7. Risk Management Activities and Fair Value Measurements

As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices.

For details on the Company’s risk management activities and fair value measurement policies under the fair value hierarchy, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Fair Value Hierarchy

The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

The following table sets forth the Company’s financial assets and liabilities as of September 30, 2012 and June 30, 2012 that are measured at fair value on a recurring basis during the period, segregated by level within the fair value hierarchy:



	Level 1				Level 2				Level 3				Total
Amounts in millions	September 30, 2012		June 30, 2012		September 30, 2012		June 30, 2012		September 30, 2012		June 30, 2012		September 30, 2012		June 30, 2012
Assets recorded at fair value:
Investment securities	$	8	$	9	$	—	$	—	$	25	$	24	$	33	$	33
Derivatives relating to:
Other foreign currency instruments⁽¹⁾	—		—		113		86		—		—		113		86
Interest rates	—		—		338		298		—		—		338		298
Net investment hedges	—		—		8		32		—		—		8		32
Commodities	—		—		5		3		—		—		5		3
Total assets recorded at fair value⁽²⁾	8		9		464		419		25		24		497		452
Liabilities recorded at fair value:
Derivatives relating to:
Foreign currency hedges	—		—		162		142		—		—		162		142
Other foreign currency instruments⁽¹⁾	—		—		24		23		—		—		24		23
Net investment hedges	—		—		35		19		—		—		35		19
Commodities	—		—		6		2		—		—		6		2
Liabilities recorded at fair value⁽³⁾	—		—		227		186		—		—		227		186
Liabilities not recorded at fair value:
Long-term debt instruments⁽⁴⁾	25,900		25,829		3,551		2,119		—		—		29,451		27,948
Total liabilities recorded and not recorded at fair value	$	25,900	$	25,829	$	3,778	$	2,305	$	—	$	—	$	29,678	$	28,134


⁽¹⁾	Other foreign currency instruments are comprised of foreign currency financial instruments that do not qualify as hedges.


⁽²⁾	Investment securities are presented in other noncurrent assets and all derivative assets are presented in prepaid expenses and other current assets or other noncurrent assets.


⁽³⁾	All liabilities are presented in accrued and other liabilities or other noncurrent liabilities.


⁽⁴⁾	Long-term debt includes the current portion ($2,920 and $4,095 as of September 30 and June 30, 2012, respectively) of debt instruments. Long term debt is not recorded at fair value on a recurring basis, but is measured at fair value for disclosure purposes. Fair values are generally estimated based on quoted market prices for identical or similar instruments.

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the three months ended September 30, 2012, the Company transferred long-term debt instruments with a fair value of $455 million from Level 1 to Level 2. The transferred instruments represent the Company's investment in industrial development bonds which are infrequently traded in an observable market. There were no additional transfers between levels during the periods presented. Also, there was no significant activity within the Level 3 assets and liabilities during the periods presented and there were no assets or liabilities that were remeasured at fair value on a non-recurring basis for the three months ended September 30, 2012.

Certain of the Company’s financial instruments used in hedging transactions are governed by industry standard netting agreements with counterparties. If the Company’s credit rating were to fall below the levels stipulated in the agreements, the counterparties could demand either collateralization or termination of the arrangement. The aggregate fair value of the instruments covered by these contractual features that are in a net liability position as of September 30, 2012 was $64 million. The Company has never been required to post any collateral as a result of these contractual features.

Disclosures about Derivative Instruments

The notional amounts and fair values of qualifying and non-qualifying financial instruments used in hedging transactions as of September 30 and June 30, 2012 are as follows:



	Notional Amount				Fair Value Asset (Liability)
Amounts in Millions	September 30, 2012		June 30, 2012		September 30, 2012			June 30, 2012
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	—	$	—	$	—		$	—
Foreign currency contracts	831		831		(162		)	(142		)
Total	831		831		(162		)	(142		)
Derivatives in Fair Value Hedging Relationships
Interest rate contracts	10,894		10,747		338			298
Derivatives in Net Investment Hedging Relationships
Net investment hedges	1,741		1,768		(27		)	13
Derivatives Not Designated as Hedging Instruments
Foreign currency contracts	13,477		13,210		89			63
Commodity contracts	150		125		(1		)	1
Total	$	13,627	$	13,335	$	88		$	64

The total notional amount of contracts outstanding at the end of the period is indicative of the level of the Company’s derivative activity during the period.



	Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)
Amounts in Millions	September 30, 2012			June 30, 2012
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	10		$	11
Foreign currency contracts	16			22
Total	$	26		$	33
Derivatives in Net Investment Hedging Relationships
Net investment hedges	$	(19	)	$	6

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive income (OCI) during the three months ended September 30, 2012 and 2011, was not material. During the next 12 months, the amount of the September 30, 2012 accumulated OCI balance that will be reclassified to earnings is expected to be immaterial.

The amounts of gains and losses on qualifying and non-qualifying financial instruments used in hedging transactions for the three months ended September 30, 2012 and 2011 are as follows:



	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income⁽¹⁾
	Three Months Ended September 30
Amounts in Millions	2012			2011
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	2		$	2
Foreign currency contracts	(18		)	(45		)
Commodity contracts	—			1
Total	$	(16	)	$	(42	)

	Amount of Gain (Loss) Recognized in Income
	Three Months Ended September 30
Amounts in Millions	2012			2011
Derivatives in Fair Value Hedging Relationships ⁽²⁾
Interest rate contracts	$	40		$	131
Debt	(38		)	(133		)
Total	2			(2		)
Derivatives in Net Investment Hedging Relationships⁽²⁾
Net investment hedges	—			(3		)
Derivatives Not Designated as Hedging Instruments⁽³⁾
Foreign currency contracts ⁽⁴⁾	279			(581		)
Commodity contracts	2			(1		)
Total	$	281		$	(582	)

⁽¹⁾

The gain or loss on the effective portion of cash flow hedging relationships is reclassified from accumulated OCI into net income in the same period during which the related item affects earnings. Such amounts are included in the Consolidated Statements of Earnings as follows: interest rate contracts in interest expense, foreign currency contracts in selling, general and administrative expense and interest expense and commodity contracts in cost of products sold.


⁽²⁾	The gain or loss on the ineffective portion of interest rate contracts and net investment hedges, if any, is included in the Consolidated Statements of Earnings in interest expense.


⁽³⁾	The gain or loss on contracts not designated as hedging instruments is included in the Consolidated Statements of Earnings as follows: foreign currency contracts in selling, general and administrative expense and commodity contracts in cost of products sold.


⁽⁴⁾	The gain or loss on non-qualifying foreign currency contracts substantially offsets the foreign currency mark-to-market impact of the related exposure.