4. Financial Instruments:

Fair Value Measurements

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3—Unobservable inputs for the asset or liability.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.

Certain non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. There were no material impairments of non-financial assets for the nine months ended September 30, 2018 and 2017, respectively.

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

Effective January 1, 2018, the company adopted the new FASB guidance on recognition, measurement, presentation and disclosure of financial instruments using the cumulative catch-up transition method. Under the new standard, the company measures equity investments at fair value with changes recognized in net income. Based on the method of adoption, prior year information has not been updated to conform with the new guidance. Refer to note 2, “Accounting Changes,” for further information.

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017.

(Dollars in millions)
At September 30, 2018	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,238	$	—	$	8,238	(6)
Money market funds	26		—		—		26

Total	$	26	$	8,238	$	—	$	8,263
Equity investments (2)	11		—		—		11
Debt securities - current (3)	—		2,932		—		2,932		(6)
Derivative assets (4)	9		685		—		694		(7)

Total assets	$	46	$	11,854	$	—	$	11,900

Liabilities:
Derivative liabilities (5)	$	2	$	413	$	—	$	415	(7)

(1)

Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2)

Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3)

Included within marketable securities in the Consolidated Statement of Financial Position.

(4)

The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at September 30, 2018 were $312 million and $382 million, respectively.

(5)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at September 30, 2018 were $122 million and $292 million, respectively.

(6)

Available-for-sale debt securities with carrying values that approximate fair value.

(7)

If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $285 million.

(Dollars in millions)
At December 31, 2017	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	8,066	$	—	$	8,066
Commercial paper	—		96		—		96
Money market funds	26		—		—		26
Canadian government securities	—		398		—		398

Total	$	26	$	8,560	$	—	$	8,586	(6)
Equity investments (2)	4		—		—		4
Debt securities - current (3)	—		608		—		608		(6)
Debt securities - noncurrent (2)	4		7		—		11
Derivative assets (4)	—		942		—		942		(7)

Total assets	$	33	$	10,117	$	—	$	10,151

Liabilities:
Derivative liabilities (5)	$	—	$	415	$	—	$	415	(7)

(1)

Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2)

Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(3)

U.S government securities reported as marketable securities in the Consolidated Statement of Financial Position.

(4)

The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2017 were $185 million and $757 million, respectively.

(5)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2017 were $377 million and $38 million, respectively.

(6)

Available-for-sale securities with carrying values that approximate fair value.

(7)

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.

Loans and Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At September 30, 2018 and December 31, 2017, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Long-Term Debt

Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was $35,989 million and $39,837 million, and the estimated fair value was $37,636 million and $42,264 million at September 30, 2018 and December 31, 2017, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

Available-for-sale Securities

Gross realized gains/losses from the sale of available-for-sale securities during the three and nine month periods ended September 30, 2018 and 2017 were immaterial. After-tax net unrealized holding gains/losses on available-for-sale securities that have been included in other comprehensive income/loss for the three and nine month periods ended September 30, 2018 and 2017 were immaterial.

The contractual maturities of substantially all available-for-sale debt securities are less than one year at September 30, 2018.

Derivative Financial Instruments

The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.

As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.

The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at September 30, 2018 and December 31, 2017 was $120 million and $126 million, respectively, for which no collateral was posted at either date. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in asset positions at September 30, 2018 and December 31, 2017 was $694 million and $942 million, respectively. This amount represents the maximum exposure to loss at the reporting date if the counterparties failed to perform as contracted. This exposure was reduced by $285 million and $255 million at September 30, 2018 and December 31, 2017, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at September 30, 2018 and December 31, 2017, this exposure was reduced by $11 million and $114 million of cash collateral, respectively. There were no non-cash collateral balances in U.S. Treasury securities at September 30, 2018 and December 31, 2017. At September 30, 2018 and December 31, 2017, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $398 million and $572 million, respectively. At September 30, 2018 and December 31, 2017, the net position related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $130 million and $160 million, respectively.

In the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. No amount was recognized in other receivables at September 30, 2018 or December 31, 2017 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral was $11 million and $114 million at September 30, 2018 and December 31, 2017, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Statement of Financial Position. No amount was rehypothecated at September 30, 2018 and December 31, 2017.

The company may employ derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.

A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At September 30, 2018 and December 31, 2017, the total notional amount of the company’s interest rate swaps was $9.9 billion and $9.1 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, 2018 and December 31, 2017 was approximately 4.3 years and 4.8 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at September 30, 2018 and December 31, 2017.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at September 30, 2018 and December 31, 2017.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments designated as net investment hedges was $6.4 billion and $7.0 billion, respectively. At September 30, 2018 and December 31, 2017, the weighted-average remaining maturity of these instruments was approximately 0.2 years at both periods.

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is four years. At September 30, 2018 and December 31, 2017, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $9.2 billion and $7.8 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, 2018 and December 31, 2017 was 0.7 years at both periods.

At September 30, 2018 and December 31, 2017, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $202 million and net gains of $27 million (before taxes), respectively, in AOCI. The company estimates that $199 million (before taxes) of deferred net gains on derivatives in AOCI at September 30, 2018, will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is approximately ten years. At September 30, 2018 and December 31, 2017, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $6.5 billion at both periods.

At September 30, 2018 and December 31, 2017, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net gains of $141 million and net gains of $42 million (before taxes), respectively, in AOCI. The company estimates that $202 million (before taxes) of deferred net gains on derivatives in AOCI at September 30, 2018, will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $7.6 billion and $11.5 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At September 30, 2018 and December 31, 2017, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.3 billion at both periods.

Other Risks

The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at September 30, 2018 and December 31, 2017.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at September 30, 2018 and December 31, 2017.

