Financial instruments include cash and cash equivalents, short-term investments, cash held in escrow, marketable equity securities, accounts receivable, company-owned life insurance, accounts payable, short-term and long-term debt instruments, and derivatives. The fair values of these financial instruments approximated their carrying values at December 31, 2018 and 2017, in the aggregate, except for long-term debt instruments.

Hedging Activities

The Company has exposure to market risk from changes in foreign currency exchange rates and interest rates, and had exposure to PPG’s stock price changes. As a result, financial instruments, including derivatives, have been used to hedge these underlying economic exposures. Certain of these instruments qualify as fair value, cash flow, and net investment hedges upon meeting the requisite criteria, including effectiveness of offsetting hedged or underlying exposures. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in Income before income taxes in the period incurred.

PPG’s policies do not permit speculative use of derivative financial instruments. PPG enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company did not realize a credit loss on derivatives during the three-year period ended December 31, 2018.

All of PPG’s outstanding derivative instruments are subject to accelerated settlement in the event of PPG’s failure to meet its debt or payment obligations under the terms of the instruments’ contractual provisions. In addition, if the Company would be acquired and its payment obligations under its derivative instruments’ contractual arrangements are not assumed by the acquirer, or if PPG would enter into bankruptcy, receivership or reorganization proceedings, its outstanding derivative instruments would also be subject to accelerated settlement.

In 2018 and 2017, there were no derivative instruments de-designated or discontinued as a hedging instrument. There were no gains or losses deferred in Accumulated other comprehensive loss on the consolidated balance sheet that were reclassified to Income before income taxes in the consolidated statement of income during the three-year period ended December 31, 2018 related to hedges of anticipated transactions that were no longer expected to occur.

Fair Value Hedges

Prior to June 2016, PPG entered into renewable equity forward arrangements to hedge the impact to PPG's Income before income taxes for changes in the fair value of 2,777,778 shares of PPG stock that were contributed to the asbestos settlement trust as discussed in Note 14, “Commitments and Contingent Liabilities.” These financial instruments were recorded at fair value as assets or liabilities and changes in the fair value of these financial instruments are reflected in Asbestos settlement, net on the consolidated statement of income. The total principal amount paid for these shares was approximately $60 million. During the terms of the equity forward arrangements, PPG paid interest to the counterparty based on the principal amount, and the counterparty paid PPG an amount equal to the dividends paid on the shares, which reduced the transaction price by approximately $10 million, net. The difference between the principal amount and any amounts related to unpaid interest or dividends and the market price for the shares, adjusted for credit risk, represented the fair value of the financial instruments as well as the amount that PPG received when the counterparty chose to settle the financial instruments. In conjunction with the funding of the asbestos settlement trust, the equity forward arrangements were settled. At settlement, in June 2016, the fair value of the equity forward arrangement was an asset of $258 million.

The Company uses interest rate swaps from time to time to manage it’s exposure to changing interest rates. When outstanding, the interest rate swaps are typically designated as fair value hedges of certain outstanding debt obligations of the Company and are recorded at fair value.

In February of 2018, PPG entered into interest rate swaps which converted $525 million of fixed rate debt to variable rate debt. The swaps are designated as fair value hedges and are carried at fair value. Changes in the fair value of these swaps and changes in the fair value of the related debt are recorded in Interest expense in the accompanying consolidated statement of income. The fair value of these interest rate swaps was $8 million at December 31, 2018. There were no interest rate swaps outstanding as of December 31, 2017.

Cash Flow Hedges

PPG designates certain foreign currency forward contracts as cash flow hedges of the Company’s exposure to variability in exchange rates on intercompany and third party transactions denominated in foreign currencies. Underlying notional amounts related to these foreign currency forward contracts were $50 million and $284 million at December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, the fair value of all foreign currency forward contracts designated as cash flow hedges was a liability of $1 million and a net asset of $3 million, respectively.

Net Investment Hedges

PPG uses cross currency swaps, foreign currency euro-denominated debt and forward contracts to hedge a significant portion of its net investment in its European operations, as follows:

In February 2018, PPG entered into U.S. dollar to euro cross currency swap contracts with a total notional amount of $575 million and designated these contracts as hedges of the Company's net investment in its European operations. During the term of these contracts, PPG will receive payments in U.S. dollars and make payments in euros to the counterparties. Also in February 2018, the Company settled outstanding U.S. dollar to euro cross currency swap contracts with a total notional amount of $560 million. As of December 31, 2018 and 2017, the fair value of these contracts was an asset of $35 million and $2 million, respectively.

At December 31, 2018 and 2017, PPG had designated €2.3 billion of euro-denominated borrowings as hedges of a portion of its net investment in the Company’s European operations. The carrying value of these instruments at December 31, 2018 and 2017 was $2.6 billion and $2.7 billion, respectively.

During 2017 and 2016, PPG used foreign currency forward contracts to hedge a portion of its net investment in its European operations. Changes in the fair value of these derivative instruments were recorded in Accumulated other comprehensive loss on the consolidated balance sheet as gains or losses. There were no such instruments used 2018. The Company paid $3 million to settle a foreign currency forward contract in 2017. There were no foreign currency forward contracts outstanding as of December 31, 2018, 2017,and 2016.

