Fair Value Measurements

ASC 820, "Fair Value Measurement," defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of June 30, 2016, September 30, 2015 and June 30, 2015 (in millions):



	Fair Value Measurements Using:
	Total as of June 30, 2016		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other current assets
Foreign currency exchange derivatives	$	21	$	—	$	21	$	—
Commodity derivatives	2		—		2		—
Other noncurrent assets
Interest rate swaps	3		—		3		—
Investments in marketable common stock	4		4		—		—
Equity swap	167		167		—		—
Total assets	$	197	$	171	$	26	$	—
Other current liabilities
Foreign currency exchange derivatives	$	37	$	—	$	37	$	—
Commodity derivatives	1		—		1		—
Cross-currency interest rate swap	8		—		8		—
Current portion of long-term debt
Fixed rate debt swapped to floating	404		—		404		—
Long-term debt
Foreign currency denominated debt	360		360		—		—
Fixed rate debt swapped to floating	450		—		450		—
Total liabilities	$	1,260	$	360	$	900	$	—



	Fair Value Measurements Using:
	Total as of September 30, 2015		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other current assets
Foreign currency exchange derivatives	$	58	$	—	$	58	$	—
Interest rate swaps	1		—		1		—
Cross-currency interest rate swaps	5		—		5		—
Other noncurrent assets
Interest rate swaps	5		—		5		—
Investments in marketable common stock	4		4		—		—
Equity swap	164		164		—		—
Total assets	$	237	$	168	$	69	$	—
Other current liabilities
Foreign currency exchange derivatives	$	63	$	—	$	63	$	—
Commodity derivatives	7		—		7		—
Cross-currency interest rate swaps	1		—		1		—
Current portion of long-term debt
Fixed rate debt swapped to floating	801		—		801		—
Long-term debt
Fixed rate debt swapped to floating	855		—		855		—
Total liabilities	$	1,727	$	—	$	1,727	$	—



	Fair Value Measurements Using:
	Total as of June 30, 2015		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other current assets
Foreign currency exchange derivatives	$	42	$	—	$	42	$	—
Cross-currency interest rate swaps	16		—		16		—
Interest rate swaps	1		—		1		—
Other noncurrent assets
Interest rate swaps	3		—		3		—
Investments in marketable common stock	5		5		—		—
Equity swap	196		196		—		—
Total assets	$	263	$	201	$	62	$	—
Other current liabilities
Foreign currency exchange derivatives	$	43	$	—	$	43	$	—
Commodity derivatives	11		—		11		—
Current portion of long-term debt
Fixed rate debt swapped to floating	801		—		801		—
Long-term debt
Fixed rate debt swapped to floating	853		—		853		—
Total liabilities	$	1,708	$	—	$	1,708	$	—

Valuation Methods

Foreign currency exchange derivatives – The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. As cash flow hedges under ASC 815, "Derivatives and Hedging," the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at June 30, 2016, September 30, 2015 and June 30, 2015. The fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.

Commodity derivatives – The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Company’s purchases of lead, copper, tin and aluminum. The commodity derivatives are valued under a market approach using publicized prices, where available, or dealer quotes. As cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions, typically sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in commodity prices at June 30, 2016, September 30, 2015 and June 30, 2015.

Interest rate swaps and related debt – The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate bonds. As fair value hedges, the interest rate swaps and related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of income. In the fourth quarter of fiscal 2013, the Company entered into four fixed to floating interest rate swaps totaling $800 million to hedge the coupon of its 5.5% notes that matured in January 2016. In the third quarter of fiscal 2014, the Company entered into four fixed to floating interest rate swaps totaling $400 million to hedge the coupon of its 2.6% notes maturing December 2016, three fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 1.4% notes maturing November 2017 and one fixed to floating interest rate swap totaling $150 million to hedge the coupon of its 7.125% notes maturing July 2017. There were eight interest rate swaps outstanding as of June 30, 2016. There were twelve interest rate swaps outstanding as of September 30, 2015 and June 30, 2015.

Cross-currency interest rate swaps – The Company selectively uses cross-currency interest rate swaps to hedge the foreign currency rate risk associated with certain of its investments in Japan. The cross-currency interest rate swaps are valued using observable market data. Changes in the market value of the swaps are reflected in the CTA component of AOCI where they offset gains and losses recorded on the Company’s net investment in Japan. At June 30, 2016, the Company had one cross-currency interest rate swap outstanding totaling 5 billion yen. At September 30, 2015 and June 30, 2015, the Company had four cross-currency interest rate swaps outstanding totaling 20 billion yen.

Foreign currency denominated debt – The Company has entered into a foreign currency denominated debt obligation to selectively hedge portions of its net investment in Japan. The currency effect of the debt obligation is reflected in the CTA component of AOCI where it offsets gains and losses recorded on the Company’s net investment in Japan. The foreign denominated debt obligation is valued under a market approach using publicized spot prices. At June 30, 2016, the Company had 37 billion yen of foreign denominated debt outstanding designated as net investment hedges in its net investment in Japan. The Company did not have any foreign denominated debt outstanding designated as a net investment hedge at September 30, 2015 or June 30, 2015.

Investments in marketable common stock – The Company invests in certain marketable common stock, which is valued under a market approach using publicized share prices. There were no unrealized gains or losses recorded in AOCI on these investments as of June 30, 2016, September 30, 2015 and June 30, 2015.

Equity swaps – The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. The equity swaps are valued under a market approach as the fair value of the swaps is equal to the Company’s stock price at the reporting period date. Changes in fair value of the equity swaps are reflected in the consolidated statements of income within selling, general and administrative expenses.

The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt, which was $6.2 billion, $6.7 billion and $6.5 billion at June 30, 2016, September 30, 2015 and June 30, 2015, respectively, was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.