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Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Note 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 March 31, 2020:



(dollars in millions)	Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total
Assets:
Other assets:
Fixed income securities	$	—	$	444	$	—	$	444
Interest rate swaps	—		1,874		—		1,874
Foreign exchange forwards	—		31		—		31
Total	$	—	$	2,349	$	—	$	2,349

Liabilities:
Other liabilities:
Interest rate swaps	$	—	$	344	$	—	$	344
Cross currency swaps	—		3,651		—		3,651
Forward starting interest rate swaps	—		1,151		—		1,151
Total	$	—	$	5,146	$	—	$	5,146

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:



(dollars in millions)	Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total
Assets:
Other assets:
Fixed income securities	$	—	$	442	$	—	$	442
Interest rate swaps	—		568		—		568
Cross currency swaps	—		211		—		211
Foreign exchange forwards	—		5		—		5
Total	$	—	$	1,226	$	—	$	1,226

Liabilities:
Other liabilities:
Interest rate swaps	$	—	$	173	$	—	$	173
Cross currency swaps	—		912		—		912
Forward starting interest rate swaps	—		604		—		604
Total	$	—	$	1,689	$	—	$	1,689


⁽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

Certain of our equity investments do not have readily determinable fair values and are excluded from the tables above. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer and are included in Investments in unconsolidated businesses in our condensed consolidated balance sheets. As of March 31, 2020 and December 31, 2019, the carrying amount of our investments without readily determinable fair values were $266 million and $284 million, respectively. During the three months ended March 31, 2020, there were insignificant adjustments due to observable price changes and there were no impairment charges. Cumulative adjustments due to observable price changes and impairment charges were insignificant.

Fixed income securities consist primarily of investments in municipal bonds. 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. Cash flows from derivatives designated in a qualifying hedging relationship are classified in the same category as the cash flows from the hedged items.

We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period.

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 debt instruments, which is a Level 1 measurement, as well as quoted prices for similar debt instruments with comparable terms and maturities, which is a Level 2 measurement.

The fair value of our short-term and long-term debt, excluding finance leases, was as follows:



			Fair Value
(dollars in millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
At December 31, 2019	$	110,373	$	86,712	$	42,488	$	—	$	129,200
At March 31, 2020	116,557		91,754		44,794		—		136,548

Derivative Instruments

We enter into derivative transactions primarily to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. We employ risk management strategies, which may include the use of a variety of derivatives including interest rate swaps, cross currency swaps, forward starting interest rate swaps, treasury rate locks, interest rate caps and foreign exchange forwards. We do not hold derivatives for trading purposes.

The following table sets forth the notional amounts of our outstanding derivative instruments:



	At March 31,		At December 31,
(dollars in millions)	2020		2019
Interest rate swaps	$	17,909	$	17,004
Cross currency swaps	23,070		23,070
Forward starting interest rate swaps	2,000		3,000
Interest rate caps	409		679
Foreign exchange forwards	955		1,130

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 that are currently 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 three months ended March 31, 2020, we entered into and settled interest rate swaps with a total notional value of $2.4 billion and $1.5 billion, respectively. During the three months ended March 31, 2019, we entered into and settled interest rate swaps with a total notional value of $510 million and $1.2 billion, respectively.

The ineffective portion of these interest rate swaps were gains of $60 million and an insignificant amount for the three months ended March 31, 2020 and 2019, respectively.

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 March 31,		At December 31,
(dollars in millions)	2020		2019
Carrying amount of hedged liabilities	$	19,296	$	17,337
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities	1,491		433

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 months ended March 31, 2020, we did not enter into or settle any cross currency swaps. During the three months ended March 31, 2020, a pre-tax loss of $3.0 billion was recognized in Other comprehensive loss. During the three months ended March 31, 2019, we did not enter into or settle any cross currency swaps and an insignificant pre-tax gain was recognized in Other comprehensive loss. A portion of the gains recognized in Other comprehensive loss was reclassified to Other income, net to offset the related pre-tax foreign currency transaction gain or loss on the underlying hedged item.

Forward Starting Interest Rate Swaps

We have entered into forward starting interest rate swaps designated as cash flow hedges in order to manage our exposure to interest rate changes on future forecasted transactions. We hedge our exposure to the variability in future cash flows based on the expected maturities of the related forecasted debt issuance.

During the three months ended March 31, 2020, we did not enter into any new forward starting interest rate swaps and we settled forward starting interest rate swaps with a total notional value of $1.0 billion. During the three months ended March 31, 2019, we did not enter into any new forward starting interest rate swaps and we settled forward starting interest rate swaps with a total notional value of $1.0 billion. During the three months ended March 31, 2020 and 2019, pre-tax losses of $840 million and $203 million, respectively, resulting from interest rate movements, were recognized in Other comprehensive loss.

Treasury Rate Locks

We enter into treasury rate locks to mitigate our interest rate risk. During the three months ended March 31, 2020, we entered into and settled treasury rate locks designated as cash flow hedges with a total notional value of $500 million and we recognized an insignificant amount in Other comprehensive loss. During the three months ended March 31, 2019, we did not enter into or settle any treasury rate locks designated as cash flow hedges, and we did not recognize any amount in our condensed consolidated financial statements.

Net Investment Hedges

We have designated certain foreign currency debt 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 €750 million as of both March 31, 2020 and December 31, 2019.

Undesignated Derivatives

We also have the following derivative contracts which we use as economic hedges 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 Facilities and ABS Notes. We did not recognize any amount in Interest expense during the three months ended March 31, 2020, and we recognized an insignificant amount in Interest expense during the same period in 2019.

Foreign Exchange Forwards

We enter into British Pound Sterling and Euro foreign exchange forwards to mitigate our foreign exchange rate risk related to non-functional currency denominated monetary assets and liabilities of international subsidiaries. During the three months ended March 31, 2020, we entered into and settled foreign exchange forwards with a total notional value of $2.7 billion and $2.8 billion, respectively. During the three months ended March 31, 2019, we entered into and settled foreign exchange forwards with a total notional value of $3.0 billion and $2.6 billion, respectively. During the three months ended March 31, 2020 and 2019, insignificant pre-tax losses were recognized in Other income, net for both periods.

Treasury Rate Locks

We enter into treasury rate locks to mitigate our interest rate risk. During the three months ended March 31, 2020, we entered into and settled treasury rate locks with a total notional value of $1.6 billion, respectively, and we recognized an insignificant amount in Interest expense. During the three months ended March 31, 2019, we did not enter into or settle any treasury rate locks, and we did not recognize any amount in our condensed consolidated financial statements.

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 (CSA) agreements which provide rules for collateral exchange. The CSA agreements 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 March 31, 2020, we held $0.1 billion and posted $1.3 billion of collateral related to derivative contracts under collateral exchange agreements, which were recorded as Other current liabilities and Prepaid expenses and other, respectively, in our condensed consolidated balance sheets. At December 31, 2019, we held an insignificant amount of collateral related to derivative contracts under collateral exchange arrangements, which were recorded as Other current liabilities in our condensed consolidated balance sheets. 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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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