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FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2014
Investments, Debt and Equity Securities [Abstract]  
Financial Instruments [Text Block]
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
June 30, 2014
 
December 31, 2013
Dollars in Millions
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents - Money market and other securities
$
—

 
$
3,749

 
$
—

 
$
3,749

 
$
—

 
$
3,201

 
$
—

 
$
3,201

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
—

 
1,813

 
—

 
1,813

 
—

 
122

 
—

 
122

Commercial paper
—

 
200

 
—

 
200

 
—

 
—

 
—

 
—

Corporate debt securities
—

 
4,640

 
—

 
4,640

 
—

 
4,432

 
—

 
4,432

Equity funds
—

 
94

 
—

 
94

 
—

 
74

 
—

 
74

Fixed income funds
—

 
10

 
—

 
10

 
—

 
46

 
—

 
46

Auction Rate Securities (ARS)
—

 
—

 
12

 
12

 
—

 
—

 
12

 
12

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
—

 
111

 
—

 
111

 
—

 
64

 
—

 
64

Foreign currency forward contracts
—

 
22

 
—

 
22

 
—

 
50

 
—

 
50

Investments in equity of other companies
53

 
—

 
—

 
53

 
—

 
—

 
—

 
—

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
—

 
(3
)
 
—

 
(3
)
 
—

 
(27
)
 
—

 
(27
)
Foreign currency forward contracts
—

 
(24
)
 
—

 
(24
)
 
—

 
(35
)
 
—

 
(35
)
Written option liabilities(a)
—

 
—

 
(198
)
 
(198
)
 
—

 
—

 
(162
)
 
(162
)
Contingent consideration liability(b)
—

 
—

 
(8
)
 
(8
)
 
—

 
—

 
(8
)
 
(8
)

(a)
Includes $69 million and $18 million in accrued expenses and $129 million and $144 million in other liabilities as of June 30, 2014 and December 31, 2013, respectively.
(b)
The contingent consideration liability is included in other liabilities.

As further described in "Note 10. Financial Instrument and Fair Value Measurement" in our 2013 Form 10-K, our fair value estimates use inputs that are either (1) quoted prices for identical assets or liabilities in active markets (Level 1 inputs), (2) observable prices for similar assets or liabilities in active markets or for identical or similar assets or liabilities in markets that are not active (Level 2 inputs) or (3) unobservable inputs (Level 3).
The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements:
 
2014
 
2013
Dollars in Millions
ARS
 
Contingent consideration liability
 
Written option liabilities
 
ARS and FRS(a)
 
Contingent consideration liability
 
Written option liabilities
Fair value at January 1
$
12

 
$
(8
)
 
$
(162
)
 
$
31

 
$
(8
)
 
$
(18
)
Additions from new alliances
—

 
—

 
—

 
—

 
—

 
(144
)
Changes in fair value
—

 
—

 
(36
)
 
—

 
—

 
—

Fair value at June 30
$
12

 
$
(8
)
 
$
(198
)
 
$
31

 
$
(8
)
 
$
(162
)

(a)
FRS: Floating Rate Securities

Available-for-sale Securities

The following table summarizes available-for-sale securities:
 
Dollars in Millions
Amortized
Cost
 
Gross
Unrealized
Gain in
Accumulated
OCI
 
Gross
Unrealized
Loss in
Accumulated
OCI
 
Fair Value
 
 
June 30, 2014
 
 
 
 
 
 
 
 
Certificates of deposit
$
1,813

 
$
—

 
$
—

 
$
1,813

 
Commercial paper
200

 
—

 
—

 
200

 
Corporate debt securities
4,592

 
51

 
(3
)
 
4,640

 
ARS
9

 
3

 
—

 
12

 
Investments in equity of other companies
41

 
18

 
(6
)
 
53

 
Total
$
6,655

 
$
72

 
$
(9
)
 
$
6,718

 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
Certificates of deposit
$
122

 
$
—

 
$
—

 
$
122

 
Corporate debt securities
4,401

 
44

 
(13
)
 
4,432

 
ARS
9

 
3

 
—

 
12

 
Total
$
4,532

 
$
47

 
$
(13
)
 
$
4,566



Available-for-sale securities included in current marketable securities were $2,789 million as of June 30, 2014 and $819 million as of December 31, 2013. Non-current available-for-sale corporate debt securities maturing within five years were $3,864 million as of June 30, 2014. ARS maturing beyond 10 years were $12 million as of June 30, 2014. Investments in equity of other companies of $53 million are included in other assets as of June 30, 2014.

