Financial Instruments, Derivatives and Fair Value Measures

6 Months Ended

Jun. 30, 2012

Financial Instruments, Derivatives and Fair Value Measures

Financial Instruments, Derivatives and Fair Value Measures

Note 9 — Financial Instruments, Derivatives and Fair Value Measures

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, totaling $398 million and $1.6 billion at June 30, 2012 and December 31, 2011, respectively, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value.  Accumulated gains and losses as of June 30, 2012 will be included in Cost of products sold at the time the products are sold, generally through the next twelve months.  The amount of hedge ineffectiveness was not significant in 2012 and 2011.

Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity.  For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, in exchange for primarily U.S. dollars and other European currencies.  For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar, European currencies and Japanese yen.  At June 30, 2012 and December 31, 2011, Abbott held $16.7 billion and $15.7 billion, respectively, of such foreign currency forward exchange contracts.

Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $670 million and approximately $680 million as of June 30, 2012 and December 31, 2011, respectively.  Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.

Abbott is a party to interest rate swap contracts totaling $6.8 billion at June 30, 2012 and at December 31, 2011 to manage its exposure to changes in the fair value of fixed-rate debt.  These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt.  Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.  No hedge ineffectiveness was recorded in income in 2012 or 2011 for these hedges.

The following table summarizes the amounts and location of certain derivative financial instruments as of June 30, 2012 and December 31, 2011:

	Fair Value - Assets					Fair Value - Liabilities
(dollars in millions)	June 30 2012		Dec. 31 2011		Balance Sheet Caption	June 30 2012		Dec. 31 2011		Balance Sheet Caption
Interest rate swaps designated as fair value hedges	$	681	$	598	Deferred income taxes and other assets	$	—	$	—	n/a
Foreign currency forward exchange contracts —
Hedging instruments	34		115		Prepaid expenses, deferred income taxes, and other receivables	—		2		Other accrued liabilities
Others not designated as hedges	99		165			118		179
Debt designated as a hedge of net investment in a foreign subsidiary	—		—		n/a	670		680		Short-term borrowings
	$	814	$	878		$	788	$	861

The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and the amounts and location of income (expense) and gain (loss) reclassified into income in the second quarter and first six months of 2012 and 2011 and for certain other derivative financial instruments.  The amount of hedge ineffectiveness was not significant in 2012 and 2011 for these hedges.

	Gain (loss) Recognized in Other Comprehensive Income (loss)												Income (expense) and Gain (loss) Reclassified into Income
	Three Months Ended June 30						Six Months Ended June 30						Three Months Ended June 30					Six Months Ended June 30					Income Statement
(dollars in millions)	2012			2011			2012			2011			2012		2011			2012		2011			Caption
Foreign currency forward exchange contracts designated as cash flow hedges	$	40		$	(54	)	$	(4	)	$	(76	)	$	33	$	(14	)	$	48	$	43		Cost of products sold
Debt designated as a hedge of net investment in a foreign subsidiary	(25		)	(20		)	10			(10		)	n/a		n/a			n/a		n/a			n/a
Interest rate swaps designated as fair value hedges	n/a			n/a			n/a			n/a			93		127			83		91			Interest expense
Foreign currency forward exchange contracts not designated as hedges	n/a			n/a			n/a			n/a			101		11			117		(90		)	Net foreign exchange loss (gain)

The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.

The carrying values and fair values of certain financial instruments as of June 30, 2012 and December 31, 2011 are shown in the table below. The carrying values of all other financial instruments approximate their estimated fair values.  The counterparties to financial instruments consist of select major international financial institutions.  Abbott does not expect any losses from nonperformance by these counterparties.

	June 30 2012						December 31 2011
(dollars in millions)	Carrying Value			Fair Value			Carrying Value			Fair Value
Long-term Investment Securities:
Equity securities	$	329		$	329		$	317		$	317
Other	61			47			61			42
Total Long-term Debt	(13,023		)	(15,328		)	(13,067		)	(15,129		)
Foreign Currency Forward Exchange Contracts:
Receivable position	133			133			280			280
(Payable) position	(118		)	(118		)	(181		)	(181		)
Interest Rate Hedge Contracts	681			681			598			598

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

			Basis of Fair Value Measurement
(dollars in millions)	Outstanding Balances		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
June 30, 2012:
Equity securities	$	106	$	106	$	—	$	—
Interest rate swap derivative financial instruments	681		—		681		—
Foreign currency forward exchange contracts	133		—		133		—
Total Assets	$	920	$	106	$	814	$	—
Fair value of hedged long-term debt	$	7,452	$	—	$	7,452	$	—
Foreign currency forward exchange contracts	118		—		118		—
Contingent consideration related to business combinations	301		—		—		301
Total Liabilities	$	7,871	$	—	$	7,570	$	301
December 31, 2011:
Equity securities	$	93	$	93	$	—	$	—
Interest rate swap derivative financial instruments	598		—		598		—
Foreign currency forward exchange contracts	280		—		280		—
Total Assets	$	971	$	93	$	878	$	—
Fair value of hedged long-term debt	$	7,427	$	—	$	7,427	$	—
Foreign currency forward exchange contracts	181		—		181		—
Contingent consideration related to business combinations	423		—		—		423
Total Liabilities	$	8,031	$	—	$	7,608	$	423

The fair value of the debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis.  The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money, exchange, payments and other changes in fair value.