FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:



	June 30, 2015											December 31, 2014
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	$	—	$	3,780		$	—		$	3,780		$	—	$	5,051		$	—		$	5,051
Marketable securities:
Certificates of deposit	—		263			—			263			—		896			—			896
Commercial paper	—		100			—			100			—		—			—			—
Corporate debt securities	—		5,426			—			5,426			—		5,259			—			5,259
Equity funds	—		97			—			97			—		94			—			94
Fixed income funds	—		11			—			11			—		11			—			11
Auction Rate Securities (ARS)	—		—			12			12			—		—			12			12
Derivative assets:
Interest rate swap contracts	—		24			—			24			—		46			—			46
Forward starting interest rate swap contracts	—		53			—			53			—		—			—			—
Foreign currency forward contracts	—		83			—			83			—		118			—			118
Equity investments	64		—			—			64			36		—			—			36
Derivative liabilities:
Interest rate swap contracts	—		—			—			—			—		(3		)	—			(3		)
Foreign currency forward contracts	—		(13		)	—			(13		)	—		—			—			—
Written option liabilities	—		—			(93		)	(93		)	—		—			(198		)	(198		)
Contingent consideration liability	—		—			(8		)	(8		)	—		—			(8		)	(8		)

As further described in "Note 10. Financial Instruments and Fair Value Measurements" in our 2014 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 inputs).

The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements:



	2015								2014
Dollars in Millions	ARS		Written option liabilities			Contingent consideration liability			ARS		Written option liabilities			Contingent consideration liability
Fair value at January 1	$	12	$	(198	)	$	(8	)	$	12	$	(162	)	$	(8	)
Settlements	—		69			—			—		—			—
Changes in fair value	—		36			—			—		(36		)	—
Fair value at June 30	$	12	$	(93	)	$	(8	)	$	12	$	(198	)	$	(8	)

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
Dollars in Millions	Amortized Cost		Gross Unrealized Gain in Accumulated OCI		Gross Unrealized Loss in Accumulated OCI			Fair Value
June 30, 2015
Certificates of deposit	$	263	$	—	$	—		$	263
Commercial paper	100		—		—			100
Corporate debt securities	5,406		27		(7		)	5,426
ARS	9		3		—			12
Equity investments	47		20		(3		)	64
Total	$	5,825	$	50	$	(10	)	$	5,865

December 31, 2014
Certificates of deposit	$	896	$	—	$	—		$	896
Corporate debt securities	5,237		30		(8		)	5,259
ARS	9		3		—			12
Equity investments	14		22		—			36
Total	$	6,156	$	55	$	(8	)	$	6,203

Available-for-sale securities included in current marketable securities were $1,169 million as of June 30, 2015 and $1,759 million as of December 31, 2014. As of June 30, 2015, all non-current available-for-sale securities mature within five years, except for ARS. Equity investments of $64 million are included in other assets as of June 30, 2015.

Fair Value Option for Financial Assets

Investments in equity and fixed income funds offsetting changes in fair value of certain employee retirement benefits were included in current marketable securities. 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, 2015					December 31, 2014
Dollars in Millions	Balance Sheet Location	Notional		Fair Value			Notional		Fair Value
Derivatives designated as hedging instruments:
Interest rate swap contracts	Other assets	$	1,250	$	24		$	847	$	46
Interest rate swap contracts	Other liabilities	500		—			1,050		(3		)
Forward starting interest rate swap contracts	Other assets	750		53			—		—
Foreign currency forward contracts	Prepaid expenses and other	705		63			1,323		106
Foreign currency forward contracts	Other assets	117		20			100		12
Foreign currency forward contracts	Accrued expenses	675		(13		)	—		—

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 included in earnings when the hedged item affects earnings. The net gains 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 ($539 million) and the Japanese yen ($713 million) at June 30, 2015. The fair value of a foreign currency forward contract attributed to the Japanese yen (notional amount of $445 million) not designated as a cash flow hedge was $6 million and was included in accrued expenses at June 30, 2015.

In 2015, BMS entered into $750 million of forward starting interest rate contracts maturing in March 2017 to hedge the variability of probable forecasted interest expense. The contracts are designated as cash flow hedges with the effective portion of fair value changes included in other comprehensive income.

The earnings impact related to discontinued cash flow hedges and hedge ineffectiveness was not significant during the six months ended June 30, 2015 and 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.

Net Investment Hedges — Non-U.S. dollar borrowings of €950 million ($1,065 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 included in long-term debt. The effective portion of foreign exchange gains or losses on the remeasurement of the debt is included 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.

The notional amount of fixed-to-floating interest rate swap contracts terminated in 2015 was $147 million, generating proceeds of $28 million (including accrued interest of $1 million). Additional contracts were terminated in connection with debt redemptions in 2015.

Long-term debt includes:



Dollars in Millions	June 30, 2015			December 31, 2014
Principal Value	$	6,368		$	6,804
Adjustments to Principal Value:
Fair value of interest rate swap contracts	24			43
Unamortized basis adjustment from interest rate swap contract terminations	282			454
Unamortized bond discounts	(59		)	(59		)
Total	$	6,615		$	7,242

The fair value of debt was $6,803 million at June 30, 2015 and $8,045 million at December 31, 2014 and was valued using Level 2 inputs. Interest payments were $124 million and $89 million for the six months ended June 30, 2015 and 2014, respectively, net of amounts related to interest rate swap contracts.

On May 5, 2015, BMS issued senior unsecured notes in a registered public offering. The notes rank equally in right of payment with all of BMS's existing and future senior unsecured indebtedness. BMS may redeem the notes, in whole or in part, at any time at a predetermined redemption price. BMS also terminated forward starting interest rate swap contracts entered into during 2015, resulting in an unrealized loss in OCI. The following table summarizes the note issuances:



Amounts in Millions	Euro			U.S. dollars
Principal Value:
1.000% Euro Notes due 2025	€	575		$	643
1.750% Euro Notes due 2035	575			643
Total	€	1,150		$	1,286

Proceeds net of discount and deferred loan issuance costs	€	1,133		$	1,268

Forward starting interest rate swap contracts terminated:
Notional amount	€	500		$	559
Unrealized loss	(16		)	(18		)

During the second quarter of 2015, the Company repurchased $500 million of long-term debt through a cash tender offer and redeemed €1.0 billion ($1.1 billion) of long-term debt following the issuance of new senior unsecured notes. In connection with the debt redemption activities, certain interest rate swap contracts were entered into and terminated during the three months ended June 30, 2015. Debt redemption activity was as follows:



	Six Months Ended		Six Months Ended
Dollars in Millions	June 30, 2015		June 30, 2014
Principal amount	$	1,624	$	582
Carrying value	1,795		633
Debt redemption price	1,957		676
Notional amount of interest rate swap contracts terminated	735		500
Interest rate swap contract termination payments	11		4
Loss on debt redemption^(a)	180		45


(a)	Including acceleration of debt issuance costs, loss on interest rate lock contract and other related fees.