Derivatives and Hedging

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging

Derivatives and Hedging

The Company is exposed to market risks, including changes in foreign currency exchange rates and interest rates. To manage the risk related to these exposures, the Company enters into various derivative instruments that reduce these risks by creating offsetting exposures. The Company does not enter into derivative transactions for trading or speculative purposes.

Foreign Exchange Risk Management

The Company is exposed to foreign exchange risk when it earns revenues, pays expenses, or enters into monetary intercompany transfers denominated in a currency that differs from its functional currency, or other transactions that are denominated in a currency other than its functional currency. The Company uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows. These exposures are hedged, on average, for less than two years.

The Company also uses foreign exchange derivatives, typically forward contracts and options, to hedge its net investments in foreign operations for up to two years in the future and to manage the currency exposure of the Company's global liquidity profile, including monetary assets or liabilities that are denominated in a non-functional currency of an entity, for up to one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income in the Consolidated Statements of Income.

Interest Rate Risk Management

The Company holds variable-rate short-term brokerage and other operating deposits. The Company uses interest rate derivatives, typically swaps, to reduce its exposure to the effects of interest rate fluctuations on the forecasted interest receipts from these deposits for up to two years in the future.

Certain derivatives also give rise to credit risks from the possible non-performance by counterparties. The credit risk at the balance sheet date is generally limited to the fair value of those contracts that are favorable to the Company. The Company has reduced its credit risk by (1) using International Swaps and Derivatives Association master agreements, collateral and credit support arrangements, (2) entering into non-exchange-traded derivatives with highly-rated major financial institutions and (3) using exchange-traded instruments. The Company monitors the creditworthiness of, and exposure to, its counterparties. As of December 31, 2014, all net derivative positions were free of credit risk contingent features. The Company has not received or pledged any collateral related to derivative arrangements as of December 31, 2014.

The notional and fair values of derivative instruments are as follows (in millions):

	Notional Amount				Derivative Assets (1)				Derivative Liabilities (2)
As of December 31	2014		2013		2014		2013		2014		2013
Derivatives accounted for as hedges:
Interest rate contracts	$	—	$	171	$	—	$	9	$	—	$	—
Foreign exchange contracts	1,200		1,191		46		71		58		93
Total	1,200		1,362		46		80		58		93
Derivatives not accounted for as hedges:
Foreign exchange contracts (3)	165		215		—		—		—		—
Total	$	1,365	$	1,577	$	46	$	80	$	58	$	93

(1) Included within Other current assets ($24 million in 2014 and $46 million in 2013, respectively) or Other non-current assets ($22 million in 2014 and $34 million in 2013, respectively)

(2) Included within Other current liabilities ($52 million in 2014 and $51 million in 2013, respectively) or Other non-current liabilities ($6 million in 2014 and $42 million in 2013, respectively)

(3) These contracts typically are for 30 day durations and executed close to the last day of the most recent reporting month, thereby resulting in nominal fair values at the balance sheet date.

Offsetting of financial assets and derivatives assets are as follows (in millions):

	Gross Amounts of Recognized Assets				Gross Amounts Offset in the Statement of Financial Position						Net Amounts of Assets Presented in the Statement of Financial Position (1)
	2014		2013		2014			2013			2014		2013
Derivatives accounted for as hedges:
Interest rate contracts	$	—	$	9	$	—		$	—		$	—	$	9
Foreign exchange contracts	46		71		(14		)	(30		)	32		41
Total	46		80		(14		)	(30		)	32		50
Derivatives not accounted for as hedges:
Foreign exchange contracts	—		—		—			—			—		—
Total	$	46	$	80	$	(14	)	$	(30	)	$	32	$	50

______________________________________________

(1) Included within Other current assets ($12 million in 2014 and $18 million in 2013, respectively) or Other non-current assets ($20 million in 2014 and $32 million in 2013, respectively)

Offsetting of financial liabilities and derivative liabilities are as follows (in millions):

