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Fair Value Measurements
6 Months Ended
Jun. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
7.
Fair Value Measurements

Recurring Fair Value Measurements
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2018:
(dollars in millions)
Level 1(1)

 
Level 2(2)

 
Level 3(3)

 
Total

Assets:
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
Equity securities
$
37

 
$

 
$

 
$
37

Fixed income securities
5

 
372

 

 
377

Cross currency swaps

 
472

 

 
472

Interest rate caps

 
19

 

 
19

Total
$
42

 
$
863

 
$

 
$
905

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
1,053

 
$

 
$
1,053

Cross currency swaps

 
63

 

 
63

Interest rate caps

 
5

 

 
5

Total
$

 
$
1,121

 
$

 
$
1,121


The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2017:
(dollars in millions)
Level 1(1)

 
Level 2(2)

 
Level 3(3)

 
Total

Assets:
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
Equity securities
$
74

 
$

 
$

 
$
74

Fixed income securities

 
366

 

 
366

Interest rate swaps

 
54

 

 
54

Cross currency swaps

 
450

 

 
450

Interest rate caps

 
6

 

 
6

Total
$
74

 
$
876

 
$

 
$
950

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
413

 
$

 
$
413

Cross currency swaps

 
46

 

 
46

Total
$

 
$
459

 
$

 
$
459

 
(1) 
Quoted prices in active markets for identical assets or liabilities
(2) 
Observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) 
Unobservable pricing inputs in the market

Equity securities measured at fair value on a recurring basis consist of investments in common stock of domestic and international corporations measured using quoted prices in active markets. These equity securities exclude certain of our equity investments, which were previously accounted for under the cost method, as they do not have readily determinable fair values. Accordingly, the value of these investments beginning January 1, 2018 has been measured using a quantitative approach under the practicability exception offered by ASU 2016-01. See Note 1 for additional information. As of June 30, 2018, the carrying amount of our investments without readily determinable fair values was $0.3 billion. During the three and six months ended June 30, 2018, there were insignificant adjustments due to observable price changes and we recognized an insignificant impairment charge.

Fixed income securities consist primarily of investments in municipal bonds as well as U.S. Treasury securities. We use quoted prices in active markets for the majority of our U.S. Treasury securities, therefore these securities are classified as Level 1. For fixed income securities that do not have quoted prices in active markets, we use alternative matrix pricing resulting in these debt securities being classified as Level 2.

Derivative contracts are valued using models based on readily observable market parameters for all substantial terms of our derivative contracts and thus are classified within Level 2. We use mid-market pricing for fair value measurements of our derivative instruments. Our derivative instruments are recorded on a gross basis.

We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between Level 1 and Level 2 during both the six months ended June 30, 2018 and 2017.

Fair Value of Short-term and Long-term Debt
The fair value of our debt is determined using various methods, including quoted prices for identical terms and maturities, which is a Level 1 measurement, as well as quoted prices for similar terms and maturities in inactive markets and future cash flows discounted at current rates, which are Level 2 measurements. The fair value of our short-term and long-term debt, excluding capital leases, was as follows:
 
At June 30,
 
 
At December 31,
 
 
2018
 
 
2017
 
(dollars in millions)
Carrying
Amount

 
Fair Value

 
Carrying
Amount

 
Fair
Value 

Short- and long-term debt, excluding capital leases
$
113,695

 
$
119,760

 
$
116,075

 
$
128,658



Derivative Instruments
The following table sets forth the notional amounts of our outstanding derivative instruments:
 
At June 30,

 
At December 31,

 
2018

 
2017

(dollars in millions)
Notional Amount

 
Notional Amount 

Interest rate swaps
$
19,835

 
$
20,173

Cross currency swaps
16,638

 
16,638

Interest rate caps
2,840

 
2,840



Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against interest rate risk exposure of designated debt issuances. We record the interest rate swaps at fair value in our condensed consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps are recorded to Interest expense, which are offset by changes in the fair value of the hedged debt due to changes in interest rates.

During the second quarter of 2018, we entered into interest rate swaps with a total notional value of $0.7 billion and settled interest rate swaps with a total notional value of $1.1 billion.

The ineffective portion of these interest rate swaps was insignificant for the three and six months ended June 30, 2018 and 2017.

The following amounts were recorded in Long-term debt in our condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges:
 
At June 30,

 
At December 31,

(dollars in millions)
2018

 
2017

Carrying amount of hedged liabilities
$
18,685

 
$
19,723

Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities
(1,005
)
 
(316
)


Cross Currency Swaps
We have entered into cross currency swaps designated as cash flow hedges to exchange our British Pound Sterling, Euro, Swiss Franc and Australian Dollar-denominated cash flows into U.S. dollars and to fix our cash payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses.

During the three and six months ended June 30, 2018, a pre-tax loss of $1.1 billion and an insignificant pre-tax gain, respectively, were recognized in Other comprehensive loss. During the three and six months end June 30, 2017, pre-tax gains of $0.4 billion and $0.5 billion, respectively, were recognized in Other comprehensive loss. A portion of the gains recognized in Other comprehensive loss was reclassified to Other income (expense), net to offset the related pre-tax foreign currency transaction gain or loss on the underlying hedged item.

Forward Starting Interest Rate Swaps
In order to manage our exposure to interest rate changes on future forecasted transactions, during the third quarter of 2018, we entered into forward starting interest rate swaps with a total notional value of $3.0 billion. We designated these contracts as cash flow hedges.

Net Investment Hedges
We have designated certain foreign currency instruments as net investment hedges to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. The notional amount of the Euro-denominated debt as a net investment hedge was $0.8 billion and $0.9 billion at June 30, 2018 and December 31, 2017, respectively.

Undesignated Derivatives
We also have the following derivative contracts which we use as an economic hedge but for which we have elected not to apply hedge accounting.

Interest Rate Caps
We enter into interest rate caps to mitigate our interest exposure to interest rate increases on our ABS Financing Facility and Asset-Backed Notes. During the three and six months ended June 30, 2018 and 2017, we recognized an insignificant amount in Interest expense.

Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term investments, trade receivables, including device payment plan agreement receivables, certain notes receivable, including lease receivables, and derivative contracts.

Counterparties to our derivative contracts are major financial institutions with whom we have negotiated derivatives agreements (ISDA master agreements) and credit support annex agreements (CSAs) which provide rules for collateral exchange. Our CSAs entered into prior to the fourth quarter of 2017 generally require collateralized arrangements with our counterparties in connection with uncleared derivatives. During the first quarter of 2017, we paid an insignificant amount of cash to extend amendments to certain of our collateral exchange arrangements, which eliminated the requirement to post collateral for a specified period of time. During the fourth quarter of 2017, we began negotiating and executing new ISDA master agreements and CSAs with our counterparties. The newly executed CSAs contain rating based thresholds such that we or our counterparties may be required to hold or post collateral based upon changes in outstanding positions as compared to established thresholds and changes in credit ratings. At June 30, 2018, we posted collateral of approximately $0.1 billion related to derivative contracts under collateral exchange arrangements, which were recorded as Prepaid expenses and other in our condensed consolidated balance sheet. We did not post any collateral at December 31, 2017. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote and do not expect that any such nonperformance would result in a significant effect on our results of operations or financial condition due to our diversified pool of counterparties.