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Derivative Instruments
 9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments Derivative Instruments

We use derivative instruments to manage certain of our market risks related to fluctuations in interest rates and foreign currency exchange rates.

Interest Rate Swaps

We enter into interest rate swaps with the objective of reducing our exposure to interest rate risk for a portion of our variable-rate debt interest payments. At September 30, 2017 and December 31, 2016, our interest rate swaps outstanding had notional amounts of $1.55 billion. These interest rate swaps will expire in July 2021 and are designated cash flow hedges as the changes in the future cash flows of the swaps are expected to offset changes in expected future interest payments on the related variable-rate debt. There were no other interest rate swaps outstanding as of September 30, 2017.

The effective portion of gains or losses on the interest rate swaps is reported as a component of Accumulated OCI ("AOCI") and reclassified into Interest expense, net in our Condensed Consolidated Statements of Income in the same period or periods during which the related hedged interest payments affect earnings. Gains or losses on the swaps representing hedge ineffectiveness are recognized in current earnings. Through September 30, 2017, the swaps were highly effective cash flow hedges and no ineffectiveness has been recorded.

Foreign Currency Contracts

We enter into foreign currency forward and swap contracts with the objective of reducing our exposure to earnings volatility arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany receivables and payables. The notional amount, maturity date, and currency of these contracts match those of the underlying intercompany receivables or payables. These foreign currency contracts are designated cash flow hedges as the future cash flows of the contracts are expected to offset changes in intercompany receivables and payables due to foreign currency exchange rate fluctuations.

The effective portion of gains or losses on the foreign currency contracts is reported as a component of AOCI. Amounts are reclassified from AOCI each quarter to offset foreign currency transaction gains or losses recorded within Other (income) expense when the related intercompany receivables and payables affect earnings due to their functional currency remeasurements. Gains or losses on the foreign currency contracts representing hedge ineffectiveness are recognized in current earnings. Through September 30, 2017, all foreign currency forward and swap contracts related to intercompany receivables and payables were highly effective cash flow hedges and no ineffectiveness has been recorded.

As of September 30, 2017, and December 31, 2016, foreign currency forward and swap contracts outstanding related to intercompany receivables and payables had total notional amounts of $452 million and $437 million, respectively. As of September 30, 2017 these foreign currency forward and swap contracts have durations expiring as early as 2017 and as late as 2020.

During the quarter ended September 30, 2017, we entered into foreign currency forward contracts with U.S. dollar notional amounts of $319 million to reduce the volatility of certain expected Thai Baht denominated proceeds related to our refranchising of KFC Thailand. These forward contracts are designated as a net investment hedge of our foreign operations to the extent that we have foreign currency denominated net assets. The mark-to-market adjustments associated with the portion of the forward contracts designated as a net investment hedge are recorded as a cumulative translation adjustment within AOCI. Forward contracts related to expected proceeds that exceed our net foreign investment do not qualify for hedge accounting. The mark-to-market adjustments associated with the portion of the forward contracts which exceeds our net foreign investment are recorded as Refranchising (gain) loss as the objective of the forwards are to provide an economic hedge related to expected foreign currency refranchising proceeds. These foreign currency forward contracts did not have a material impact on our Condensed Consolidated Financial Statements for the quarter ended September 30, 2017, and will mature in December 2017.

As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. At September 30, 2017, all of the counterparties to our interest rate swaps and foreign currency contracts had investment grade ratings according to the three major ratings agencies. All counterparties have performed in accordance with their contractual obligations as of September 30, 2017.

Gains and losses on derivative instruments designated as cash flow and net investment hedges recognized in OCI and reclassifications from AOCI into Net Income:

 
Quarter ended
 
Year to date
 
Gains/(Losses) Recognized in OCI
 
(Gains)/Losses Reclassified from AOCI into Net Income
 
Gains/(Losses) Recognized in OCI
 
(Gains)/Losses Reclassified from AOCI into Net Income
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
(9
)
 
$
—

 
$
—

 
$
(8
)
 
$
(9
)
 
$
2

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
(17
)
 
(5
)
 
15

 
5

 
(49
)
 
(11
)
 
50

 
11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit/(expense)
2

 
1

 
(2
)
 
—

 
5

 
1

 
(3
)
 
—



As of September 30, 2017, the estimated net gain included in AOCI related to our cash flow hedges that will be reclassified into earnings in the next 12 months is $5 million, based on current LIBOR interest rates.

See Note 13 for the fair value of our derivative assets and liabilities.