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Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Note 8. Fair Value Measurements

Recurring Fair Value Measurements

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2019:



(dollars in millions)	Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total
Assets:
Other assets:
Fixed income securities	$	—	$	444	$	—	$	444
Interest rate swaps	—		849		—		849
Cross currency swaps	—		79		—		79
Total	$	—	$	1,372	$	—	$	1,372

Liabilities:
Other liabilities:
Interest rate swaps	$	—	$	212	$	—	$	212
Cross currency swaps	—		1,381		—		1,381
Forward starting interest rate swaps	—		886		—		886
Foreign exchange forwards	—		10		—		10
Total	$	—	$	2,489	$	—	$	2,489

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:



(dollars in millions)	Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total
Assets:
Other assets:
Fixed income securities	$	—	$	405	$	—	$	405
Interest rate swaps	—		3		—		3
Cross currency swaps	—		220		—		220
Interest rate caps	—		14		—		14
Total	$	—	$	642	$	—	$	642

Liabilities:
Other liabilities:
Interest rate swaps	$	—	$	813	$	—	$	813
Cross currency swaps	—		536		—		536
Forward starting interest rate swaps	—		60		—		60
Interest rate caps	—		4		—		4
Total	$	—	$	1,413	$	—	$	1,413


⁽¹⁾	Quoted prices in active markets for identical assets or liabilities


⁽²⁾	Observable inputs other than quoted prices in active markets for identical assets and liabilities


⁽³⁾	Unobservable pricing inputs in the market

Certain of our equity investments do not have readily determinable fair values and are excluded from the tables above. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer and are included in Investments in unconsolidated businesses in our condensed consolidated balance sheets. As of September 30, 2019 and December 31, 2018, the carrying amount of our investments without readily determinable fair values were $293 million and $248 million, respectively. During the three and nine months ended September 30, 2019, there were insignificant adjustments due to observable price changes and there were no impairment charges. Cumulative adjustments due to observable price changes and impairment charges were $50 million and insignificant, respectively.

Fixed income securities consist primarily of investments in municipal bonds. For fixed income securities that do not have quoted prices in active markets, we use alternative matrix pricing resulting in these debt securities being classified as Level 2.

Derivative contracts are valued using models based on readily observable market parameters for all substantial terms of our derivative contracts and thus are classified within Level 2. We use mid-market pricing for fair value measurements of our derivative instruments. Our derivative instruments are recorded on a gross basis.

We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2019 and 2018.

Fair Value of Short-term and Long-term Debt

The fair value of our debt is determined using various methods, including quoted prices for identical terms and maturities, which is a Level 1 measurement, as well as quoted prices for similar terms and maturities in inactive markets and future cash flows discounted at current rates, which are Level 2 measurements. The fair value of our short-term and long-term debt, excluding finance leases, was as follows:



	At September 30,				At December 31,
	2019				2018
(dollars in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Short- and long-term debt, excluding finance leases	$	108,604	$	128,380	$	112,159	$	118,535

Derivative Instruments

The following table sets forth the notional amounts of our outstanding derivative instruments:



	At September 30,		At December 31,
(dollars in millions)	2019		2018
Interest rate swaps	$	16,993	$	19,813
Cross currency swaps	22,212		16,638
Forward starting interest rate swaps	3,000		4,000
Interest rate caps	975		2,218
Foreign exchange forwards	1,085		600

Interest Rate Swaps

We enter into interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against interest rate risk exposure of designated debt issuances. We record the interest rate swaps at fair value in our condensed consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps are recorded to Interest expense, which are offset by changes in the fair value of the hedged debt due to changes in interest rates.

During the nine months ended September 30, 2019, we entered into interest rate swaps with a total notional value of $510 million. During the three and nine months ended September 30, 2019, we settled interest rate swaps with a total notional value of $2.1 billion and $3.3 billion, respectively.

The ineffective portions of these interest rate swaps for the three and nine months ended September 30, 2019 were insignificant and $88 million, respectively, and insignificant for the similar periods in 2018.

