Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2018

Financial assets and financial liabilities measured at fair value on a recurring basis

(Dollars in millions)
At June 30, 2018	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	7,123	$	—	$	7,123	(6)
Money market funds	476		—		—		476

Total	$	476	$	7,123	$	—	$	7,599
Equity investments (2)	10		—		—		10
Debt securities - current (3)	—		963		—		963		(6)
Derivative assets (4)	—		699		—		699		(7)

Total assets	$	485	$	8,785	$	—	$	9,270

Liabilities:
Derivative liabilities (5)	$	—	$	256	$	—	$	256	(7)

(1)

Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2)

Included within marketable securities, and investments and sundry assets in the Consolidated Statement of Financial Position.

(3)

Included within marketable securities in the Consolidated Statement of Financial Position.

(4)

The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at June 30, 2018 were $301 million and $398 million, respectively.

(5)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at June 30, 2018 were $94 million and $162 million, respectively.

(6)

Available-for-sale debt securities with carrying values that approximate fair value.

(7)

If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $201 million.

(Dollars in millions)
At December 31, 2017	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,066	$	—	$	8,066
Commercial paper	—		96		—		96
Money market funds	26		—		—		26
Canadian government securities	—		398		—		398

Total	$	26	$	8,560	$	—	$	8,586	(6)
Equity investments (2)	4		—		—		4
Debt securities - current (3)	—		608		—		608		(6)
Debt securities - noncurrent (2)	4		7		—		11
Derivative assets (4)	—		942		—		942		(7)

Total assets	$	33	$	10,117	$	—	$	10,151

Liabilities:
Derivative liabilities (5)	$	—	$	415	$	—	$	415	(7)

(1)

Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2)

Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3)

U.S government securities reported as marketable securities in the Consolidated Statement of Financial Position.

(4)

The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2017 were $185 million and $757 million, respectively.

(5)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2017 were $377 million and $38 million, respectively.

(6)

Available-for-sale securities with carrying values that approximate fair value.

(7)

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	6/30/2018		12/31/2017		Classification	6/30/2018		12/31/2017
Designated as hedging instruments:
Interest rate contracts	Prepaid expenses and other current assets	$	—	$	2	Other accrued expenses and liabilities	$	1	$	—
	Investments and sundry assets	258		459		Other liabilities	83		34
Foreign exchange contracts	Prepaid expenses and other current assets	270		111		Other accrued expenses and liabilities	41		318
	Investments and sundry assets	141		298		Other liabilities	79		3

	Fair value of derivative assets	$	668	$	870	Fair value of derivative liabilities	$	204	$	355

Not designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	$	30	$	61	Other accrued expenses and liabilities	$	29	$	57
Equity contracts	Prepaid expenses and other current assets	1		12		Other accrued expenses and liabilities	23		3

	Fair value of derivative assets	$	31	$	72	Fair value of derivative liabilities	$	52	$	60


Total derivatives		$	699	$	942		$	256	$	415

Total debt designated as hedging instruments(1):
Short-term debt		N/A		N/A			$	—	$	—
Long-term debt		N/A		N/A			6,353		6,471

		N/A		N/A			$	6,353	$	6,471


Total		$	699	$	942		$	6,610	$	6,886

N/A - not applicable

(1)

Debt designated as hedging instruments are reported at carrying value.

(Dollars in millions)

				Cumulative Amount of
Line Item in the	Carrying Amount of the			Fair Value Hedging Adjustment
Consolidated Statement of Financial Position	Hedged Item			Included in the Carrying
in which the Hedged Item is Included	Assets/(Liabilities)			Amount of Assets/(Liabilities)
Short-term debt	$	(745	)	$	4
Long-term debt	$	(9,424	)	$	(268	)(1)

(1)

Includes ($184) million of hedging adjustments on discontinued hedging relationships.

Effect of Derivative Instruments in the Consolidated Statement of Earnings

										Other
(Dollars in millions)	Cost of		Cost of			Cost of		SG&A		(Income) and			Interest
For the three months ended June 30, 2018:	Services		Sales			Financing		Expense		Expense			Expense
Total	$	8,645	$	1,869		$	290	$	4,857	$	280		$	173
Gains/(losses) of total hedge activity	9		(6		)	18		10		(435		)	(17		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on					Attributable to Risk
(Dollars in millions)	Statement of	Derivatives					Being Hedged(2)
For the three months ended June 30:	Earnings Line Item	2018			2017		2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(32	)	$	42	$	42	$	(22	)
	Interest expense	(28		)	36		37		(19		)
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(38		)	185		N/A		N/A
Equity contracts	SG&A expense	12			11		N/A		N/A

Total		$	(86	)	$	275	$	79	$	(41	)

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the three months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended June 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(149	)	$	(96	)	Interest expense	$	(38	)	$	(7	)	$	—	$	—
							Other (income) and expense	(397		)	146			—		2
							Cost of sales	(6		)	10			—		—
							Cost of services	9			18			—		—
							SG&A expense	(3		)	8			—		—
Instruments in net investment hedges(4):
Foreign exchange contracts	627			(724		)	Cost of financing	—			—			8		—
							Interest expense	—			—			11		7

Total	$	477		$	(820	)		$	(434	)	$	176		$	20	$	9

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for further information.

N/A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.

(1)

The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)

The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3)

The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)

Instruments in net investment hedges include derivative and non-derivative instruments.

											Other
(Dollars in millions)	Cost of		Cost of			Cost of		SG&A			(Income) and			Interest
For the six months ended June 30, 2018:	Services		Sales			Financing		Expense			Expense			Expense
Total	$	17,479	$	3,591		$	559	$	10,302		$	692		$	338
Gains/(losses) of total hedge activity	28		(23		)	41		(23		)	(386		)	(33		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on					Attributable to Risk
(Dollars in millions)	Statement of	Derivatives					Being Hedged(2)
For the six months ended June 30:	Earnings Line Item	2018			2017		2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(112	)	$	41	$	138	$	1
	Interest expense	(101		)	35		124		1
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(93		)	108		N/A		N/A
Equity contracts	SG&A expense	(2		)	58		N/A		N/A


Total		$	(308	)	$	243	$	262	$	1

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the six months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended June 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(89	)	$	(128	)	Interest expense	$	(71	)	$	(14	)	$	—	$	—
							Other (income) and expense	(293		)	211			—		3
							Cost of sales	(23		)	22			—		—
							Cost of services	28			27			—		—
							SG&A expense	(21		)	29			—		—
Instruments in net investment hedges(4):
Foreign exchange contracts	423			(1,006		)	Cost of financing	—			—			16		—
							Interest expense	—			—			16		27


Total	$	334		$	(1,134	)		$	(380	)	$	274		$	31	$	29

N/A - not applicable

(1)

(2)

(3)

The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)

Instruments in net investment hedges include derivative and non-derivative instruments.