	Gross Amounts of Recognized Liabilities				Gross Amounts Offset in the Statement of Financial Position						Net Amounts of Liabilities Presented in the Statement of Financial Position (2)
	2014		2013		2014			2013			2014		2013
Derivatives accounted for as hedges:
Interest rate contracts	$	—	$	—	$	—		$	—		$	—	$	—
Foreign exchange contracts	58		93		(14		)	(30		)	44		63
Total	58		93		(14		)	(30		)	44		63
Derivatives not accounted for as hedges:
Foreign exchange contracts	—		—		—			—			—		—
Total	$	58	$	93	$	(14	)	$	(30	)	$	44	$	63

______________________________________________

(2) Included within Other current liabilities ($40 million in 2014 and $23 million in 2013, respectively) or Other non-current liabilities ($4 million in 2014 and $40 million in 2013, respectively)

The amounts of derivative gains (losses) recognized in the Consolidated Financial Statements are as follows (in millions):

Year Ended December 31, 2014
Gain (Loss) recognized in Accumulated Other Comprehensive Loss:	Compensation and Benefits		Other General Expenses			Interest Expense		Other Income			Total
Cash flow hedges:
Interest rate contracts	$	—	$	—		$	—	$	—		$	—
Foreign exchange contracts	11		(3		)	—		(10		)	(2		)
Total	11		(3		)	—		(10		)	(2		)

Year Ended December 31, 2013
Gain (Loss) recognized in Accumulated Other Comprehensive Loss:	Compensation and Benefits			Other General Expenses		Interest Expense		Other Income		Total
Cash flow hedges:
Interest rate contracts	$	—		$	—	$	2	$	—	$	2
Foreign exchange contracts	(17		)	—		—		13		(4		)
Total	(17		)	—		2		13		(2		)

Year Ended December 31, 2012
Gain (Loss) recognized in Accumulated Other Comprehensive Loss:	Compensation and Benefits			Other General Expenses			Interest Expense		Other Income		Total
Cash flow hedges:
Interest rate contracts	$	—		$	—		$	—	$	—	$	—
Foreign exchange contracts	(8		)	(19		)	—		6		(21		)
Total	(8		)	(19		)	—		6		(21		)
Foreign net investment hedges:
Foreign exchange contracts	$	—		$	—		$	—	$	4	$	4

Year Ended December 31, 2014
Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion):	Compensation and Benefits			Other General Expenses		Interest Expense			Other Income			Total
Cash flow hedges:
Interest rate contracts	$	—		$	—	$	(1	)	$	—		$	(1	)
Foreign exchange contracts	(5		)	3		(10		)	(2		)	(14		)
Total	(5		)	3		(11		)	(2		)	(15		)

Year Ended December 31, 2013
Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion):	Compensation and Benefits			Other General Expenses			Interest Expense			Other Income		Total
Cash flow hedges:
Interest rate contracts	$	—		$	—		$	(1	)	$	—	$	(1	)
Foreign exchange contracts	(12		)	(9		)	(3		)	14		(10		)
Total	(12		)	(9		)	(4		)	14		(11		)

Year Ended December 31, 2012
Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion):	Compensation and Benefits			Other General Expenses			Interest Expense			Other Income			Total
Cash flow hedges:
Interest rate contracts	$	—		$	—		$	(1	)	$	—		$	(1	)
Foreign exchange contracts	(9		)	(16		)	—			(9		)	(34		)
Total	(9		)	(16		)	(1		)	(9		)	(35		)

The amount of gain (loss) recognized in the Consolidated Financial Statements is as follows (in millions):

	Twelve months ended December 31,
	Amount of Gain (Loss) Recognized in Income on Derivative (1)								Amount of Gain (Loss) Recognized in Income on Related Hedged Item
	2014			2013			2012		2014		2013		2012
Fair value hedges:
Foreign exchange contracts (2)	$	(9	)	$	(8	)	$	1	$	9	$	8	$	(1	)

(1) Included in interest expense

(2) Relates to fixed rate debt

The Company estimates that approximately $11 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

The amount of gain (loss) recognized in income on the ineffective portion of derivatives for 2014, 2013 and 2012 was not material.

The Company recorded a loss of $18 million and a loss of $18 million in Other income for foreign exchange derivatives not designated or qualifying as hedges for 2014 and 2013, respectively.