Hedging Activities and Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2020

Derivative [Line Items]

Schedule of Notional Amounts of Outstanding Derivative Positions [Table Text Block]

The following table presents the contractual amounts of our hedging instruments outstanding:

(in millions)	FASB ASC Topic 815 Designation	As of
		March 31, 2020		December 31, 2019
Forward currency contracts	Cash flow hedge	$	3,916	$	3,891
Forward currency contracts	Net investment hedge	957		953
Foreign currency-denominated debt (1)	Net investment hedge	997		997
Forward currency contracts	Non-designated	4,209		4,377
Total Notional Outstanding		$	10,078	$	10,218

(1)

The €900 million (approximately $1.000 billion) debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our Euro functional subsidiaries.

Derivative Instruments, Gain (Loss) [Table Text Block]

	Effect of Hedging Relationships on Accumulated Other Comprehensive Income
	Amount Recognized in OCI on Hedges								Unaudited Condensed Consolidated Statements of Operations (1)			Amount Reclassified from AOCI into Earnings
(in millions)	Pre-Tax Gain (Loss)		Tax Benefit (Expense)			Gain (Loss) Net of Tax			Location of Amount Reclassified	Total Amount of Line Item Presented		Pre-Tax (Gain) Loss			Tax (Benefit) Expense		(Gain) Loss Net of Tax
Three Months Ended March 31, 2020
Forward currency contracts
Cash flow hedges	$	119	$	(27	)	$	92		Cost of products sold	$	806	$	(23	)	$	5	$	(18	)
Net investment hedges (2)	22		(26		)	(4		)	Interest expense	88		(6		)	1		(5		)
Foreign currency-denominated debt
Net investment hedges (3)	24		(2		)	22			Other, net	36		—			—		—
Interest rate derivative contracts
Cash flow hedges	—		—			—			Interest expense	88		1			—		1
Three Months Ended March 31, 2019
Forward currency contracts
Cash flow hedges	$	72	$	(16	)	$	56		Cost of products sold	$	730	$	(9	)	$	2	$	(7	)
Net investment hedges (2)	33		(7		)	26			Interest expense	109		(10		)	2		(8		)

(1) In all periods presented in the table above, the pre-tax (gain) loss amounts reclassified from AOCI to earnings represent the effect of the hedging relationships on earnings. All other amounts included in earnings related to hedging relationships were immaterial.

(2) For our outstanding forward currency contracts designated as net investment hedges, the net gain or loss reclassified from AOCI to earnings as a reduction of Interest expense represents the straight-line amortization of the excluded component as calculated at the date of designation. This initial value of the excluded component has been excluded from the assessment of effectiveness in accordance with FASB ASC Topic 815. In the current period, we did not recognize any gains or losses on the components included in the assessment of hedge effectiveness in earnings.

(3)

For our outstanding Euro-denominated debt principal designated as a net investment hedge, the change in fair value attributable to changes in the spot rate is recorded in the Foreign currency translation adjustment (CTA) component of OCI. No amounts were reclassified from AOCI to current period earnings.

Derivative Instruments, Gain (Loss) that may be Reclassified from AOCI to Earnings within Twelve Months [Table Text Block]

As of March 31, 2020, pre-tax net gains or losses for our derivative instruments designated, or previously designated, as cash flow and net investment hedges under FASB ASC Topic 815 that may be reclassified from AOCI to earnings within the next twelve months are presented below (in millions):

Designated Hedging Instrument	FASB ASC Topic 815 Designation	Location on Unaudited Condensed Consolidated Statements of Operations	Amount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings
Forward currency contracts	Cash flow hedge	Cost of products sold	$	116
Forward currency contracts	Net investment hedge	Interest expense	24
Interest rate derivative contracts	Cash flow hedge	Interest expense	(5		)

Derivatives Not Designated as Hedging Instruments [Table Text Block]

Net gains and losses on currency hedge contracts not designated as hedging instruments offset by net gains and losses from currency transaction exposures are presented below:

	Location on Unaudited Condensed Consolidated Statements of Operations	Three Months Ended March 31,
(in millions)		2020			2019
Net gain (loss) on currency hedge contracts	Other, net	$	(15	)	$	22
Net gain (loss) on currency transaction exposures	Other, net	8			6
Net currency exchange gain (loss)		$	(7	)	$	28

Schedule of Derivative Instruments in Statement of Financial Position, Fair Value [Table Text Block]

The following are the balances of our derivative and nonderivative assets and liabilities:

	Location on Unaudited Condensed Consolidated Balance Sheets (1)	As of
(in millions)		March 31, 2020		December 31, 2019
Derivative and Nonderivative Assets:
Designated Hedging Instruments
Forward currency contracts	Other current assets	$	112	$	72
Forward currency contracts	Other long-term assets	292		216
		404		288
Non-Designated Hedging Instruments
Forward currency contracts	Other current assets	106		33
Total Derivative and Nonderivative Assets		$	509	$	321
Derivative and Nonderivative Liabilities:
Designated Hedging Instruments
Forward currency contracts	Other current liabilities	$	2	$	3
Forward currency contracts	Other long-term liabilities	4		8
Foreign currency-denominated debt	Other long-term liabilities	975		998
		982		1,009
Non-Designated Hedging Instruments
Forward currency contracts	Other current liabilities	43		29
Total Derivative and Nonderivative Liabilities		$	1,025	$	1,037

(1)

We classify derivative and nonderivative assets and liabilities as current when the settlement date of the contract is one year or less.

Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

Changes in the fair value of our licensing arrangements' financial asset were as follows:

(in millions)
Balance as of December 31, 2019	$	518
Proceeds from royalty rights	(47		)
Fair value adjustment (expense) benefit	8
Balance as of March 31, 2020	$	480

Changes in the fair value of our licensing arrangements' financial liability were as follows:

(in millions)
Balance as of December 31, 2019	$	571
Payments for royalty rights	(77		)
Fair value adjustment expense (benefit)	13
Balance as of March 31, 2020	$	507

Assets and liabilities measured at fair value on a recurring basis consist of the following:

	As of
	March 31, 2020								December 31, 2019
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Money market and government funds	$	16	$	—	$	—	$	16	$	50	$	—	$	—	$	50
Publicly-held securities	—		—		—		—		1		—		—		1
Hedging instruments	—		509		—		509		—		321		—		321
Licensing arrangements	—		—		480		480		—		—		518		518
	$	17	$	509	$	480	$	1,006	$	51	$	321	$	518	$	890
Liabilities
Hedging instruments	$	—	$	1,025	$	—	$	1,025	$	—	$	1,037	$	—	$	1,037
Contingent consideration liability	—		—		218		218		—		—		354		354
Licensing arrangements	—		—		507		507		—		—		571		571
	$	—	$	1,025	$	725	$	1,750	$	—	$	1,037	$	925	$	1,963

The recurring Level 3 fair value measurements of our licensing arrangements recognized in our unaudited condensed consolidated balance sheets as of March 31, 2020 include the following significant unobservable inputs:

Licensing Arrangements	Fair Value as of March 31, 2020	Valuation Technique	Unobservable Input	Range				Weighted Average (1)
Financial Asset	$480 million	Discounted Cash Flow	Discount Rate	11	%	-	15%	15%
			Projected Year of Payment	2020		-	2028	2024
Financial Liability	$507 million	Discounted Cash Flow	Discount Rate	12	%	-	15%	13%
			Projected Year of Payment	2020		-	2027	2023

(1)

Unobservable inputs relate to a single financial asset and liability. As such, unobservable inputs were not weighted by the relative fair value of the instruments. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.