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Fair Value Measurements And Disclosure

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures

Fair Value Measurements And Disclosure [Text Block]

NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework in ASC 820, “Fair Value Measurement,” provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.

The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2018.

Long-Term Debt and Other Financial Instruments

The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:

		September 30, 2019						December 31, 2018
		Carrying			Fair			Carrying			Fair
		Amount			Value			Amount			Value
Notes and debentures¹		$	160,758		$	180,801		$	171,529		$	172,287
Commercial paper			2,439			2,439			3,048			3,048
Bank borrowings			4			4			4			4
Investment securities²			3,599			3,599			3,409			3,409
¹	Includes credit agreement borrowings.
²	Excludes investments accounted for under the equity method.

The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.

The following tables present the fair value leveling for investment securities and derivatives that are measured at fair value as of September 30, 2019 and December 31, 2018. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.

		September 30, 2019
		Level 1			Level 2			Level 3			Total
Equity Securities
Domestic equities		$	781		$	-		$	-		$	781
International equities			171			-			-			171
Fixed income equities			227			-			-			227
Available-for-Sale Debt Securities			-			1,380			-			1,380
Asset Derivatives
Interest rate swaps			-			2			-			2
Cross-currency swaps			-			70			-			70
Foreign exchange contracts			-			81			-			81
Liability Derivatives
Cross-currency swaps			-			(4,553)			-			(4,553)
Interest rate locks			-			(225)			-			(225)
Foreign exchange contracts			-			(2)			-			(2)

		December 31, 2018
		Level 1			Level 2			Level 3			Total
Equity Securities
Domestic equities		$	1,061		$	-		$	-		$	1,061
International equities			256			-			-			256
Fixed income equities			172			-			-			172
Available-for-Sale Debt Securities			-			870			-			870
Asset Derivatives
Cross-currency swaps			-			472			-			472
Foreign exchange contracts			-			87			-			87
Liability Derivatives
Interest rate swaps			-			(39)			-			(39)
Cross-currency swaps			-			(2,563)			-			(2,563)
Foreign exchange contracts			-			(2)			-			(2)

Investment Securities

Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities is estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

The components comprising total gains and losses in the period on equity securities are as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2019			2018			2019			2018
Total gains (losses) recognized on equity securities	$	21		$	80		$	231		$	88
Gains (Losses) recognized on equity securities sold		8			(2)			101			(4)
Unrealized gains (losses) recognized on equity securities held at end of period		13			82			130			92

At September 30, 2019, available-for-sale debt securities totaling $1,380 have maturities as follows - less than one year: $102; one to three years: $177; three to five years: $164; five or more years: $937.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in “Other current assets” and our investment securities are recorded in “Other Assets” on the consolidated balance sheets.

Derivative Financial Instruments

We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount.

We also designate some of our foreign exchange contracts as fair value hedges. The purpose of these contracts is to hedge currency risk associated with foreign-currency-denominated operating assets and liabilities.

Accrued and realized gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged. Unrealized gains on fair value hedges are recorded at fair market value as assets, and unrealized losses are recorded at fair market value as liabilities. Changes in the fair value of derivative instruments designated as fair value hedges are offset against the change in fair value of the hedged assets or liabilities through earnings. In the nine months ended September 30, 2019 and 2018, no ineffectiveness was measured on fair value hedges.

Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our foreign-denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated interest rate to a fixed U.S. dollar denominated interest rate.

We also designate some of our foreign exchange contracts as cash flow hedges. The purpose of these contracts is to hedge currency risk associated with variability in anticipated foreign-currency-denominated cash flows, such as unremitted or forecasted royalty and license fees owed to WarnerMedia’s domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into the consolidated statements of income in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as “Other income (expense) – net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cash flow hedges each quarter. In the nine months ended September 30, 2019 and 2018, no ineffectiveness was measured on cash flow hedges.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses from the settlement of our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $62 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

Net Investment Hedging We have designated €1,450 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of our subsidiaries. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated OCI, net on the consolidated balance sheet. Net gains on net investment hedges recognized in accumulated OCI in the third quarter and for the first nine months of 2019 was $43.

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2019, we had posted collateral of $407 (a deposit asset) and held collateral of $38 (a receipt liability). Under the agreements, if AT&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in September, we would have been required to post additional collateral of $122. If AT&T’s credit rating had been downgraded four ratings levels by Fitch Ratings, two levels by S&P, and two levels by Moody’s, we would have been required to post additional collateral of

$4,502. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- by S&P, we would have been required to post additional collateral of $288. At December 31, 2018, we had posted collateral of $1,675 (a deposit asset) and held collateral of $103 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

		September 30,			December 31,
		2019			2018
Interest rate swaps		$	853		$	3,483
Cross-currency swaps			42,792			42,192
Interest rate locks			3,500			-
Foreign exchange contracts			473			2,094
Total		$	47,618		$	47,769

Following are the related hedged items affecting our financial position and performance:

Effect of Derivatives on the Consolidated Statements of Income
	Three months ended						Nine months ended
	September 30,						September 30,
Fair Value Hedging Relationships	2019			2018			2019			2018
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps	$	-		$	2		$	59		$	(60)
Gain (Loss) on long-term debt		-			(2)			(59)			60

In addition, the net swap settlements that accrued and settled in the quarter ended September 30 were offset against interest expense.

The following table presents information for our cash flow hedging relationships:

	Three months ended						Nine months ended
	September 30,						September 30,
Cash Flow Hedging Relationships	2019			2018			2019			2018
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	(487)		$	(13)		$	(1,082)		$	308
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI		5			17			2			17
Other income (expense) - net reclassified from accumulated OCI into income		6			-			16			-
Interest rate locks:
Gain (Loss) recognized in accumulated OCI		(202)			-			(225)			-
Interest income (expense) reclassified from accumulated OCI into income		(15)			(15)			(47)			(44)

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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