Financial Instruments and Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Financial Instruments and Fair Value Measurements

7) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The carrying value of our financial instruments approximates fair value, except for notes and debentures, which are not recorded at fair value. The carrying value of our notes and debentures was $17.98 billion at both March 31, 2020 and December 31, 2019 and the fair value, which is determined based on quoted prices in active markets (Level 1 in the fair value hierarchy) was $18.2 billion and $20.6 billion at March 31, 2020 and December 31, 2019, respectively. The carrying value of our investments without a readily determinable fair value for which we have no significant influence was $114 million and $113 million at March 31, 2020 and December 31, 2019, respectively.

We use derivative financial instruments primarily to modify our exposure to market risks from fluctuations in foreign currency exchange rates. We do not use derivative instruments unless there is an underlying exposure and, therefore, we do not hold or enter into derivative financial instruments for speculative trading purposes.

Foreign Exchange Contracts

Foreign exchange forward contracts have principally been used to hedge projected cash flows, in currencies such as the British Pound, the Euro, the Canadian Dollar and the Australian Dollar, generally for periods up to 24 months. We designate foreign exchange forward contracts used to hedge committed and forecasted foreign currency transactions as cash flow hedges. Gains or losses on the effective portion of designated cash flow hedges are initially recorded in other comprehensive income (loss) and reclassified to the statement of operations when the hedged item is recognized. Additionally, we enter into non-designated forward contracts to hedge non-U.S. dollar denominated cash flows.

At March 31, 2020 and December 31, 2019, the notional amount of all foreign exchange contracts was $1.37 billion and $1.44 billion, respectively. At March 31, 2020, $713 million related to future production costs and $658 million related to our foreign currency balances and other expected foreign currency cash flows. At December 31, 2019, $833 million related to future production costs and $606 million related to our foreign currency balances and other expected foreign currency cash flows.

Gains (losses) recognized on derivative financial instruments were as follows:



	Three Months Ended
	March 31,
	2020		2019			Financial Statement Account
Non-designated foreign exchange contracts	$	29	$	(3	)	Other items, net

The fair value of our derivative instruments was not material to the Consolidated Balance Sheets for any of the periods presented.

The following tables set forth our assets and liabilities measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019. These assets and liabilities have been categorized according to the three-level fair value hierarchy established by the FASB, which prioritizes the inputs used in measuring fair value. Level 1 is based on publicly quoted prices for the asset or liability in active markets. Level 2 is based on inputs that are observable other than quoted market prices in active markets, such as quoted prices for the asset or liability in inactive markets or quoted prices for similar assets or liabilities. Level 3 is based on unobservable inputs reflecting our own assumptions about the assumptions that market participants would use in pricing the asset or liability.



At March 31, 2020	Level 1		Level 2		Level 3		Total
Assets:
Foreign currency hedges	$	—	$	36	$	—	$	36
Total Assets	$	—	$	36	$	—	$	36
Liabilities:
Deferred compensation	$	—	$	403	$	—	$	403
Foreign currency hedges	—		46		—		46
Total Liabilities	$	—	$	449	$	—	$	449



At December 31, 2019	Level 1		Level 2		Level 3		Total
Assets:
Marketable securities	$	146	$	—	$	—	$	146
Foreign currency hedges	—		13		—		13
Total Assets	$	146	$	13	$	—	$	159
Liabilities:
Deferred compensation	$	—	$	490	$	—	$	490
Foreign currency hedges	—		14		—		14
Total Liabilities	$	—	$	504	$	—	$	504

The fair value of foreign currency hedges is determined based on the present value of future cash flows using observable inputs including foreign currency exchange rates. The fair value of deferred compensation liabilities is determined based on the fair value of the investments elected by employees. The fair value of marketable securities at December 31, 2019 was determined based on quoted market prices in active markets. During the three months ended March 31, 2020, we sold marketable securities for proceeds of $146 million. During the three months ended March 31, 2019, we recorded an unrealized gain of $38 million resulting from changes in the fair value of our marketable securities.

- 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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