Fair Value Option for Financial Assets

The Company invests in equity and fixed income funds that are designed to offset the changes in fair value of certain employee retirement benefits. Investments in equity and fixed income funds are included in current marketable securities and were $94 million and $10 million, respectively, as of June 30, 2014 and $74 million and $46 million, respectively, as of December 31, 2013. Investment income resulting from the change in fair value for the investments in equity and fixed income funds was not significant.

Qualifying Hedges
The following table summarizes the fair value of outstanding derivatives:
 
 
 
June 30, 2014
 
December 31, 2013
Dollars in Millions
Balance Sheet Location
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
Other assets
 
$
1,173

 
$
111

 
$
673

 
$
64

Interest rate swap contracts
Other liabilities
 
1,150

 
(3
)
 
1,950

 
(27
)
Foreign currency forward contracts
Prepaid expenses and other
 
187

 
17

 
301

 
44

Foreign currency forward contracts
Other assets
 
187

 
5

 
100

 
6

Foreign currency forward contracts
Accrued expenses
 
710

 
(22
)
 
704

 
(31
)
Foreign currency forward contracts
Other liabilities
 
109

 
(2
)
 
263

 
(4
)


Cash Flow Hedges — Foreign currency forward contracts are primarily utilized to hedge forecasted intercompany inventory purchase transactions in certain foreign currencies. These contracts are designated as cash flow hedges with the effective portion of changes in fair value being temporarily reported in accumulated other comprehensive loss and recognized in earnings when the hedged item affects earnings. The net losses on foreign currency forward contracts are expected to be reclassified to cost of products sold within the next two years. The notional amount of outstanding foreign currency forward contracts was primarily attributed to the Euro ($601 million) and Japanese yen ($319 million) at June 30, 2014.

Cash flow hedge accounting is discontinued when the forecasted transaction is no longer probable of occurring on the originally forecasted date, or 60 days thereafter, or when the hedge is no longer effective. Assessments to determine whether derivatives designated as qualifying hedges are highly effective in offsetting changes in the cash flows of hedged items are performed at inception and on a quarterly basis. Any ineffective portion of the change in fair value is included in current period earnings. The earnings impact related to discontinued cash flow hedges and hedge ineffectiveness was not significant during the six months ended June 30, 2014 and 2013.

Net Investment Hedges — Non-U.S. dollar borrowings of €541 million ($738 million) are designated to hedge the foreign currency exposures of the net investment in certain foreign affiliates. These borrowings are designated as net investment hedges and recognized in long-term debt. The effective portion of foreign exchange gains or losses on the remeasurement of the debt is recognized in the foreign currency translation component of accumulated other comprehensive loss with the related offset in long-term debt.

Fair Value Hedges — Fixed-to-floating interest rate swap contracts are designated as fair value hedges and are used as part of an interest rate risk management strategy to create an appropriate balance of fixed and floating rate debt. The swaps and underlying debt for the benchmark risk being hedged are recorded at fair value. When the underlying swap is terminated prior to maturity, the fair value basis adjustment to the underlying debt instrument is amortized into earnings as an adjustment to interest expense over the remaining term of the debt.

Fixed-to-floating interest rate swap contracts were executed in 2014 to convert $200 million notional amount from fixed rate to variable rate debt.

Long-term debt and the current portion of long-term debt includes:
Dollars in Millions
June 30,
2014
 
December 31,
2013
Principal Value
$
6,959

 
$
7,593

Adjustments to Principal Value:
 
 
 
Fair value of interest rate swap contracts
108

 
37

Unamortized basis adjustment from interest rate swap contract terminations
365

 
442

Unamortized bond discounts
(60
)
 
(64
)
Total
$
7,372

 
$
8,008

 
 
 
 
Current portion of long-term debt(a)
$
—

 
$
27

Long-term debt
7,372

 
7,981



(a)
Included in liabilities related to assets held-for-sale at December 31, 2013.

The fair value of debt was $8,011 million at June 30, 2014 and $8,487 million at December 31, 2013 and was valued using Level 2 inputs. Interest payments were $89 million and $105 million for the six months ended June 30, 2014 and 2013, respectively, net of amounts related to interest rate swap contracts.

No commercial paper borrowings were outstanding as of June 30, 2014.

The following information pertains to the outstanding 5.45% Notes due 2018 that were redeemed in February 2014:
 
Six Months Ended
Dollars in Millions
June 30, 2014
Principal amount
$
582

Carrying value
633

Debt redemption price
676

Notional amount of interest rate swap contracts terminated
500

Interest rate swap contract termination payments
(4
)
Total loss
45