The following amounts were recorded in Long-term debt in our condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges:



	At September 30,		At December 31,
(dollars in millions)	2019		2018
Carrying amount of hedged liabilities	$	17,535	$	18,903
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities	645		(785		)

Cross Currency Swaps

We have entered into cross currency swaps designated as cash flow hedges to exchange our British Pound Sterling, Euro, Swiss Franc and Australian Dollar-denominated cash flows into U.S. dollars and to fix our cash payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses.

During the three and nine months ended September 30, 2019, we entered into cross currency swaps with a total notional value of $2.1 billion and $5.6 billion, respectively. During the three and nine months ended September 30, 2019, pre-tax losses of $658 million and $986 million, respectively, were recognized in Other comprehensive income (loss). During the three and nine months ended September 30, 2018, pre-tax gains of $214 million and $220 million, respectively, were recognized in Other comprehensive income (loss). A portion of the gains recognized in Other comprehensive income (loss) was reclassified to Other income (expense), net to offset the related pre-tax foreign currency transaction gain or loss on the underlying hedged item.

Forward Starting Interest Rate Swaps

We have entered into forward starting interest rate swaps designated as cash flow hedges in order to manage our exposure to interest rate changes on future forecasted transactions.

During the three and nine months ended September 30, 2019, we did not enter into any new forward starting interest rate swaps. During the three months ended September 30, 2019, we did not settle any forward starting interest rate swaps and for the nine months ended September 30, 2019, we settled forward starting interest rate swaps with a total notional value of $1.0 billion. During the three and nine months ended September 30, 2019, pre-tax losses of $350 million and $847 million, respectively, were recognized in Other comprehensive income (loss).

We hedge our exposure to the variability in future cash flows based on the expected maturities of the related forecasted debt issuance.

Net Investment Hedges

We have designated certain foreign currency debt instruments as net investment hedges to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. The notional amount of the Euro-denominated debt as a net investment hedge was €750 million as of both September 30, 2019 and December 31, 2018.

Undesignated Derivatives

We also have the following derivative contracts which we use as economic hedges but for which we have elected not to apply hedge accounting.

Interest Rate Caps

We enter into interest rate caps to mitigate our interest exposure to interest rate increases on our ABS Financing Facilities and ABS Notes. During the three and nine months ended September 30, 2019 and 2018, we recognized an insignificant amount in Interest expense.

Foreign Exchange Forwards

We enter into British Pound Sterling and Euro foreign exchange forwards to mitigate our foreign exchange rate risk related to non-functional currency denominated monetary assets and liabilities of international subsidiaries. During the three and nine months ended September 30, 2019, we entered into foreign exchange forwards with a total notional value of $3.1 billion and $9.2 billion, respectively, and settled foreign exchange forwards with a total notional value of $3.0 billion and $8.6 billion, respectively. During the three and nine months ended September 30, 2019, pre-tax losses of an insignificant amount and $53 million, respectively, were recognized in Other income (expense), net.

Concentrations of Credit Risk

Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term investments, trade receivables, including device payment plan agreement receivables, certain notes receivable, including lease receivables, and derivative contracts.

Counterparties to our derivative contracts are major financial institutions with whom we have negotiated derivatives agreements (ISDA master agreements) and credit support annex (CSA) agreements which provide rules for collateral exchange. Negotiations and executions of new ISDA master agreements and CSA agreements with our counterparties continued throughout 2018 and 2019. The newly executed CSA agreements contain rating based thresholds such that we or our counterparties may be required to hold or post collateral based upon changes in outstanding positions as compared to established thresholds and changes in credit ratings. At September 30, 2019, we held an insignificant amount and at December 31, 2018, we posted approximately $0.1 billion of collateral related to derivative contracts under collateral exchange arrangements, which were recorded as Other current liabilities and Prepaid expenses and other, respectively, in our condensed consolidated balance sheets. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote and do not expect that any such nonperformance would result in a significant effect on our results of operations or financial condition due to our diversified pool of counterparties.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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