Flow Hedges

For derivatives that are designated and qualify as cash flow hedging instruments, the gain or loss on the derivative is recorded in AOCL; it is reclassified to income in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCL fluctuate based on changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCL and net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions during any period.

The portion of the mark-to-market effects of the foreign currency contracts is recorded in AOCL; it is reclassified to income in the same period or periods that the underlying item affects income.

Commodity swaps, futures and option contracts with maturities of not more than 48 months are utilized and designated as cash flow hedges of forecasted commodity purchases. The designated portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCL; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income.

Fair Value Hedges

For interest rate instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedge item attributable to the hedged risk are recognized in current period income and reflected as “Interest expense and amortization of debt discount” in the consolidated statements of income, except for amounts excluded from the assessment of effectiveness that are recognized in earnings through an amortization approach.

Net Foreign Investment Hedges

The Company designates derivatives that qualify as effective net foreign investment hedges, the results of which are presented in the effect of derivative instruments table. In addition, the Company utilizes non-derivative instruments as net foreign investment hedges. The Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $184 million at December 31, 2019 ($182 million at December 31, 2018).

The following tables provide the fair value and gross balance sheet classification of derivative instruments at December 31, 2019 and 2018:

Fair Value of Derivative Instruments		Dec 31, 2019
In millions	Balance Sheet Classification	Gross		Counterparty and Cash Collateral Netting 1			Net Amounts Included in the Consolidated Balance Sheets
Asset derivatives:
Derivatives designated as hedging instruments:
Interest rate contracts	Other current assets	$	21	$	(13	)	$	8
Foreign currency contracts	Other current assets	105		(36		)	69
Commodity contracts	Other current assets	44		(25		)	19
Commodity contracts	Deferred charges and other assets	28		(3		)	25
Total		$	198	$	(77	)	$	121
Derivatives not designated as hedging instruments:
Interest rate contracts	Other current assets	$	14	$	(14	)	$	—
Interest rate contracts	Deferred charges and other assets	—		—			—
Foreign currency contracts	Other current assets	44		(12		)	32
Commodity contracts	Other current assets	18		(3		)	15
Commodity contracts	Deferred charges and other assets	—		—			—
Total		$	76	$	(29	)	$	47
Total asset derivatives		$	274	$	(106	)	$	168
Liability derivatives:
Derivatives designated as hedging instruments:
Interest rate contracts	Accrued and other current liabilities	$	23	$	(13	)	$	10
Interest rate contracts	Other noncurrent obligations	1		—			1
Foreign currency contracts	Accrued and other current liabilities	46		(36		)	10
Commodity contracts	Accrued and other current liabilities	95		(29		)	66
Commodity contracts	Other noncurrent obligations	38		(4		)	34
Total		$	203	$	(82	)	$	121
Derivatives not designated as hedging instruments:
Interest rate contracts	Accrued and other current liabilities	$	136	$	(14	)	$	122
Interest rate contracts	Other noncurrent obligations	150		—			150
Foreign currency contracts	Accrued and other current liabilities	23		(12		)	11
Commodity contracts	Accrued and other current liabilities	17		(3		)	14
Commodity contracts	Other noncurrent obligations	1		—			1
Total		$	327	$	(29	)	$	298
Total liability derivatives		$	530	$	(111	)	$	419

1. Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.

Fair Value of Derivative Instruments		Dec 31, 2018
In millions	Balance Sheet Classification	Gross		Counterparty and Cash Collateral Netting 1			Net Amounts Included in the Consolidated Balance Sheets
Asset derivatives:
Derivatives designated as hedging instruments:
Foreign currency contracts	Other current assets	$	98	$	(42	)	$	56
Commodity contracts	Other current assets	47		(13		)	34
Commodity contracts	Deferred charges and other assets	18		(3		)	15
Total		$	163	$	(58	)	$	105
Derivatives not designated as hedging instruments:
Foreign currency contracts	Other current assets	$	128	$	(64	)	$	64
Commodity contracts	Other current assets	41		(1		)	40
Commodity contracts	Deferred charges and other assets	4		(2		)	2
Total		$	173	$	(67	)	$	106
Total asset derivatives		$	336	$	(125	)	$	211
Liability derivatives:
Derivatives designated as hedging instruments:
Interest rate contracts	Other noncurrent obligations	$	64	$	—		$	64
Foreign currency contracts	Accrued and other current liabilities	46		(42		)	4
Commodity contracts	Accrued and other current liabilities	111		(18		)	93
Commodity contracts	Other noncurrent obligations	86		(9		)	77
Total		$	307	$	(69	)	$	238
Derivatives not designated as hedging instruments:
Foreign currency contracts	Accrued and other current liabilities	$	103	$	(64	)	$	39
Commodity contracts	Accrued and other current liabilities	7		(4		)	3
Commodity contracts	Other noncurrent obligations	8		(3		)	5
Total		$	118	$	(71	)	$	47
Total liability derivatives		$	425	$	(140	)	$	285

1. Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.

Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding assets or liabilities, when applicable. The Company posted cash collateral of $5 million at December 31, 2019 ($26 million at December 31, 2018). Counterparties posted cash collateral of $3 million with the Company at December 31, 2019 ($34 million at December 31, 2018).

Effect of Derivative Instruments	Amount of gain (loss) recognized in OCI 1									Amount of gain (loss) recognized in income 2
In millions	2019			2018			2017			2019			2018			2017			Income Statement Classification
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate contracts	$	—		$	—		$	—		$	17		$	—		$	(2	)	Interest expense and amortization of debt discount 3
Excluded components 4	(3		)	—			—			—			—			—
Cash flow hedges:
Interest rate contracts	(316		)	26			2			1			(3		)	4			Interest expense and amortization of debt discount
Foreign currency contracts	16			19			(30		)	28			(18		)	7			Cost of sales
Foreign currency contracts	10			(3		)	(5		)	8			—			(17		)	Sundry income (expense) - net
Commodity contracts	(6		)	(46		)	37			(81		)	(69		)	10			Cost of sales
Net investment hedges:
Foreign currency contracts	(52		)	116			(73		)	—			—			—
Excluded components 4	162			—			—			99			—			—			Sundry income (expense) - net
Total derivatives designated as hedging instruments	$	(189	)	$	112		$	(69	)	$	72		$	(90	)	$	2
Derivatives not designated as hedging instruments:
Interest rate contracts	$	—		$	—		$	—		$	(4	)	$	—		$	—		Interest expense and amortization of debt discount
Foreign currency contracts	—			—			—			45			101			(289		)	Sundry income (expense) - net
Commodity contracts	—			—			—			(28		)	(12		)	(9		)	Cost of sales
Total derivatives not designated as hedging instruments	$	—		$	—		$	—		$	13		$	89		$	(298	)
Total derivatives	$	(189	)	$	112		$	(69	)	$	85		$	(1	)	$	(296	)

1. OCI is defined as other comprehensive income (loss).

2. Pretax amounts.

3. Gain (loss) recognized in income of derivatives is offset by gain (loss) recognized in income of the hedged item.

4. The excluded components are related to the time value of the derivatives designated as hedges.

The following table provides the net after-tax amounts to be reclassified from AOCL to income within the next 12 months:

Expected Reclassifications from AOCL within the next 12 months	Dec 31, 2019
Cash flow hedges
Interest rate contracts	$	2
Commodity contracts	$	(23	)
Foreign currency contracts	$	5
Net investment hedges
Excluded components	$	26