FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial instruments include cash and cash equivalents, marketable securities, accounts receivable and payable, debt instruments and derivatives.

Changes in exchange rates and interest rates create exposure to market risk. Certain derivative financial instruments are used when available on a cost-effective basis to hedge the underlying economic exposure. These instruments qualify as cash flow, net investment and fair value hedges upon meeting certain criteria, including effectiveness of offsetting hedged exposures. Changes in fair value of derivatives that do not qualify for hedge accounting are recognized in earnings as they occur. Derivative financial instruments are not used for trading purposes.

Financial instruments are subject to counterparty credit risk which is considered as part of the overall fair value measurement. Counterparty credit risk is monitored on an ongoing basis and mitigated by limiting amounts outstanding with any individual counterparty, utilizing conventional derivative financial instruments and only entering into agreements with counterparties that meet high credit quality standards. The consolidated financial statements would not be materially impacted if any counterparty failed to perform according to the terms of its agreement. Collateral is not required by any party whether derivatives are in an asset or liability position under the terms of the agreements.

Fair Value Measurements – The fair value of financial instruments are classified into one of the following categories:

Level 1 inputs utilize unadjusted quoted prices in active markets accessible at the measurement date for identical assets or liabilities. The fair value hierarchy provides the highest priority to Level 1 inputs.

Level 2 inputs utilize observable prices for similar instruments and quoted prices for identical or similar instruments in non-active markets. Additionally, certain corporate debt securities utilize a third-party matrix pricing model using significant inputs corroborated by market data for substantially the full term of the assets. Equity and fixed income funds are primarily invested in publicly traded securities valued at the respective net asset value of the underlying investments. Level 2 derivative instruments are valued using LIBOR yield curves, less credit valuation adjustments, and observable forward foreign exchange rates at the reporting date. Valuations of derivative contracts may fluctuate considerably from volatility in underlying foreign currencies and underlying interest rates driven by market conditions and the duration of the contract.

Level 3 unobservable inputs are used when little or no market data is available. There were no Level 3 financial assets or liabilities as of December 31, 2017 and 2016.

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



	December 31, 2017					December 31, 2016
Dollars in Millions	Level 1		Level 2			Level 1		Level 2
Cash and cash equivalents - Money market and other securities	$	—	$	4,728		$	—	$	3,532
Marketable securities:
Certificates of deposit	—		141			—		27
Commercial paper	—		50			—		750
Corporate debt securities	—		3,548			—		3,947
Equity funds	—		124			—		101
Fixed income funds	—		8			—		7
Derivative assets	—		13			—		75
Equity investments	67		—			24		—
Derivative liabilities	—		(52		)	—		(30		)

Equity investments not measured at fair value at year end and excluded from the above table were limited partnerships and other equity method investments of $66 million in 2017 and $37 million in 2016 and other equity investments without readily determinable fair values of $152 million in 2017 and $8 million in 2016. These amounts are included in Other assets.

Available-for-sale Securities

The following table summarizes available-for-sale securities:



	December 31, 2017									December 31, 2016
Dollars in Millions	Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value
Dollars in Millions	Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value
Certificates of deposit	$	141	$	—	$	—		$	141	$	27	$	—	$	—		$	27
Commercial paper	50		—		—			50		750		—		—			750
Corporate debt securities	3,555		3		(10		)	3,548		3,945		10		(8		)	3,947
Equity investments	31		37		(1		)	67		31		—		(7		)	24
	$	3,777	$	40	$	(11	)	$	3,806	$	4,753	$	10	$	(15	)	$	4,748

Financial assets measured using the fair value option
Equity and fixed income funds^(a)								132									108
Total								$	3,938								$	4,856



Dollars in Millions	December 31, 2017		December 31, 2016
Current marketable securities	$	1,391	$	2,113
Non-current marketable securities^(b)	2,480		2,719
Other assets^(c)	67		24
Total	$	3,938	$	4,856


(a)	The fair value option for financial assets was elected for investments in equity and fixed income funds and are included in current marketable securities. Changes in fair value were not significant.


(b)	All non-current marketable securities mature within five years as of December 31, 2017 and 2016.


(c)	Includes equity investments.

Qualifying Hedges and Non-Qualifying Derivatives

The following summarizes the fair value of outstanding derivatives:



	December 31, 2017									December 31, 2016
	Asset^(a)				Liability^(b)					Asset^(a)				Liability^(b)
Dollars in Millions	Notional		Fair Value		Notional		Fair Value			Notional		Fair Value		Notional		Fair Value
Derivatives designated as hedging instruments:
Interest rate swap contracts	$	—	$	—	$	755	$	(6	)	$	750	$	1	$	755	$	(3	)
Forward starting interest rate swap contracts	—		—		—		—			500		8		250		(11		)
Foreign currency forward contracts	944		12		489		(9		)	967		66		198		(9		)

Derivatives not designated as hedging instruments:
Foreign currency forward contracts	206		1		1,369		(37		)	106		—		360		(7		)


(a)	Included in prepaid expenses and other and other assets.


(b)	Included in accrued liabilities and pension and other liabilities.

Cash Flow Hedges — Foreign currency forward contracts are used to hedge certain forecasted intercompany inventory purchase transactions and certain other foreign currency transactions. The effective portion of changes in fair value for contracts designated as cash flow hedges are 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 net earnings (primarily included in cost of products sold) within the next two years. The notional amount of outstanding foreign currency forward contracts was primarily attributed to the euro ($1,904 million) and Japanese yen ($311 million) at December 31, 2017.

In 2015, BMS entered into $750 million of forward starting interest rate swap contracts maturing in March 2017 to hedge the variability of probable forecasted interest expense associated with potential future issuances of debt. BMS terminated the forward starting interest rate swap contracts in 2017 and the proceeds and related gain were not material. The contracts were 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 all periods presented. Cash flow hedge accounting is discontinued when the forecasted transaction is no longer probable of occurring within 60 days after the originally forecasted date 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.

