The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. As of and for the six months ended November 30, 2019, there have been no material changes to the Company's hedging program or strategy from what was disclosed within the Annual Report on Form 10-K. For additional information about the Company's derivatives and hedging policies refer to Note 1 — Summary of Significant Accounting Policies and Note 14 - Risk Management and Derivatives of the Annual Report on Form 10-K for the fiscal year ended May 31, 2019.

The majority of derivatives outstanding as of November 30, 2019 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Japanese Yen/U.S. Dollar and Chinese Yuan/U.S. Dollar currency pairs. All derivatives are recognized on the Unaudited Condensed Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date.



	DERIVATIVE ASSETS					DERIVATIVE LIABILITIES
	BALANCE SHEET LOCATION	NOVEMBER 30,		MAY 31,		BALANCE SHEET LOCATION	NOVEMBER 30,		MAY 31,
(Dollars in millions)	BALANCE SHEET LOCATION	2019		2019		BALANCE SHEET LOCATION	2019		2019
Derivatives formally designated as hedging instruments:
Foreign exchange forwards and options	Prepaid expenses and other current assets	$	354	$	509	Accrued liabilities	$	54	$	5
Foreign exchange forwards and options	Deferred income taxes and other assets	34		—		Deferred income taxes and other liabilities	1		—
Total derivatives formally designated as hedging instruments		388		509			55		5
Derivatives not designated as hedging instruments:
Foreign exchange forwards and options	Prepaid expenses and other current assets	39		102		Accrued liabilities	18		46
Embedded derivatives	Prepaid expenses and other current assets	—		5		Accrued liabilities	—		1
Embedded derivatives	Deferred income taxes and other assets	—		6		Deferred income taxes and other liabilities	—		2
Total derivatives not designated as hedging instruments		39		113			18		49
TOTAL DERIVATIVES		$	427	$	622		$	73	$	54

The following tables present the amounts in the Unaudited Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items for the three and six months ended November 30, 2019 and 2018:



	THREE MONTHS ENDED NOVEMBER 30,
	2019						2018
(Dollars in millions)	TOTAL			AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY			TOTAL			AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY
Revenues	$	10,326		$	1		$	9,374		$	3
Cost of sales	5,782			102			5,269			10
Demand creation expense	881			(3		)	910			—
Other (income) expense, net	(41		)	31			(48		)	—
Interest expense (income), net	12			(1		)	14			(1		)



	SIX MONTHS ENDED NOVEMBER 30,
	2019						2018
(Dollars in millions)	TOTAL			AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY			TOTAL		AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY
Revenues	$	20,986		$	9		$	19,322	$	8
Cost of sales	11,571			177			10,820		(34		)
Demand creation expense	1,899			(3		)	1,874		—
Other (income) expense, net	(74		)	77			5		(9		)
Interest expense (income), net	27			(3		)	25		(3		)



(Dollars in millions)	AMOUNT OF GAIN (LOSS) RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES⁽¹⁾					AMOUNT OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME⁽¹⁾
	THREE MONTHS ENDED NOVEMBER 30,					LOCATION OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME	THREE MONTHS ENDED NOVEMBER 30,
	2019			2018			2019			2018
Derivatives designated as cash flow hedges:
Foreign exchange forwards and options	$	(83	)	$	3	Revenues	$	1		$	3
Foreign exchange forwards and options	37			173		Cost of sales	102			10
Foreign exchange forwards and options	—			—		Demand creation expense	(3		)	—
Foreign exchange forwards and options	27			79		Other (income) expense, net	31			—
Interest rate swaps⁽²⁾	—			—		Interest expense (income), net	(1		)	(1		)
Total designated cash flow hedges	$	(19	)	$	255		$	130		$	12



(Dollars in millions)	AMOUNT OF GAIN (LOSS) RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS) ON DERIVATIVES⁽¹⁾					AMOUNT OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME⁽¹⁾
	SIX MONTHS ENDED NOVEMBER 30,					LOCATION OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME	SIX MONTHS ENDED NOVEMBER 30,
	2019			2018			2019			2018
Derivatives designated as cash flow hedges:
Foreign exchange forwards and options	$	(62	)	$	19	Revenues	$	9		$	8
Foreign exchange forwards and options	146			274		Cost of sales	177			(34		)
Foreign exchange forwards and options	—			—		Demand creation expense	(3		)	—
Foreign exchange forwards and options	60			105		Other (income) expense, net	77			(9		)
Interest rate swaps⁽²⁾	—			—		Interest expense (income), net	(3		)	(3		)
Total designated cash flow hedges	$	144		$	398		$	257		$	(38	)



	AMOUNT OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES										LOCATION OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
	THREE MONTHS ENDED NOVEMBER 30,					SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)	2019			2018		2019			2018
Derivatives not designated as hedging instruments:
Foreign exchange forwards and options	$	(21	)	$	74	$	(21	)	$	188	Other (income) expense, net
Embedded derivatives	(4		)	6		(5		)	4		Other (income) expense, net

All changes in fair value of derivatives designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Unaudited Condensed Consolidated Statements of Income in the same manner as the underlying exposure. Derivative instruments designated as cash flow hedges must be discontinued when it is no longer probable the forecasted hedged transaction will occur in the initially identified time period. The gains and losses associated with discontinued derivative instruments in Accumulated other comprehensive income (loss) will be recognized immediately in Other (income) expense, net, if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-month period thereafter. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company accounts for the derivative as an undesignated instrument as discussed below.

The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was approximately $9.0 billion as of November 30, 2019. Approximately $389 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) as of November 30, 2019, are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of November 30, 2019, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 18 months.

The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Unaudited Condensed Consolidated Balance Sheets and/or the embedded derivative contracts. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the re-measurement gain or loss from the hedged balance sheet position and/or embedded derivative contract. The total notional amount of outstanding undesignated derivative instruments was $3.9 billion as of November 30, 2019.

Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, through the date the foreign currency fluctuations cease to exist.

The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of November 30, 2019, the Company was in compliance with all credit risk-related contingent features, and derivative instruments with such features were in a net liability position of $20 million. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of November 30, 2019, the Company had $122 million of cash collateral received from various counterparties to its derivative contracts. The Company considers the impact of the risk of counterparty default to be immaterial.