NOTE 4. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial Risk Management and Derivative Instruments

The Company is exposed to certain commodity, interest rate and foreign currency risks related to its ongoing business operations and uses derivative instruments to mitigate its exposure to these risks.

Commodity Price Risk Management

The Company may use commodity exchange traded futures and over-the-counter swap contracts to fix the price of a portion of its forecasted raw material requirements. Contract maturities, which are generally no longer than 2 years, are matched to the length of the raw material purchase contracts. Commodity purchase contracts are measured at fair value using market quotations obtained from commodity futures exchanges or commodity derivative dealers.

As of December 31, 2015, the notional amount of commodity derivatives was $43, of which $21 related to jet fuel swaps and $22 related to soybean oil futures. As of June 30, 2015, the notional amount of commodity derivatives was $47, of which $27 related to jet fuel swaps and $20 related to soybean oil futures.

Interest Rate Risk Management

The Company may also enter into over-the-counter interest rate derivative instruments to fix a portion of the benchmark interest rate prior to an anticipated issuance of fixed rate debt or to manage the Company's level of fixed and floating rate debt. The interest rate derivative instruments are measured at fair value using information quoted by U.S. government bond dealers.

As of both December 31, 2015 and June 30, 2015, the Company had no interest rate derivative instruments.

Foreign Currency Risk Management

The Company may also enter into certain over-the-counter derivative contracts to manage a portion of the Company's forecasted foreign currency exposure associated with the purchase of inventory. These foreign currency contracts generally have durations of no longer than 2 years. The foreign exchange contracts are measured at fair value using information quoted by foreign exchange dealers.

The notional amount of outstanding foreign currency forward contracts used by the Company's subsidiaries in Canada, Australia and New Zealand were $37, $39 and $7, respectively, as of December 31, 2015, and $64, $35 and $6, respectively, as of June 30, 2015.

Counterparty Risk Management and Derivative Contract Requirements

The Company utilizes a variety of financial institutions as counterparties for over-the counter derivative instruments. The Company enters into agreements governing the use of over-the-counter derivative instruments and sets internal limits on the aggregate over-the-counter derivative instrument positions held with each counterparty. Certain terms of these agreements require the Company or the counterparty to post collateral when the fair value of the derivative instrument exceeds contractually defined counterparty liability position limits. Of the $10 and $8 of the derivative instruments reflected in accrued liabilities and other liabilities as of December 31, 2015 and June 30, 2015, respectively, $9 and $8, respectively, contained such terms. As of both December 31, 2015 and June 30, 2015, neither the Company nor any counterparty was required to post any collateral as no counterparty liability position limits were exceeded.

Certain terms of the agreements governing the Company's over-the-counter derivative instruments require the credit ratings, as assigned by Standard & Poor's and Moody's to the Company and its counterparties, to remain at a level equal to or better than the minimum of an investment grade credit rating. If the Company's credit ratings were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions. As of both December 31, 2015 and June 30, 2015, the Company and each of its counterparties had been assigned investment grade credit ratings by both Standard & Poor's and Moody's.

Certain of the Company's exchange-traded futures contracts used for commodity price risk management include requirements for the Company to post collateral in the form of a cash margin account held by the Company's broker for trades conducted on that exchange. As of December 31, 2015 and June 30, 2015, the Company maintained cash margin balances related to exchange-traded futures contracts of $1 and $2, respectively, which are classified as other current assets on the condensed consolidated balance sheets.

Trust Assets

The Company has held interests in mutual funds and cash equivalents as part of trust assets related to certain of its nonqualified deferred compensation plans. These trusts represent variable interest entities for which the Company is considered the primary beneficiary, and therefore, trust assets are consolidated and included in other assets in the condensed consolidated balance sheets. The interests in mutual funds are measured at fair value using quoted market prices. The Company has designated these marketable securities as trading investments. The participants in the deferred compensation plans may select among certain mutual funds in which their compensation deferrals are invested in accordance with the terms of the plans and within the confines of the trusts which hold the marketable securities.

Fair Value Measurements

Financial assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets are required to be classified and disclosed in one of the following three categories of the fair value hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity's own assumptions.

