Financial instruments include cash and cash equivalents, marketable securities, accounts receivable and payable, debt instruments and derivatives. The carrying amount of receivables and accounts payable approximates fair value due to their short-term maturity.

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 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. 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 values of financial instruments are classified into one of the following categories:

Level 1 inputs utilize non-binding 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 utilize observable prices for similar instruments, non-binding 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, certificates of deposit, money market funds, foreign currency forward contracts, interest rate swap contracts, forward starting interest rate swap contracts, equity funds, fixed income funds and long-term debt. 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 March 31, 2013. Level 2 derivative instruments are valued using London Interbank Offered Rate and Euro Interbank Offered Rate 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 Security (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 the 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 as of March 31, 2013 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 markets liquidity. The fair value of written options to sell the assets of certain businesses in connection with collaboration agreements (see “—Note 3. Alliances and Collaborations” for further discussion) is based on an option pricing methodology that considers revenue and profitability projections, volatility, discount rates, and potential exercise price assumptions.

The following table summarizes available-for-sale securities at March 31, 2013 and December 31, 2012:

				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
March 31, 2013
	Certificates of Deposit	$	173	$	-	$	-	$	-	$	173	$	-	$	173	$	-
	Corporate Debt Securities		4,032		75		-		-		4,107		-		4,107		-
	Equity Funds		52		-		-		10		62		-		62		-
	Fixed Income Funds		47		-		-		-		47		-		47		-
	ARS		8		3		-		-		11		-		-		11
	FRS		21		-		(1)		-		20		-		-		20
	Total Marketable Securities	$	4,333	$	78	$	(1)	$	10	$	4,420	$	-	$	4,389	$	31

December 31, 2012
	Certificates of Deposit	$	34	$	-	$	-	$	-	$	34	$	-	$	34	$	-
	Corporate Debt Securities		4,305		72		-		-		4,377		-		4,377		-
	U.S. Treasury Securities		150		-		-		-		150		150		-		-
	Equity Funds		52		-		-		5		57		-		57		-
	Fixed Income Funds		47		-		-		-		47		-		47		-
	ARS		8		3		-		-		11		-		-		11
	FRS		21		-		(1)		-		20		-		-		20
	Total Marketable Securities	$	4,617	$	75	$	(1)	$	5	$	4,696	$	150	$	4,515	$	31

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

	March 31,		December 31,
Dollars in Millions	2013		2012
Current Marketable Securities	$	1,178	$	1,173
Non-current Marketable Securities		3,242		3,523
Total Marketable Securities	$	4,420	$	4,696

Money market funds and other securities aggregating $935 million and $1,288 million at March 31, 2013 and December 31, 2012, respectively, were included in cash and cash equivalents and valued using Level 2 inputs.

At March 31, 2013, $3,231 million of non-current available for sale corporate debt securities mature within five years. All auction rate securities mature beyond 10 years.

The change in fair value for the investments in equity and fixed income funds are recognized in other (income)/expense 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:

			March 31, 2013				December 31, 2012
					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	$	1,273	$	134	$	573	$	146
	Foreign currency forward contracts	Other assets		1,231		87		735		59
	Foreign currency forward contracts	Accrued expenses		286		(7)		916		(30)
	Forward starting interest rate swap contracts	Accrued expenses		80		-		-		-

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 gains on foreign currency forward contracts are expected to be reclassified to cost of products sold within the next two years, including $67 million of pre-tax gains to be reclassified within the next 12 months. The notional amount of outstanding foreign currency forward contracts was primarily attributed to the Euro ($839 million) and Japanese yen ($365 million) at March 31, 2013.

During 2013, BMS entered into an aggregate $80 million notional amount of forward starting interest rate swap contracts maturing in December 2013 with several financial institutions to hedge the variability of probable forecasted interest expense. The Company designated these contracts as cash flow hedges, with effective changes in fair value recorded net of tax in accumulated other comprehensive loss.

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 months ended March 31, 2013 and 2012.

Net Investment Hedges − Non-U.S. dollar borrowings of €541 million ($696 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.

During 2013, fixed-to-floating interest rate swap contracts were executed to convert $500 million notional amount of 0.875% Notes Due 2017 and $200 million notional amount of 5.45% Notes Due 2018 from fixed rate debt to variable rate debt.

		March 31,		December 31,
Dollars in Millions		2013		2012
Principal Value		$	6,609	$	6,631
Adjustments to Principal Value:
	Fair value of interest rate swap contracts		134		146
	Unamortized basis adjustment from interest rate swap contract terminations		490		509
	Unamortized bond discounts		(53)		(54)
Total		$	7,180	$	7,232

Current portion of long-term debt		$	658	$	664
Long-term debt			6,522		6,568

The fair value of debt was $8,112 million at March 31, 2013 and $8,285 million at December 31, 2012 and was valued using Level 2 inputs. Interest payments were $49 million and $33 million for the three months ended March 31, 2013 and 2012, respectively, net of amounts related to interest rate swap contracts.

The average amount of commercial paper outstanding was $211 million at a weighted-average interest rate of 0.14% during the three months ended March 31, 2013. The maximum month end amount of commercial paper outstanding was $600 million, which was outstanding at March 31, 2013. No commercial paper borrowings were outstanding at December 31, 2012.

	Three Months Ended March 31,
Dollars in Millions	2013		2012
Principal amount	$	-	$	80
Carrying value		-		90
Repurchase price		-		109
Notional amount of interest rate swaps terminated		-		6
Swap termination proceeds		-		2
Total loss		-		19