Financial Instruments, Derivatives and Fair Value Measures

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments, Derivatives and Fair Value Measures

Note 11 — 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, primarily for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, with gross notional amounts totaling $7.3 billion at September 30, 2023 and $7.7 billion at December 31, 2022, 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, 2023 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, 2023 and December 31, 2022, Abbott held the gross notional amounts of $14.2 billion and $12.0 billion, respectively, of such foreign currency forward exchange contracts.

Abbott has designated a yen-denominated, 5-year term loan of approximately $401 million and $446 million as of September 30, 2023 and December 31, 2022, 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 with a notional amount totaling approximately $2.9 billion at September 30, 2023 and December 31, 2022 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 and non-derivative financial instruments as of September 30, 2023 and December 31, 2022:

	Fair Value - Assets					Fair Value - Liabilities
(in millions)	September 30, 2023		December 31, 2022		Balance Sheet Caption	September 30, 2023		December 31, 2022		Balance Sheet Caption
Interest rate swaps designated as fair value hedges:
Non-current	$	—	$	—	Deferred income taxes and other assets	$	158	$	136	Post-employment obligations, deferred income taxes and other long-term liabilities
Current	—		—		Prepaid expenses and other receivables	13		20		Other accrued liabilities
Foreign currency forward exchange contracts:
Hedging instruments	254		304		Prepaid expenses and other receivables	63		96		Other accrued liabilities
Others not designated as hedges	113		108		Prepaid expenses and other receivables	115		130		Other accrued liabilities
Debt designated as a hedge of net investment in a foreign subsidiary	—		—		n/a	401		446		Long-term debt
	$	367	$	412		$	750	$	828

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, 2023 and 2022.

	Gain (loss) Recognized in Other Comprehensive Income (loss)								Income (expense) and Gain (loss) Reclassified into Income
	Three Months Ended September 30				Nine Months Ended September 30				Three Months Ended September 30				Nine Months Ended September 30
(in millions)	2023		2022		2023		2022		2023		2022		2023		2022		Income Statement Caption
Foreign currency forward exchange contracts designated as cash flow hedges	$	125	$	350	$	152	$	442	$	22	$	79	$	211	$	149	Cost of products sold
Debt designated as a hedge of net investment in a foreign subsidiary	12		24		45		108		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		(18)		(85)		(15)		(253)		Interest expense

A gain of $60 million and a loss of $27 million were recognized in the three months ended September 30, 2023 and 2022, respectively, related to foreign currency forward exchange contracts not designated as a hedge. A loss of $4 million and a gain of $225 million were recognized in the first nine months ended September 30, 2023 and 2022, 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, 2023 and December 31, 2022 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, 2023				December 31, 2022
(in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term Investment Securities:
Equity securities	$	566	$	566	$	558	$	558
Other	222		222		208		208
Total Long-term Debt	(15,528)		(14,681)		(16,773)		(16,313)
Foreign Currency Forward Exchange Contracts:
Receivable position	367		367		412		412
(Payable) position	(178)		(178)		(226)		(226)
Interest Rate Hedge Contracts:
Receivable position	—		—		—		—
(Payable) position	(171)		(171)		(156)		(156)

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
(in millions)	Outstanding Balances		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2023:
Equity securities	$	304	$	304	$	—	$	—
Foreign currency forward exchange contracts	367		—		367		—
Total Assets	$	671	$	304	$	367	$	—
Fair value of hedged long-term debt	$	2,702	$	—	$	2,702	$	—
Interest rate swap derivative financial instruments	171		—		171		—
Foreign currency forward exchange contracts	178		—		178		—
Contingent consideration related to business combinations	109		—		—		109
Total Liabilities	$	3,160	$	—	$	3,051	$	109
December 31, 2022:
Equity securities	$	307	$	307	$	—	$	—
Foreign currency forward exchange contracts	412		—		412		—
Total Assets	$	719	$	307	$	412	$	—
Fair value of hedged long-term debt	$	2,691	$	—	$	2,691	$	—
Interest rate swap derivative financial instruments	156				156
Foreign currency forward exchange contracts	226		—		226		—
Contingent consideration related to business combinations	130		—		—		130
Total Liabilities	$	3,203	$	—	$	3,073	$	130

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. The decrease in the amount of contingent consideration from December 31, 2022 reflects the impact of projected timeline changes for events that will trigger payment of contingent consideration, partially offset by additional contingent consideration due to a recent business acquisition.