The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract.

The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.

Total notional amounts of the Company's derivative instruments as of December 28, 2013 and December 29, 2012 were as follows:

Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at December 28, 2013 and December 29, 2012, measured on a recurring basis.

Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.

The Company's calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company's calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of December 28, 2013 or December 29, 2012.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of December 28, 2013 and December 29, 2012:

Derivatives designated as hedging instruments:

		2013						2012
(millions)			Level 1		Level 2		Total			Level 1		Level 2		Total

Assets:
Foreign currency exchange contracts:
	Other current assets	$	-	$	7	$	7		$	-	$	4	$	4
Interest rate contracts (a):
	Other assets		-		-		-			-		64		64
Total assets		$	-	$	7	$	7		$	-	$	68	$	68

Liabilities:
Foreign currency exchange contracts:
	Other current liabilities	$	-	$	(8)	$	(8)		$	-	$	(3)	$	(3)
Interest rate contracts:
	Other liabilities		-		(59)		(59)			-		-		-
Commodity contracts:
	Other current liabilities		-		(9)		(9)			-		(11)		(11)
	Other liabilities		-		(19)		(19)			-		(27)		(27)
Total liabilities		$	-	$	(95)	$	(95)		$	-	$	(41)	$	(41)

(a)	The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $2.5 billion as of December 28, 2013 and $2.3 billion as of December 29, 2012:

Derivatives not designated as hedging instruments:

		2013							2012
(millions)			Level 1		Level 2		Total			Level 1		Level 2		Total

Assets:
Commodity contracts:
	Other current assets	$	3	$	-	$	3		$	5	$	-	$	5
Total assets		$	3	$	-	$	3		$	5	$	-	$	5

Liabilities:
Commodity contracts:
	Other current liabilities	$	(7)	$	-	$	(7)		$	(3)	$	-	$	(3)
Total liabilities		$	(7)	$	-	$	(7)		$	(3)	$	-	$	(3)

The effect of derivative instruments on the Consolidated Statement of Income for the years ended December 28, 2013 and December 29, 2012 were as follows:


Derivatives in fair value hedging relationships
											Location of gain		Gain (loss)
											(loss) recognized		recognized in
(millions)											in income		income (a)
													2013		2012

Foreign currency exchange contracts											OIE	$	2	$	(1)

Interest rate contracts											Interest expense		(5)		5
Total												$	(3)	$	4
(a)	Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives in cash flow hedging relationships
						Location of gain		Gain (loss)			Location of gain
			Gain (loss)			(loss) reclassified		reclassified from			(loss) recognized		Gain (loss)
(millions)			recognized in AOCI			from AOCI		AOCI into income			in income (a)		recognized in income(a)
			2013		2012			2013		2012			2013		2012

Foreign currency exchange contracts		$	13	$	-	COGS	$	10	$	(1)	OIE	$	-	$	-
Foreign currency exchange contracts			(2)		1	SGA expense		2		2	OIE		-		-
Interest rate contracts			-		-	Interest expense		4		4	N/A		-		-
Commodity contracts			-		(6)	COGS		(10)		(19)	OIE		-		-
Total		$	11	$	(5)		$	6	$	(14)		$	-	$	-
(a)	Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives in net investment hedging relationships
													Gain (loss)
(millions)													recognized in AOCI
													2013		2012

Foreign currency exchange contracts												$	-	$	5
Total												$	-	$	5

Derivatives not designated as hedging instruments
											Location of gain		Gain (loss)
											(loss) recognized		recognized in
(millions)											in income		income
													2013		2012

Foreign currency exchange contracts											OIE	$	3	$	-
Interest rate contracts											Interest expense		-		(1)
Commodity contracts											COGS		(37)		(10)
Total												$	(34)	$	(11)

During the next 12 months, the Company expects $5 million of net deferred losses reported in accumulated other comprehensive income (AOCI) at December 28, 2013 to be reclassified to income, assuming market rates remain constant through contract maturities.

Certain of the Company's derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company's credit rating falls below BB+ (S&P), or Baa1 (Moody's). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on December 28, 2013 was $87 million. If the credit-risk-related contingent features were triggered as of December 28, 2013, the Company would be required to post additional collateral of $78 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of December 28, 2013 triggered by credit-risk-related contingent features, however there was $9 million of collateral posted under the reciprocal agreements as discussed under the counterparty credit risk concentration below.

On November 4, 2013, the Company announced Project K, a four-year efficiency and effectiveness program. As part of Project K the Company will be consolidating the usage of and disposing certain long-lived assets, including manufacturing facilities and Corporate owned assets over the term of the program. In the fourth quarter of 2013, long-lived assets of $97 million, including manufacturing facilities in our U.S. Morning Foods and Asia Pacific reporting units and certain Corporate owned assets, were written down to an estimated fair value of $31 million due to Project K. The Company's calculation of the fair value of long-lived assets is based on Level 3 inputs, including market comparables, market trends and the condition of the assets. See Note 3 for more information.

During 2013, the Company recognized asset impairment charges totaling $4 million on the manufacturing facility in Australia closed during 2012 and currently held for sale.

In the fourth quarter of 2012, a $17 million asset impairment was recognized related the closure of a manufacturing facility in Australia. The long-lived assets and supplies associated with this facility were written down to fair value of $11 million. The Company's calculation of the fair value of long-lived assets was based on Level 3 inputs, including market comparables, market trends and the condition of the assets. See Note 3 for more information.

The following table presents level 3 assets that were measured at fair value on the Consolidated Balance Sheet on a nonrecurring basis as of December 28, 2013:
(millions)		Fair Value		Total Loss
Description:
Long-lived assets	$	38	$	(70)
Total	$	38	$	(70)

The following table presents level 3 assets that were measured at fair value on the Consolidated Balance Sheet on a nonrecurring basis as of December 29, 2012:
(millions)		Fair Value		Total Loss
Description:
Long-lived assets	$	11	$	(17)
Total	$	11	$	(17)

The carrying values of the Company's short-term items, including cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate fair value. The fair value of the Company's long-term debt, which are level 2 liabilities, is calculated based on broker quotes and was as follows at December 28, 2013:

The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.

Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. If these counterparties fail to perform according to the terms of derivative contracts, this could result in a loss to the Company. As of December 28, 2013, there were no counterparties that represented a significant concentration of credit risk to the Company.

For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. As of December 28, 2013, the Company had posted collateral of $9 million in the form of cash, which was reflected as an increase in accounts receivable on the Consolidated Balance Sheet.

Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company's major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 29% of consolidated trade receivables at December 28, 2013.

Refer to Note 1 for disclosures regarding the Company's accounting policies for derivative instruments.