Derivative Instruments

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

Summary of Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. To further limit credit risk, we also enter into collateral security arrangements related to certain interest rate derivative instruments whereby collateral is posted between counterparties if the fair value of the derivative instrument exceeds certain thresholds. Additional collateral would be required in the event of a significant credit downgrade by either party.

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues as well as costs denominated in foreign currencies, which subjects us to foreign currency risk. We use foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues, expenses, assets and liabilities denominated in foreign currencies. The objective of the foreign exchange contracts is to better ensure that the U.S. dollar-equivalent cash flows are not adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. For derivative instruments that are designated as cash flow hedges, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our foreign exchange contracts on a quarterly basis. We do not use any foreign exchange contracts for trading purposes.

For our derivative instruments designated as cash flow hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. As of September 30, 2015, we have estimated that approximately $19 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

Interest Rate Contracts

In connection with the July 2014 issuance of our fixed rate notes due 2019, 2021 and 2024, we entered into certain interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with $2.4 billion of these notes so that the interest payable on these senior notes effectively became variable based on London InterBank Offered Rate (LIBOR) plus a spread. We have designated these swap agreements as qualifying hedging instruments and are accounting for them as fair value hedges. These transactions are characterized as fair value hedges for financial accounting purposes because they protect us against changes in the fair value of certain of our fixed rate borrowings due to benchmark interest rate movements. Changes in the fair values of these interest rate swap agreements are recognized in other assets or other liabilities with a corresponding increase or decrease in long-term debt. Each quarter we pay interest based on LIBOR plus a spread to the counterparty and on a semi-annual basis receive interest from the counterparty per the fixed rate of these senior notes. The net amount is recognized as interest expense in interest and other, net. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our contracts on a quarterly basis. We do not use any interest rate swap agreements for trading purposes.

For our derivative instruments designated as fair value hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments as of September 30, 2015 and December 31, 2014 were as follows:

	Balance Sheet Location	September 30, 2015		December 31, 2014
		(In millions)
Derivative Assets:
Foreign exchange contracts designated as cash flow hedges	Other Current Assets	$	30	$	42
Foreign exchange contracts not designated as hedging instruments	Other Current Assets	32		20
Interest rate contracts designated as fair value hedges	Other Assets	77		22
Total derivative assets		$	139	$	84
Derivative Liabilities:
Foreign exchange contracts designated as cash flow hedges	Other Current Liabilities	$	5	$	—
Foreign exchange contracts not designated as hedging instruments	Other Current Liabilities	27		20
Total derivative liabilities		$	32	$	20
Total fair value of derivative instruments		$	107	$	64

Under the master netting agreements with the respective counterparties to our derivative contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our condensed consolidated balance sheet. As of September 30, 2015, the potential effect of rights of set-off associated with the foreign exchange contracts discussed above would be an offset to both assets and liabilities by $22 million, resulting in net derivative assets and derivative liabilities of $40 million and $10 million, respectively. We are not required to pledge, nor are we entitled to receive, collateral related to our foreign exchange derivative transactions. As of September 30, 2015, we had neither pledged nor received collateral related to our interest rate derivative transactions.

Effect of Derivative Contracts on Accumulated Other Comprehensive Income

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of September 30, 2015 and December 31, 2014, and the impact of these derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2015: 

	December 31, 2014		Amount of gain (loss) recognized in other comprehensive income (effective portion)		Amount of gain (loss) reclassified from accumulated other comprehensive income to net revenue and operating expense (effective portion)		September 30, 2015
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	41	$	29	$	51	$	19

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of September 30, 2014 and December 31, 2013, and the impact of these derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2014:

	December 31, 2013			Amount of gain (loss) recognized in other comprehensive income (effective portion)		Amount of gain (loss) reclassified from accumulated other comprehensive income to net revenue and operating expense (effective portion)			September 30, 2014
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	(15	)	$	42	$	(8	)	$	35

Effect of Derivative Contracts on Condensed Consolidated Statement of Income

The following table provides the location in our financial statements of the recognized gains or losses related to our foreign exchange derivative instruments: 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015			2014
	(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues and operating expenses	$	19	$	—	$	51		$	(8	)
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net	13		13		(2		)	(1		)
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income	$	32	$	13	$	49		$	(9	)

$8 million in net derivative gains and $8 million in net derivative losses recognized in interest and other, net, during the three and nine months ended September 30, 2015, respectively, pertained to foreign exchange contracts not designated as hedging instruments used to mitigate the effect of translation in future periods.

The following table provides the location in our financial statements of the recognized gains or losses related to our interest rate derivative instruments: 

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In millions)
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net	$	56		$	(10	)	$	55		$	(10	)
Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net	(56		)	10			(55		)	10
Total gain (loss) recognized from interest rate derivative contracts in the condensed consolidated statement of income	$	—		$	—		$	—		$	—

Notional Amounts of Derivative Contracts

Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, but is used only as the basis on which the value of foreign exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:

	September 30,
	2015		2014
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	705	$	429
Foreign exchange contracts not designated as hedging instruments	2,890		2,275
Interest rate contracts designated as fair value hedges	2,400		2,400
Total	$	5,995	$	5,104