Financial Instruments, Derivatives and Fair Value Measures

9 Months Ended

Sep. 30, 2020

Financial Instruments, Derivatives and Fair Value Measures

Financial Instruments, Derivatives and Fair Value Measures

Note 10 — Financial Instruments, Derivatives and Fair Value Measures

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in exchange rates primarily for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, with gross notional amounts totaling $7.9 billion at September 30, 2020 and $6.8 billion at December 31, 2019, 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 September 30, 2020 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months.

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, 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 and European currencies.  At September 30, 2020 and December 31, 2019, Abbott held the gross notional amount of $8.9 billion and $9.1 billion, respectively, of such foreign currency forward exchange contracts.

Abbott has designated a yen-denominated, 5-year term loan of approximately $566 million and $546 million as of September 30, 2020 and December 31, 2019, respectively, as a hedge of the net investment in certain foreign subsidiaries.  The change in the value of the debt, which is due to changes in foreign exchange rates, is recorded in Accumulated other comprehensive income (loss), net of tax.

Abbott is a party to interest rate hedge contracts totaling approximately $2.9 billion at September 30, 2020 and December 31, 2019 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.

The following table summarizes the amounts and location of certain derivative financial instruments as of September 30, 2020 and December 31, 2019:

	Fair Value - Assets					Fair Value - Liabilities
	Sept. 30,		Dec. 31,			Sept. 30,		Dec. 31,
(in millions)	2020		2019		Balance Sheet Caption	2020		2019		Balance Sheet Caption
Interest rate swaps designated as fair value hedges	$	232	$	48	Deferred income taxes and other assets	$	—	$	—	Post-employment obligations, deferred income taxes and other long-term liabilities
Foreign currency forward exchange contracts:
Hedging instruments		89		110	Prepaid expenses and other receivables		241		56	Other accrued liabilities
Others not designated as hedges		37		38	Prepaid expenses and other receivables		62		33	Other accrued liabilities
Debt designated as a hedge of net investment in a foreign subsidiary		—		—	n/a		566		546	Long-term debt
	$	358	$	196		$	869	$	635

The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges and certain other derivative financial instruments, as well as the amounts and location of income (expense) and gain (loss) reclassified into income for the three and nine months ended September 30, 2020 and 2019.

	Gain (loss) Recognized in Other								Income (expense) and Gain (loss)
	Comprehensive Income (loss)								Reclassified into Income
	Three Months				Nine Months				Three Months				Nine Months
	Ended Sept. 30				Ended Sept. 30				Ended Sept. 30				Ended Sept. 30
(in millions)	2020		2019		2020		2019		2020		2019		2020		2019		Income Statement Caption
Foreign currency forward exchange contracts designated as cash flow hedges	$	103	$	99	$	(35)	$	78	$	48	$	26	$	90	$	58	Cost of products sold
Debt designated as a hedge of net investment in a foreign subsidiary		(10)		—		(20)		—		—		—		—		—	n/a
Interest rate swaps designated as fair value hedges		n/a		n/a		n/a		n/a		(11)		35		184		174	Interest expense

Losses of $100 million and gains of $49 million were recognized in the three months ended September 30, 2020 and 2019, respectively, related to foreign currency forward exchange contracts not designated as a hedge.  Losses of $198 million and gains of $124 million were recognized in the nine months ended September 30, 2020 and 2019, respectively, related to foreign currency forward exchange contracts not designated as a hedge. These amounts are reported in the Condensed Consolidated Statement of Earnings on the Net foreign exchange (gain) loss line.

The carrying values and fair values of certain financial instruments as of September 30, 2020 and December 31, 2019 are shown in the following table.  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 non-performance by these counterparties.

	September 30, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
(in millions)	Value		Value		Value		Value
Long-term Investment Securities:
Equity securities	$	755	$	755	$	836	$	836
Other		48		48		47		47
Total Long-term Debt		(18,355)		(22,224)		(17,938)		(20,772)
Foreign Currency Forward Exchange Contracts:
Receivable position		126		126		148		148
(Payable) position		(303)		(303)		(89)		(89)
Interest Rate Hedge Contracts:
Receivable position		232		232		48		48

The fair value of the debt was determined based on significant other observable inputs, including current interest rates.

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
			Quoted		Significant
			Prices in		Other		Significant
	Outstanding		Active		Observable		Unobservable
(in millions)	Balances		Markets		Inputs		Inputs
September 30, 2020:
Equity securities	$	351	$	351	$	—	$	—
Interest rate swap derivative financial instruments		232		—		232		—
Foreign currency forward exchange contracts		126		—		126		—
Total Assets	$	709	$	351	$	358	$	—
Fair value of hedged long-term debt	$	3,070	$	—	$	3,070	$	—
Foreign currency forward exchange contracts		303		—		303		—
Contingent consideration related to business combinations		68		—		—		68
Total Liabilities	$	3,441	$	—	$	3,373	$	68
December 31, 2019:
Equity securities	$	357	$	357	$	—	$	—
Interest rate swap derivative financial instruments		48		—		48		—
Foreign currency forward exchange contracts		148		—		148		—
Total Assets	$	553	$	357	$	196	$	—
Fair value of hedged long-term debt	$	2,890	$	—	$	2,890	$	—
Foreign currency forward exchange contracts		89		—		89		—
Contingent consideration related to business combinations		68		—		—		68
Total Liabilities	$	3,047	$	—	$	2,979	$	68

The fair value of foreign currency forward exchange contracts is determined using a market approach, which utilizes values for comparable derivative instruments.  The fair value of 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 using significant other observable inputs.  The fair value of the contingent consideration was determined based on independent appraisals at the time of acquisition, adjusted for the time value of money and other changes in fair value.