Derivative Instruments



	Gross Notional Amount		Fair Value of
	Gross Notional Amount		Current Assets⁽¹⁾		Current Liabilities⁽²⁾
As of February 28, 2019
Derivative instruments with hedge accounting designation
Cash flow currency hedges	$	235	$	—	$	(3	)

Derivative instruments without hedge accounting designation
Non-designated currency hedges	2,205		6		(3		)
Convertible notes settlement obligation⁽³⁾			—		(420		)
			6		(423		)

			$	6	$	(426	)

As of August 30, 2018
Derivative instruments with hedge accounting designation
Cash flow currency hedges	$	538	$	—	$	(13	)

Derivative instruments without hedge accounting designation
Non-designated currency hedges	1,919		14		(10		)
Convertible notes settlement obligation⁽³⁾			—		(167		)
			14		(177		)

			$	14	$	(190	)


⁽¹⁾	Included in receivables – other.


⁽²⁾	Included in accounts payable and accrued expenses – other for forward contracts and in current debt for convertible notes settlement obligations.


⁽³⁾	Notional amounts of convertible notes settlement obligations as of February 28, 2019 and August 30, 2018 were 35 million and 3 million shares of our common stock, respectively.

Derivative Instruments with Hedge Accounting Designation

We utilize currency forward contracts that generally mature within 12 months to hedge our exposure to changes in currency exchange rates. Currency forward contracts are measured at fair value based on market-based observable inputs including currency exchange spot and forward rates, interest rates, and credit-risk spreads (Level 2). We do not use derivative instruments for speculative purposes.

Cash Flow Hedges: We utilize cash flow hedges for our exposure from changes in currency exchange rates for certain capital expenditures. For derivative instruments designated as cash flow hedges, the effective portion of the realized and unrealized gains or losses on derivatives is included as a component of accumulated other comprehensive income. Amounts in accumulated other comprehensive income are reclassified into earnings in the same line items and in the same periods in which the underlying transactions affect earnings. For the periods presented prior to the second quarter of 2018, the ineffective and excluded portion of the realized and unrealized gain or loss was included in other non-operating income (expense). As a result of adopting ASU 2017-12, beginning in the second quarter of 2018, the excluded portion of such amounts is included in the same line item in which the underlying transactions affect earnings and the ineffective portion of the realized and unrealized gains or losses on derivatives is included as a component of accumulated other comprehensive income.

We recognized gains of $7 million and losses of $6 million for the second quarter and first six months of 2019, respectively, and gains of $21 million and $17 million for the second quarter and first six months of 2018, respectively, in accumulated other comprehensive income from the effective portion of cash flow hedges. Neither the amount excluded from hedge effectiveness nor the reclassifications from accumulated other comprehensive income to earnings were material in the second quarters or first six months of 2019 or 2018. The amounts from cash flow hedges included in accumulated other comprehensive income that are expected to be reclassified into earnings in the next 12 months were also not material.

Fair Value Hedges: During the second quarter of 2018, we utilized fair value hedges to hedge our exposure to changes in fair values from the changes in currency exchange rates for certain monetary assets and liabilities. Other non-operating income (expense) for the second quarter of 2018 included gains of $56 million from the change in fair value attributed to changes in the undiscounted spot rate which offset the losses on the remeasurement of the hedged assets and liabilities, and losses of $19 million from the amortization of amounts excluded from hedge effectiveness of fair value hedges. Amounts recorded to other comprehensive income (loss) for the second quarter of 2018 were not material.

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives: We generally utilize a rolling hedge strategy with currency forward contracts that mature within three months to hedge our exposures of monetary assets and liabilities from changes in currency exchange rates. At the end of each reporting period, monetary assets and liabilities denominated in currencies other than the U.S. dollar are remeasured into U.S. dollars and the associated outstanding forward contracts are marked to market. Currency forward contracts are valued at fair values based on the middle of bid and ask prices of dealers or exchange quotations (Level 2). Realized and unrealized gains and losses on derivative instruments without hedge accounting designation as well as the changes in the underlying monetary assets and liabilities from changes in currency exchange rates are included in other non-operating income (expense). For derivative instruments without hedge accounting designation, we recognized gains of $11 million in the second quarter of 2019, losses of $11 million in the first quarter of 2019, and gains of $50 million and $52 million in the second quarter and first six months of 2018, respectively.

Convertible Notes Settlement Obligations: For settlement obligations associated with our convertible notes subject to mark-to-market accounting treatment, the fair values of the underlying derivative settlement obligations were initially determined using the Black-Scholes option valuation model (Level 2), which requires inputs of stock price, expected stock-price volatility, estimated option life, risk-free interest rate, and dividend rate. The subsequent measurement amounts were based on the volume-weighted-average trading price of our common stock (Level 2). (See "Debt" note.) We recognized losses of $82 million and $66 million in the second quarter and first six months of 2019, respectively, and losses of $20 million and $24 million for the second quarter and first six months of 2018, respectively, in other non-operating income (expense), net for the changes in fair value of the derivative settlement obligations.