
Note 11.	Fair Value Measurements and Fair Value of Financial Instruments

Fair Value Measurements

The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2018. The company’s financial assets and liabilities carried at fair value are primarily comprised of insurance contracts, investments in money market funds, derivative contracts, mutual funds holding publicly traded securities and other investments in unit trusts held as assets to satisfy outstanding deferred compensation and retirement liabilities; and acquisition-related contingent consideration.

The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities that the company has the ability to access.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates and yield curves.

Level 3: Inputs are unobservable data points that are not corroborated by market data.

The following tables present information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017:



	March 31,		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	2018		(Level 1)		(Level 2)		(Level 3)

Assets
Cash equivalents	$	36	$	36	$	—	$	—
Bank time deposits	2		2		—		—
Investments in mutual funds and other similar instruments	13		13		—		—
Warrants	2		—		2		—
Insurance contracts	115		—		115		—
Derivative contracts	7		—		7		—

Total Assets	$	175	$	51	$	124	$	—

Liabilities
Derivative contracts	$	165	$	—	$	165	$	—
Contingent consideration	41		—		—		41

Total Liabilities	$	206	$	—	$	165	$	41



	December 31,		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	2017		(Level 1)		(Level 2)		(Level 3)

Assets
Cash equivalents	$	22	$	22	$	—	$	—
Bank time deposits	2		2		—		—
Investments in mutual funds and other similar instruments	13		13		—		—
Warrants	2		—		2		—
Insurance contracts	116		—		116		—
Derivative contracts	10		—		10		—

Total Assets	$	165	$	37	$	128	$	—

Liabilities
Derivative contracts	$	139	$	—	$	139	$	—
Contingent consideration	35		—		—		35

Total Liabilities	$	174	$	—	$	139	$	35

The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The fair value of derivative contracts is the estimated amount that the company would receive/pay upon liquidation of the contracts, taking into account the change in interest rates and currency exchange rates. The company determines the fair value of acquisition-related contingent consideration based on the probability-weighted discounted cash flows associated with such future payments. Changes to the fair value of contingent consideration are recorded in selling, general and administrative expense. The following table provides a rollforward of the fair value, as determined by level 3 inputs, of the contingent consideration.



	Three Months Ended
	March 31,			April 1,
(In millions)	2018			2017

Contingent Consideration
Beginning Balance	$	35		$	6
Acquisitions	11			9
Payments	(5		)	—
Change in fair value included in earnings	—			25

Ending Balance	$	41		$	40

Derivative Contracts

As of both March 31, 2018 and December 31, 2017, the total notional amount of outstanding interest rate swaps was $3.10 billion. These swap arrangements are described in Note 8. The notional amounts of currency exchange contracts outstanding totaled $2.98 billion and $2.92 billion at March 31, 2018 and December 31, 2017, respectively.

While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheet. The following tables present the fair value of derivative instruments in the consolidated balance sheet and statement of income.



	Fair Value – Assets				Fair Value – Liabilities
	March 31,		December 31,		March 31,		December 31,
(In millions)	2018		2017		2018		2017

Derivatives Designated as Hedging Instruments
Interest rate swaps (a)	$	—	$	—	$	162	$	124
Derivatives Not Designated as Hedging Instruments
Currency exchange contracts (b)	7		10		3		15

Total Derivatives	$	7	$	10	$	165	$	139


(a)	The fair value of the interest rate swaps is included in the consolidated balance sheet under the caption other long-term liabilities.


(b)	The fair value of the currency exchange contracts is included in the consolidated balance sheet under the captions other current assets or other accrued expenses.

The following amounts related to cumulative basis adjustments for fair value hedges were included in the consolidated balance sheet under the caption long-term obligations:



	Carrying Amount of the Hedged Liability				Cumulative Amount of Fair Value Hedging Adjustment - Increase (Decrease) Included in Carrying Amount of Liability (c)
	March 31,		December 31,		March 31,			December 31,
(In millions)	2018		2017		2018			2017

Long-term Obligations	$	3,261	$	3,309	$	(120	)	$	(70	)


(c)	Includes increases in the carrying amount of $40 million and $43 million at March 31, 2018 and December 31, 2017, respectively, on discontinued hedging relationships.



	Gain (Loss) Recognized
	Three Months Ended
	March 31,			April 1,
(In millions)	2018			2017

Fair Value Hedging Relationships
Interest rate swaps
Hedged long-term obligations - included in other expense, net	$	(38	)	$	(6	)
Derivatives designated as hedging instruments - included in other expense, net	42			3
Derivatives Designated as Cash Flow Hedges
Interest rate swaps
Amount reclassified from accumulated other comprehensive items to other expense, net	(3		)	(3		)
Derivatives Designated as Net Investment Hedges
Foreign currency-denominated debt
Included in currency translation adjustment within other comprehensive items	(200		)	(46		)
Derivatives Not Designated as Hedging Instruments
Currency exchange contracts
Included in cost of revenues	(2		)	(1		)
Included in other expense, net	(8		)	19

Gains and losses recognized on currency exchange contracts and the interest rate swaps designated as fair value hedges are included in the consolidated statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.

The company uses foreign currency-denominated debt to partially hedge its net investments in foreign operations against adverse movements in exchange rates. The company’s euro-denominated senior notes have been designated as, and are effective as, economic hedges of part of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in currency translation adjustment within other comprehensive items and shareholders’ equity.

See Note 1 to the consolidated financial statements for 2017 included in the company's Annual Report on Form 10-K for additional information on the company's risk management objectives and strategies.

Fair Value of Other Financial Instruments

The carrying value and fair value of the company’s notes receivable and debt obligations are as follows:



	March 31, 2018				December 31, 2017
	Carrying		Fair		Carrying		Fair
(In millions)	Value		Value		Value		Value

Notes Receivable	$	94	$	99	$	89	$	93

Debt Obligations:
Senior notes	$	19,742	$	20,053	$	20,024	$	20,639
Commercial paper	1,171		1,171		960		960
Other	23		23		24		24

	$	20,936	$	21,247	$	21,008	$	21,623

The fair value of debt obligations was determined based on quoted market prices and on borrowing rates available to the company at the respective period ends which represent level 2 measurements.