The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. At September 30, 2018 and December 31, 2017, the company did not have any derivative instruments relating to this program outstanding.

The following tables provide a quantitative summary of the derivative and non-derivative instrument-related risk management activity at September 30, 2018 and December 31, 2017, as well as for the three and nine months ended September 30, 2018 and 2017, respectively.

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	9/30/2018		12/31/2017		Classification	9/30/2018		12/31/2017
Designated as hedging instruments:
Interest rate contracts	Prepaid expenses and other current assets	$	—	$	2	Other accrued expenses and liabilities	$	11	$	—
	Investments and sundry assets	237		459		Other liabilities	145		34
Foreign exchange contracts	Prepaid expenses and other current assets	281		111		Other accrued expenses and liabilities	52		318
	Investments and sundry assets	145		298		Other liabilities	147		3

	Fair value of derivative assets	$	664	$	870	Fair value of derivative liabilities	$	356	$	355

Not designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	$	18	$	61	Other accrued expenses and liabilities	$	53	$	57
Equity contracts	Prepaid expenses and other current assets	12		12		Other accrued expenses and liabilities	6		3

	Fair value of derivative assets	$	30	$	72	Fair value of derivative liabilities	$	59	$	60

Total derivatives		$	694	$	942		$	415	$	415

Total debt designated as hedging instruments(1):
Short-term debt		N/A		N/A			$	—	$	—
Long-term debt		N/A		N/A			6,294		6,471

		N/A		N/A			$	6,294	$	6,471

Total		$	694	$	942		$	6,709	$	6,886

N/A - not applicable

(1)

Debt designated as hedging instruments are reported at carrying value.

At September 30, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges:

(Dollars in millions)

Line Item in the	Carrying Amount of the			Cumulative Amount of Fair Value Hedging Adjustment
Consolidated Statement of Financial Position	Hedged Item			Included in the Carrying
in which the Hedged Item is Included	Assets/(Liabilities)			Amount of Assets/(Liabilities)
Short-term debt	$	(1,539	)	$	10
Long-term debt	$	(8,567	)	$	(208	)(1)

(1)

Includes ($178) million of hedging adjustments on discontinued hedging relationships.

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

The total amounts of income and expense line items presented in the Consolidated Statement of Earnings in which the effects of fair value hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items, are as follows:

(Dollars in millions)									Other
For the three months	Cost of		Cost of		Cost of		SG&A		(Income) and			Interest
ended September 30, 2018:	Services		Sales		Financing		Expense		Expense			Expense
Total	$	8,040	$	1,625	$	287	$	4,363	$	275		$	191
Gains/(losses) of total hedge activity	1		8		15		47		(63		)	(21		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives						Being Hedged(2)
For the three months ended September 30:	Earnings Line Item	2018			2017			2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(27	)	$	(3	)	$	33	$	20
	Interest expense	(26		)	(3		)	33		20
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(55		)	(35		)	N/A		N/A
Equity contracts	SG&A expense	40			31			N/A		N/A

Total		$	(69	)	$	(10	)	$	66	$	41

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the three months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(46	)	$	(70	)	Interest expense	$	(36	)	$	(7	)	$	—	$	—
							Other (income) and expense	(8		)	64			—		(1		)
							Cost of sales	8			1			—		—
							Cost of services	1			20			—		—
							SG&A expense	7			(6		)	—		—
Instruments in net investment hedges(4):
Foreign exchange							Cost of financing	—			—			8		0
contracts	86			(507		)	Interest expense	—			—			9		8

Total	$	40		$	(577	)		$	(28	)	$	73		$	18	$	7

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for further information.

N/A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Financial Position and Consolidated Statement of Changes in Equity.

(1)

The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)

The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3)

The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)

Instruments in net investment hedges include derivative and non-derivative instruments.

(Dollars in millions)										Other
For the nine months	Cost of		Cost of			Cost of		SG&A		(Income) and			Interest
ended September 30, 2018:	Services		Sales			Financing		Expense		Expense			Expense
Total	$	25,519	$	5,216		$	846	$	14,665	$	968		$	530
Gains/(losses) of total hedge activity	29		(15		)	56		24		(449		)	(53		)

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on					Attributable to Risk
(Dollars in millions)	Statement of	Derivatives					Being Hedged(2)
For the nine months ended September 30:	Earnings Line Item	2018			2017		2018		2017
Derivative instruments in fair value hedges(1):
Interest rate contracts	Cost of financing	$	(138	)	$	37	$	170	$	22
	Interest expense	(128		)	34		157		20
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(148		)	74		N/A		N/A
Equity contracts	SG&A expense	38			88		N/A		N/A


Total		$	(377	)	$	233	$	327	$	42

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
(Dollars in millions)							Consolidated	Reclassified						Amounts Excluded from
For the nine months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2018			2017			Earnings Line Item	2018			2017			2018		2017
Derivative instruments in cash flow hedges:
Foreign exchange contracts	$	(134	)	$	(198	)	Interest expense	$	(108	)	$	(21	)	$	—	$	—
							Other (income) and expense	(301		)	275			—		2
							Cost of sales	(15		)	23			—		—
							Cost of services	29			47			—		—
							SG&A expense	(14		)	23			—		—
Instruments in net investment hedges(4):
Foreign exchange							Cost of financing	—			—			24		0
contracts	509			(1,513		)	Interest expense	—			—			25		34


Total	$	375		$	(1,712	)		$	(408	)	$	347		$	49	$	37

N/A - not applicable

(1)

(2)

(3)

The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)

Instruments in net investment hedges include derivative and non-derivative instruments.

For the three and nine months ending September 30, 2018 and 2017, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.