Financial instruments include cash and cash equivalents, marketable securities, accounts receivable and payable, debt instruments and derivatives. Due to their short-term maturity, the carrying amount of accounts receivables and payable approximate fair value. Cash equivalents primarily consist of highly liquid investments with original maturities of three months or less at the time of purchase and are recorded at cost, which approximates fair value.

BMS has exposure to market risk due to changes in currency exchange rates and interest rates. As a result, 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 initial and periodic assessments of the effectiveness in 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.

All financial instruments, including derivatives, 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 is 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. Under the terms of the agreements, posting of collateral is not required by any party whether derivatives are in an asset or liability position.

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

Level 1 inputs utilize quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. These instruments include U.S. treasury securities.

Level 2 inputs include observable prices for similar instruments, quoted prices for identical or similar instruments in markets that are not active, and other observable inputs that can be corroborated by market data for substantially the full term of the assets or liabilities. These instruments include corporate debt securities, commercial paper, Federal Deposit Insurance Corporation (FDIC) insured debt securities, certificates of deposit, money market funds, foreign currency forward contracts, interest rate swap contracts, equity funds and fixed income funds. Additionally, certain corporate debt securities utilize a third-party matrix-pricing model that uses 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 and are valued at the respective net asset value of the underlying investments. There were no significant unfunded commitments or restrictions on redemptions related to equity and fixed income funds as of June 30, 2012. Level 2 derivative instruments are valued using London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR) yield curves, less credit valuation adjustments, and observable forward foreign exchange rates at the reporting date. Valuations of derivative contracts may fluctuate considerably from period-to-period due to volatility in underlying foreign currencies and underlying interest rates, which are driven by market conditions and the duration of the contract. Credit adjustment volatility may have a significant impact on the valuation of interest rate swaps due to changes in counterparty credit ratings and credit default swap spreads.

Level 3 unobservable inputs are used when little or no market data is available. Valuation models for the Auction Rate Security (ARS) and Floating Rate Securities (FRS) portfolio are based on expected cash flow streams and collateral values including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The fair value of ARS was determined using an internally developed valuation which was based in part on indicative bids received on the underlying assets of the security and other evidence of fair value. The ARS is a private placement security rated 'BBB' by Standard and Poor's and represents interests in insurance securitizations. Due to the current lack of an active market for FRS and the general lack of transparency into their underlying assets, other qualitative analysis is relied upon to value FRS including discussions with brokers and fund managers, default risk underlying the security and overall capital market liquidity.

The following table summarizes available-for-sale securities at June 30, 2012 and December 31, 2011:

				Gross		Gross
				Unrealized		Unrealized
				Gain in		Loss in		Gain/(Loss)
		Amortized		Accumulated		Accumulated		in		Fair		Fair Value
Dollars in Millions		Cost		OCI		OCI		Income		Value		Level 1		Level 2		Level 3
June 30, 2012
Marketable Securities
	Certificates of Deposit	$	621	$	-	$	-	$	-	$	621	$	-	$	621	$	-
	Corporate Debt Securities		4,405		69		(2)		-		4,472		-		4,472		-
	Commercial Paper		546		-		-		-		546		-		546		-
	U.S. Treasury Securities		150		1		-		-		151		151		-		-
	FDIC Insured Debt Securities		50		-		-		-		50		-		50		-
	Equity Funds		50		-		-		3		53		-		53		-
	Fixed Income Funds		45		-		-		1		46		-		46		-
	ARS		9		1		-		-		10		-		-		10
	FRS		21		-		(2)		-		19		-		-		19
	Total Marketable Securities	$	5,897	$	71	$	(4)	$	4	$	5,968	$	151	$	5,788	$	29

December 31, 2011
Marketable Securities
	Certificates of Deposit	$	1,051	$	-	$	-	$	-	$	1,051	$	-	$	1,051	$	-
	Corporate Debt Securities		2,908		60		(3)		-		2,965		-		2,965		-
	Commercial Paper		1,035		-		-		-		1,035		-		1,035		-
	U.S. Treasury Securities		400		2		-		-		402		402		-		-
	FDIC Insured Debt Securities		302		1		-		-		303		-		303		-
	ARS		80		12		-		-		92		-		-		92
	FRS		21		-		(3)		-		18		-		-		18
	Total Marketable Securities	$	5,797	$	75	$	(6)	$	-	$	5,866	$	402	$	5,354	$	110

The following table summarizes the classification of available for sale securities in the consolidated balance sheet:

Money market funds and other securities aggregating $2,512 million and $5,469 million at June 30, 2012 and December 31, 2011, respectively, were included in cash and cash equivalents and valued using Level 2 inputs. At June 30, 2012, $3,718 million of non-current available for sale corporate debt securities and FRS mature within five years.

The change in fair value for the investments in equity and fixed income funds are recognized in the results of operations and are designed to offset the changes in fair value of certain employee retirement benefits.

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

			June 30, 2012				December 31, 2011
					Fair Value				Fair Value
Dollars in Millions		Balance Sheet Location	Notional		(Level 2)		Notional		(Level 2)
Derivatives designated as hedging instruments:
	Interest rate swap contracts	Other assets	$	573	$	150	$	579	$	135
	Foreign currency forward contracts	Other assets		1,254		85		1,347		88
	Foreign currency forward contracts	Accrued expenses		348		(5)		480		(29)

Cash Flow Hedges − Foreign currency forward contracts are primarily utilized to hedge forecasted intercompany inventory purchase transactions in certain foreign currencies. These forward contracts are designated as cash flow hedges with the effective portion of changes in fair value being temporarily reported in accumulated other comprehensive income (OCI) and recognized in earnings when the hedged item affects earnings. As of June 30, 2012, significant outstanding foreign currency forward contracts were primarily attributed to Euro and Japanese yen foreign currency forward contracts in the notional amount of $746 million and $514 million, respectively.

The net gain on foreign currency forward contracts qualifying for cash flow hedge accounting is expected to be reclassified to cost of products sold within the next two years, including $78 million of pre-tax gains to be reclassified within the next 12 months. 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 three and six months ended June 30, 2012 and 2011.

Net Investment Hedges − Non-U.S. dollar borrowings of €541 million ($677 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 OCI 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 adjustment to long-term debt from interest rate swaps that qualify as fair value hedges and other items was as follows:

		June 30,		December 31,
Dollars in Millions		2012		2011
Principal Value		$	4,533	$	4,669
Adjustments to Principal Value:
	Fair value of interest rate swaps		150		135
	Unamortized basis adjustment from swap terminations		547		594
	Unamortized bond discounts		(21)		(22)
Total		$	5,209	$	5,376

The fair value of long-term debt was $6,294 million at June 30, 2012 and $6,406 million at December 31, 2011 and was valued using Level 2 inputs. Interest payments were $56 million and $32 million for the three months ended June 30, 2012 and 2011, respectively, and $89 million and $63 million for the six months ended June 30, 2012 and 2011, respectively, net of amounts related to interest rate swap contracts.

During the second quarter of 2011, fixed-to-floating interest rate swap agreements of $800 million notional amount and €75 million notional amount were terminated generating total proceeds of $95 million (including accrued interest of $12 million). The basis adjustment from the swap terminations is amortized as interest expense over the remaining life of the underlying debt.

	Six Months Ended June 30,
Dollars in Millions	2012		2011
Principal amount	$	80	$	71
Carrying value		90		88
Repurchase price		109		78
Notional amount of interest rate swaps terminated		6		34
Swap termination proceeds		2		6
Total (gain)/loss		19		(10)