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Financial instruments

9 Months Ended

Mar. 31, 2022

Our financial instruments consist primarily of cash and cash equivalents, marketable securities and other investments, accounts receivable and long-term investments, as well as obligations under accounts payable, trade, notes payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable, accounts payable, trade and notes payable approximate fair value.

Marketable securities and other investments include deposits and equity investments. Deposits are recorded at cost, and equity investments are recorded at fair value. Changes in fair value related to equity investments are recorded in net income. Unrealized gains and losses related to equity investments were not material as of March 31, 2022 and 2021.

The carrying value of long-term debt, which excludes the impact of net unamortized debt issuance costs, and estimated fair value of long-term debt are as follows:


	March 31, 2022		June 30, 2021
Carrying value of long-term debt	$	6,588,048	$	6,646,029
Estimated fair value of long-term debt	6,680,555		7,527,268

The fair value of long-term debt is classified within level 2 of the fair value hierarchy.

We utilize derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions, and we do not anticipate any material non-performance by any of the counterparties. We do not hold or issue derivative financial instruments for trading purposes.

The Company’s €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.

In connection with the proposed Acquisition, the Company entered into deal-contingent forward contracts during October 2021 to mitigate the risk of appreciation in the GBP-denominated purchase price. The deal-contingent forward contracts have an aggregate notional amount of £6,415 million, and settlement is contingent upon closing the proposed Acquisition.

Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value.

The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:


	Balance Sheet Caption	March 31, 2022	June 30, 2021
Net investment hedges


Cross-currency swap contracts	Other liabilities	29,299	71,798
Cash flow hedges
Forward exchange contracts	Non-trade and notes receivable	30,355	5,376
Forward exchange contracts	Other accrued liabilities	9,540	9,435
Deal-contingent forward contracts	Other accrued liabilities	396,365	—

Costless collar contracts	Non-trade and notes receivable	279	110
Costless collar contracts	Other accrued liabilities	3,662	901

The cross-currency swap, forward exchange, deal-contingent forward and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. We have not entered into any master netting arrangements.

The cross-currency swap contracts have been designated as hedging instruments. The forward exchange, deal-contingent forward and costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.

The forward exchange and costless collar contracts are adjusted to fair value by recording gains and losses through the cost of sales caption in the Consolidated Statement of Income. The deal-contingent forward contracts are adjusted to fair value by recording gains and losses through the other expense (income), net caption in the Consolidated Statement of Income.

Derivatives designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive (loss) on the Consolidated Balance Sheet until the hedged item is recognized in earnings. We assess the effectiveness of the €69 million, €290 million and ¥2,149 million cross-currency swap hedging instruments using the spot method. Under this method, the periodic interest settlements are recognized directly in earnings through interest expense.

Net gains (losses) of $24 million and $(3) million relating to forward exchange contracts were recorded during the three months ended March 31, 2022 and 2021, respectively. Net gains of $47 million and $21 million relating to forward exchange contracts were recorded during the nine months ended March 31, 2022 and 2021, respectively. Net (losses) of $(247) million and $(396) million relating to the deal-contingent forward contracts were recorded during the three and nine months ended March 31, 2022, respectively. All other gains or losses on derivative financial instruments recorded in the Consolidated Statement of Income for the three and nine months ended March 31, 2022 and 2021 were not material.

Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) on the Consolidated Balance Sheet are as follows:


	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2022		2021		2022		2021
Cross-currency swap contracts	$	887	$	5,188	$	30,205	$	(33,675)

Foreign denominated debt	16,194		25,636		41,843		(26,200)

During the nine months ended March 31, 2022 and 2021, the periodic interest settlements related to the cross-currency swaps were not material.

A summary of financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2022 and June 30, 2021 are as follows:


			Quoted Prices		Significant Other		Significant
	Fair		In Active		Observable		Unobservable
	Value at		Markets		Inputs		Inputs
	March 31, 2022		(Level 1)		(Level 2)		(Level 3)
Assets:
Equity securities	$	17,057	$	17,057	$	—	$	—



Derivatives	30,634		—		30,634		—

Liabilities:
Derivatives	438,866		—		438,866		—


			Quoted Prices		Significant Other		Significant
	Fair		In Active		Observable		Unobservable
	Value at		Markets		Inputs		Inputs
	June 30, 2021		(Level 1)		(Level 2)		(Level 3)
Assets:
Equity securities	$	20,517	$	20,517	$	—	$	—



Derivatives	5,486		—		5,486		—

Liabilities:
Derivatives	82,134		—		82,134		—

The fair values of the equity securities are determined using the closing market price reported in the active market in which the fund is traded.

Derivatives consist of forward exchange, deal-contingent forward, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of the fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.

The primary investment objective for all investments is the preservation of principal and liquidity while earning income.

There are no other financial assets or financial liabilities that are marked to market on a recurring basis.

- 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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