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Fair Value Measurements And Disclosure

9 Months Ended

Sep. 30, 2020

NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework in ASC 820, “Fair Value Measurement,” provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.

The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2019.

Long-Term Debt and Other Financial Instruments

The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:


	September 30, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Notes and debentures1	$	155,218	$	181,872	$	161,109	$	182,124
Commercial paper	1,754		1,754		—		—
Bank borrowings	—		—		4		4
Investment securities2	3,669		3,669		3,723		3,723
1Includes credit agreement borrowings.
2Excludes investments accounted for under the equity method.

The carrying amount of debt with an original maturity of less than one year approximates fair value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.

Following is the fair value leveling for investment securities that are measured at fair value and derivatives as of September 30, 2020 and December 31, 2019. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities,” “Other current assets” and “Accounts payable and accrued liabilities” on our consolidated balance sheets.


	September 30, 2020
	Level 1		Level 2		Level 3		Total
Equity Securities
Domestic equities	$	893	$	—	$	—	$	893
International equities	148		—		—		148
Fixed income equities	233		—		—		233
Available-for-Sale Debt Securities	—		1,524		—		1,524
Asset Derivatives
Cross-currency swaps	—		322		—		322
Foreign exchange contracts	—		16		—		16
Liability Derivatives

Cross-currency swaps	—		(4,244)		—		(4,244)
Foreign exchange contracts	—		(6)		—		(6)


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Equity Securities
Domestic equities	$	844	$	—	$	—	$	844
International equities	183		—		—		183
Fixed income equities	229		—		—		229
Available-for-Sale Debt Securities	—		1,444		—		1,444
Asset Derivatives
Interest rate swaps	—		2		—		2
Cross-currency swaps	—		172		—		172
Interest rate locks	—		11		—		11
Foreign exchange contracts	—		89		—		89
Liability Derivatives
Cross-currency swaps	—		(3,187)		—		(3,187)
Interest rate locks	—		(95)		—		(95)

Investment Securities

Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities is estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

The components comprising total gains and losses in the period on equity securities are as follows:


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Total gains (losses) recognized on equity securities	$	64	$	21	$	22	$	231
Gains (Losses) recognized on equity securities sold	—		74		(24)		101
Unrealized gains (losses) recognized on equity securities held at end of period	$	64	$	(53)	$	46	$	130

At September 30, 2020, available-for-sale debt securities totaling $1,524 have maturities as follows - less than one year: $62; one to three years: $155; three to five years: $163; five or more years: $1,144.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in “Other current assets” and our investment securities are recorded in “Other Assets” on the consolidated balance sheets.

Derivative Financial Instruments

We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

Fair Value Hedging Periodically, we enter into and designate fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount.

We also designate some of our foreign exchange contracts as fair value hedges. The purpose of these contracts is to hedge currency risk associated with foreign-currency-denominated operating assets and liabilities.

Unrealized and realized gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged. Unrealized gains on derivatives designated as fair value hedges are recorded at fair market value as assets, and unrealized losses are recorded at fair market value as liabilities. Changes in the fair value of derivative instruments designated as fair value hedges are offset against the change in fair value of the hedged assets or liabilities through earnings. In the nine months ended September 30, 2020 and 2019, no ineffectiveness was measured on fair value hedges.

Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from our foreign-denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated interest rate to a fixed U.S. dollar denominated interest rate.

We also designate some of our foreign exchange contracts as cash flow hedges. The purpose of these contracts is to hedge certain forecasted film production costs and film tax incentives denominated in foreign currencies.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, changes in fair value are reported as a component of accumulated OCI and are reclassified into the consolidated statements of income in the same period the hedged transaction affects earnings.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt. Over the next 12 months, we expect to reclassify $95 from accumulated OCI to “Interest expense” due to the amortization of net losses on historical interest rate locks.

We settled all interest rate locks in May 2020 in conjunction with the issuance of fixed rate debt obligations that the interest rate locks were hedging and paid $731 that was largely offset by the return of collateral at the time of settlement. Cash flows from the interest rate lock settlements and return of collateral were reported as Financing Activities in our Statement of Cash Flows, consistent with our accounting policy for these instruments.

Net Investment Hedging We have designated €1,450 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of our subsidiaries. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated OCI, net on the consolidated balance sheet. Net losses on net investment hedges recognized in accumulated OCI in the third quarter were $70 and for the first nine months of 2020 were $75.

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2020, we had posted collateral of $485 (a deposit asset) and held collateral of $4 (a receipt liability). Under the agreements, if AT&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in September, we would have been required to post additional collateral of $25. If AT&T’s credit rating had been downgraded four ratings levels by Fitch Ratings, two levels by S&P, and two levels by Moody’s, we would have been required to post additional collateral of $3,237. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- by S&P, we would have been required to post additional collateral of $241. At December 31, 2019, we had posted collateral of $204 (a deposit asset) and held collateral of $44 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:


	September 30,		December 31,
	2020		2019
Interest rate swaps	$	—	$	853
Cross-currency swaps	42,969		42,325
Interest rate locks	—		3,500
Foreign exchange contracts	204		269
Total	$	43,173	$	46,947

Following are the related hedged items affecting our financial position and performance:


Effect of Derivatives on the Consolidated Statements of Income
	Three months ended				Nine months ended
	September 30,				September 30,
Fair Value Hedging Relationships	2020		2019		2020		2019
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps	$	(1)	$	—	$	(5)	$	59
Gain (Loss) on long-term debt	1		—		5		(59)

In addition, the net swap settlements that accrued and settled in the quarters ended September 30, 2020 and 2019 were offset against interest expense.

The following table presents information for our cash flow hedging relationships:


	Three months ended				Nine months ended
	September 30,				September 30,
Cash Flow Hedging Relationships	2020		2019		2020		2019
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	1,079	$	(487)	$	(2,091)	$	(1,082)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI	10		5		(1)		2
Other income (expense) - net reclassified from accumulated OCI into income	(9)		6		4		16
Interest rate locks:
Gain (Loss) recognized in accumulated OCI	—		(202)		(648)		(225)
Interest income (expense) reclassified from accumulated OCI into income	(25)		(15)		(59)		(47)

- 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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