Other Financial Instruments

PPG uses foreign currency forward contracts to manage net transaction exposures that do not qualify for hedge accounting; therefore, the change in the fair value of these instruments is recorded in Other charges in the consolidated statement of income in the period of change. Underlying notional amounts related to these foreign currency forward contracts were $2.5 billion and $2.2 billion at December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, the fair values of these contracts were a net asset of $36 million and a liability of $20 million, respectively.

Gains/Losses Deferred in Accumulated other comprehensive loss

As of December 31, 2018 and 2017, the Company had accumulated pre-tax unrealized translation gains in Accumulated other comprehensive loss on the consolidated balance sheet related to the euro-denominated borrowings, foreign currency forward contracts, and the cross currency swaps of $161 million and $16 million, respectively.

The following tables summarize the location and amount of gains (losses) related to derivative and debt financial instruments for the years ended December 31, 2018, 2017 and 2016. All dollar amounts are shown on a pre-tax basis.



	2018						2017					2016						Caption in Consolidated Statement of Income
($ in millions)	(Loss)/Gain Deferred in AOCL			Gain/(Loss) Recognized			Loss Deferred in AOCL			Gain Recognized		Gain/(Loss) Deferred in AOCL			(Loss)/Gain Recognized			Caption in Consolidated Statement of Income
Fair Value
Interest rate Swaps					$3						$—					$—		Interest expense
Total Fair Value					$3						$—					$—
Cash Flow
Foreign currency forward contracts⁽¹⁾		($9	)		($8	)		($7	)		$9		$1			($5	)	Other charges and Cost of sales
Total Cash Flow		($9	)		($8	)		($7	)		$9		$1			($5	)
Net Investment
Cross currency swaps		$21			$13			($61	)		$—		$25			$—		Interest expense
Foreign denominated debt	124			—			(403		)	—		122			—
Foreign currency forward contracts	—			—			—			—		(14		)	—
Total Net Investment		$145			$13			($464	)		$—		$133			$—
Economic
Foreign currency forward contracts					$55						$14					$14		Other charges


(1)	For the period ended December 31, 2018, the amounts excluded from effectiveness recognized in earnings based on an amortization approach was expense of $4 million.

Fair Value Measurements

The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of December 31, 2018 and 2017, respectively, the assets and liabilities measured at fair value on a recurring basis were cash equivalents, equity securities and derivatives. In addition, the Company measures its pension plan assets at fair value (see Note 13, “Employee Benefit Plans” for further details). The Company’s financial assets and liabilities are measured using inputs from the following three levels:

Level 1 inputs are quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level 1 inputs are considered to be the most reliable evidence of fair value as they are based on unadjusted quoted market prices from various financial information service providers and securities exchanges.

Level 2 inputs are directly or indirectly observable prices that are not quoted on active exchanges, which include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of the derivative instruments reflect the instruments’ contractual terms, including the period to maturity, and uses observable market-based inputs, including forward curves.

Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities. The Company does not have any recurring financial assets or liabilities that are recorded in its consolidated balance sheets as of December 31, 2018 and 2017 that are classified as Level 3 inputs.

Assets and liabilities reported at fair value on a recurring basis



	December 31, 2018						December 31, 2017
($ in millions)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets:
Other current assets:
Marketable equity securities		$4		$—		$—		$4		$—		$—
Foreign currency forward contracts^(a)	—		—		—		—		6		—
Foreign currency forward contracts^(b)	—		45		—		—		—		—
Cross currency swaps^(c)	—		—		—		—		2		—
Other assets:
Cross currency swaps^(c)		$—		$35		$—		$—		$—		$—
Interest rate swaps^(d)	—		8		—		—		—		—
Investments:
Marketable equity securities		$69		$—		$—		$79		$—		$—
Liabilities:
Accounts payable and accrued liabilities:
Foreign currency forward contracts^(a)		$—		$1		$—		$—		$23		$—
Foreign currency forward contracts^(b)	—		9		—		—		—		—


(a)	Cash flow hedges


(b)	Derivatives not designated as hedging instruments


(c)	Net investment hedges


(d)	Fair value hedges

Long-Term Debt



($ in millions)	December 31, 2018^(a)	December 31, 2017^(b)
Long-term debt - carrying value	$5,000	$4,123
Long-term debt - fair value	$5,101	$4,341


(a)	Excluding capital lease obligations of $12 million and short term borrowings of $4 million as of December 31, 2018.


(b)	Excluding capital lease obligations of $15 million and short term borrowings of $8 million as of December 31, 2017.

The fair values of the debt instruments were based on discounted cash flows and interest rates then currently available to the Company for instruments of the same remaining maturities and were measured using level 2 inputs.

Assets and liabilities reported at fair value on a nonrecurring basis

There were no significant adjustments to the fair value of nonmonetary assets or liabilities during the year ended December 31, 2018. In conjunction with the 2016 restructuring actions, certain nonmonetary assets were written down to their fair value. Refer to Note 8, “Business Restructuring” for further details associated with these actions.”

Call and put option on noncontrolling interest

PPG owns a majority interest in a coatings business whose financial results are included in PPG’s consolidated financial statements. PPG has recorded the noncontrolling interest in this consolidated affiliate as a liability instead of equity on its consolidated balance sheets due to call and put option provisions associated with the noncontrolling interest, which have similar terms. This liability was $40 million and $44 million at December 31, 2018 and 2017, respectively.