As of December 31, 2015 and June 30, 2015, the Company's financial assets and liabilities that were measured at fair value on a recurring basis during the applicable periods included derivative financial instruments, which were classified as either Level 1 or Level 2, and trust assets to fund certain of the Company's nonqualified deferred compensation plans, which were classified as Level 1.

The following table summarizes the fair value of the Company's financial assets and liabilities for which disclosure of fair value is required:

				12/31/2015				6/30/2015
	Balance sheet classification	Fair value hierarchy level		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Investments including money market funds ^(a)	Cash and cash equivalents		1	$	234	$	234	$	212	$	212
Time deposits ^(a)	Cash and cash equivalents		2		79		79		84		84
Foreign exchange derivative contracts	Other current assets		2		5		5		1		1
Commodity purchase derivative contracts	Other current assets		1		1		1		-		-
Trust assets for nonqualified deferred
compensation plans	Other assets		1		47		47		38		38
				$	366	$	366	$	335	$	335
Liabilities
Notes and loans payable ^(b)	Notes and loans payable		2	$	500	$	500	$	95	$	95
Commodity purchase derivative contracts	Accrued liabilities		1		1		1		-		-
Commodity purchase derivative contracts	Accrued liabilities		2		8		8		8		8
Commodity purchase derivative contracts	Other liabilities		2		1		1		-		-
Long-term debt ^(c)	Other liabilities		2		1,796		1,848		2,096		2,137
				$	2,306	$	2,358	$	2,199	$	2,240

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(a)		Cash equivalents are composed of time deposits and other interest bearing investments including money market funds with original maturity dates of 90 days or less. Cash equivalents are recorded at cost, which approximates fair value.
(b)		Short-term debt is composed of U.S. commercial paper and/or other similar short-term debts issued by non-U.S. subsidiaries, all of which are recorded at cost, which approximates fair value.
(c)		Long-term debt, which is recorded at cost, includes current maturities. The fair value of long-term debt was determined using secondary market prices quoted by corporate bond dealers, and was classified as Level 2.

Commodity, Interest Rate and Foreign Exchange Derivatives

The Company designates its commodity forward and future contracts for forecasted purchases of raw materials, interest rate forward contracts for forecasted interest payments, and foreign currency forward contracts for forecasted purchases of inventory as cash flow hedges.

The effects of derivative instruments designated as hedging instruments on comprehensive income and net earnings were as follows:

	Gains (losses) recognized in comprehensive income
	Three Months Ended						Six Months Ended
	12/31/2015			12/31/2014			12/31/2015			12/31/2014
Commodity purchase derivative contracts	$	-		$	(10	)	$	(7	)	$	(16	)
Interest rate derivative contracts		-			(9	)		-			(12	)
Foreign exchange derivative contracts		(2	)		1			5			5
Total	$	(2	)	$	(18	)	$	(2	)	$	(23	)

	Gains (losses) reclassified from accumulated other comprehensive net loss and recognized in net earnings
	Three Months Ended						Six Months Ended
	12/31/2015			12/31/2014			12/31/2015			12/31/2014
Commodity purchase derivative contracts	$	(3	)	$	-		$	(5	)	$	-
Interest rate derivative contracts		(1	)		(1	)		(3	)		(3	)
Foreign exchange derivative contracts		(1	)		1			-			-
Total	$	(5	)	$	-		$	(8	)	$	(3	)

The gains (losses) reclassified from accumulated other comprehensive net loss and recognized in net earnings during the three and six months ended December 31, 2015 and 2014, for commodity purchase and foreign exchange contracts were included in cost of products sold. The gains (losses) reclassified from accumulated other comprehensive losses and recognized in net earnings during the three and six months ended December 31, 2015 and 2014, for interest rate contracts were included in interest expense.

The estimated amount of the existing net gain (loss) in accumulated other comprehensive net loss as of December 31, 2015, that is expected to be reclassified into net earnings within the next twelve months is $(12). Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During the three and six months ended December 31, 2015 and 2014, hedge ineffectiveness was not significant.