Net Investment Hedges — Non-U.S. dollar borrowings of €950 million ($1,127 million) at December 31, 2017 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 loss on the remeasurement of euro debt was $134 million in 2017 and a gain of $48 million, and $80 million in 2016 and 2015, respectively, and were recorded 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 used as an interest rate risk management strategy to create an appropriate balance of fixed and floating rate debt. The contracts and underlying debt for the hedged benchmark risk are recorded at fair value. The effective interest rate for the contracts is one-month LIBOR (1.56% as of December 31, 2017) plus an interest rate spread ranging from 0.3% to 4.6%. When the underlying swap is terminated prior to maturity, the fair value basis adjustment to the underlying debt instrument is amortized as a reduction to interest expense over the remaining life of the debt.

The notional amount of fixed-to-floating interest rate swap contracts executed was $255 million in 2016. The notional amount of fixed-to-floating interest rate swap contracts terminated was $500 million in 2016 and $147 million in 2015 generating proceeds of $43 million in 2016 and $28 million in 2015 (including accrued interest). Additional contracts were terminated in connection with debt redemptions in 2015.

Debt Obligations

Short-term debt obligations include:



	December 31,
Dollars in Millions	2017		2016
Commercial paper	$	299	$	—
Non-U.S. short-term borrowings	512		109
Other	176		134
Current portion of long-term debt	—		749
Total	$	987	$	992

The average amount of commercial paper outstanding was $389 million at a weighted-average interest rate of 1.17% during 2017. The maximum amount of commercial paper outstanding was $1.3 billion with $299 million outstanding borrowings at December 31, 2017. There were no commercial paper borrowings in 2016.

Long-term debt and the current portion of long-term debt includes:



	December 31,
Dollars in Millions	2017			2016
Principal Value:
0.875% Notes due 2017	$	—		$	750
1.750% Notes due 2019	500			500
1.600% Notes due 2019	750			—
2.000% Notes due 2022	750			750
7.150% Notes due 2023	302			302
3.250% Notes due 2023	500			500
1.000% Euro Notes due 2025	682			601
6.800% Notes due 2026	256			256
3.250% Notes due 2027	750			—
1.750% Euro Notes due 2035	682			601
5.875% Notes due 2036	287			404
6.125% Notes due 2038	230			278
3.250% Notes due 2042	500			500
4.500% Notes due 2044	500			500
6.875% Notes due 2097	87			260
0% - 5.75% Other - maturing 2018 - 2024	59			59
Subtotal	6,835			6,261

Adjustments to Principal Value:
Fair value of interest rate swap contracts	(6		)	(2		)
Unamortized basis adjustment from swap terminations	227			287
Unamortized bond discounts and issuance costs	(81		)	(81		)
Total	$	6,975		$	6,465

Current portion of long-term debt	$	—		$	749
Long-term debt	6,975			5,716

The fair value of long-term debt was $7.5 billion and $6.9 billion at December 31, 2017 and 2016, respectively, and was estimated using Level 2 inputs which are based upon the quoted market prices for the same or similar debt instruments. The fair value of short-term borrowings approximates the carrying value due to the short maturities of the debt instruments.

Senior unsecured notes were issued in registered public offerings in 2017 and 2015. The notes rank equally in right of payment with all of BMS's existing and future senior unsecured indebtedness and are redeemable 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 other comprehensive income. The following table summarizes the issuance of long-term debt obligations in 2017 and 2015 (none in 2016):



	2017			2015
Amounts in Millions	U.S. dollars			Euro			U.S. dollars
Principal Value:
1.600% Notes due 2019	$	750		€	—		$	—
1.000% Euro Notes due 2025	—			575			643
3.250% Notes due 2027	750			—			—
1.750% Euro Notes due 2035	—			575			643
Total	$	1,500		€	1,150		$	1,286

Proceeds net of discount and deferred loan issuance costs	$	1,488		€	1,133		$	1,268

Forward starting interest rate swap contracts terminated:
Notional amount	$	750		€	500		$	559
Realized gain	6			—			—
Unrealized loss	(2		)	(16		)	(18		)

BMS repaid $750 million of 0.875% Notes at maturity in 2017. The following summarizes the debt redemption activity for 2017 and 2015 (none in 2016):



Dollars in Millions	2017		2015
Principal amount	$	337	$	1,624
Carrying value	366		1,795
Debt redemption price	474		1,957
Notional amount of interest rate swap contracts terminated	—		735
Interest rate swap termination payments	—		11
Loss on debt redemption^(a)	109		180


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

Interest payments were $215 million in 2017, $191 million in 2016 and $205 million in 2015 net of amounts received from interest rate swap contracts.

We currently have three separate revolving credit facilities totaling $5.0 billion from a syndicate of lenders. The facilities provide for customary terms and conditions with no financial covenants. Our 364 day $2.0 billion facility expires in March 2018 and our two $1.5 billion facilities were extended to October 2021 and July 2022. Our two $1.5 billion, five-year facilities are extendable annually by one year on the anniversary date with the consent of the lenders. No borrowings were outstanding under any revolving credit facility at December 31, 2017 or 2016.

Available financial guarantees provided in the form of stand-by letters of credit and performance bonds were $704 million at December 31, 2017. Stand-by letters of credit are issued through financial institutions in support of guarantees for various obligations. Performance bonds are issued to support a range of ongoing operating activities, including sale of products to hospitals and foreign ministries of health, bonds for customs, duties and value added tax and guarantees related to miscellaneous legal actions. A significant majority of the outstanding financial guarantees will expire within the year and are not expected to be funded.