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FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURES
 12 Months Ended
Dec. 31, 2018
Financial Instruments And Fair Value Measures [Abstract]  
Financial Instruments and Fair Value Measures

Note 15. Financial Instruments and Fair Value Measures

Credit and Market Risk—Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to changes in interest and currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties in derivative transactions are substantial investment and commercial banks with significant experience using such derivative instruments. We monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest rates and currency exchange rates and restrict the use of derivative financial instruments to hedging activities.

We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. Our sales are not materially dependent on a single customer or a small group of customers.

Foreign Currency Risk Management—We conduct our business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our primary objective is to preserve the U.S. Dollar value of foreign currency denominated cash flows and earnings. We attempt to hedge currency exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign currency exchange forward and option contracts (foreign currency exchange contracts) with third parties.

We hedge monetary assets and liabilities denominated in non-functional currencies. Prior to conversion into U.S. dollars, these assets and liabilities are remeasured at spot exchange rates in effect on the balance sheet date. The effects of changes in spot rates are recognized in earnings and included in other (income) expense. We partially hedge forecasted sales and purchases, which are denominated in non-functional currencies, with foreign currency exchange contracts. Changes in the forecasted non-functional currency cash flows due to movements in exchange rates are substantially offset by changes in the fair value of the foreign currency exchange contracts designated as hedges. Market value gains and losses on these contracts are recognized in earnings when the hedged transaction is recognized. At December 31, 2018 and 2017, we had contracts with notional amounts of $14,995 million and $9,273 million to exchange foreign currencies, principally the U.S. Dollar, Euro, British Pound, Canadian Dollar, Mexican Peso, Swiss Franc, Indian Rupee, Russian Ruble, and Chinese Renminbi. As of December 31, 2018, we estimate that approximately $90 million of net derivative gains related to our cash flow hedges included in Accumulated other comprehensive income (loss) will be reclassified into earnings within the next 12 months.

We have also designated foreign currency debt and certain derivative contracts as hedges against portions of our net investment in foreign operations during the year ended December 31, 2018. Gains or losses on the effective portion of the foreign currency debt designated as a net investment hedge are recorded in the same manner as foreign currency translation adjustments. The Company did not have ineffectiveness related to net investment hedges during the year ended December 31, 2018.

Interest Rate Risk Management—We use a combination of financial instruments, including long-term, medium-term and short-term financing, variable-rate commercial paper, and interest rate swaps to manage the interest rate mix of our total debt portfolio and related overall cost of borrowing. At December 31, 2018 and 2017, interest rate swap agreements designated as fair value hedges effectively changed $2,600 million of fixed rate debt at 2.93% to LIBOR based floating rate debt. Our interest rate swaps mature at various dates through 2026.

Fair Value of Financial Instruments—The FASB’s 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 (exit price).

Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2018 and 2017:

December 31,
20182017
Assets:
Foreign currency exchange contracts$119$17
Available for sale investments1,7843,916
Interest rate swap agreements2044
Cross currency swap agreements32-
Liabilities:
Foreign currency exchange contracts$4$70
Interest rate swap agreements6552

The foreign currency exchange contracts, interest rate swap agreements, and cross currency swap agreements are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are classified within level 2. The Company also holds investments in commercial paper, certificates of deposits, and time deposits that are designated as available for sale and are valued using published prices based off observable market data. As such, these investments are classified within level 2. The Company also holds available for sale investments in U.S. government and corporate debt securities valued utilizing published prices based on quoted market pricing, which are classified within level 1.

The carrying value of cash and cash equivalents, trade accounts and notes receivables, payables, commercial paper and short-term borrowings contained in the Consolidated Balance Sheet approximates fair value. The following table sets forth the Company’s financial assets and liabilities that were not carried at fair value:

December 31, 2018December 31, 2017
CarryingFairCarryingFair
ValueValueValueValue
Assets
Long-term receivables$333$329$296$289
Liabilities
Long-term debt and related current maturities$12,628$13,133$13,924$14,695

The following table sets forth the amounts recorded on the Consolidated Balance Sheet related to
cumulative basis adjustments for fair value hedges:
Line in the Consolidated Balance Sheet of Hedged ItemCarrying Amount of the Hedged ItemCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Item
December 31, December 31, December 31, December 31,
2018201720182017
Long-term debt$ 2,555 $ 2,592 $(45)$(8)

The Company determined the fair value of the long-term receivables by discounting based upon the terms of the receivable and counterparty details including credit quality. As such, the fair value of these receivables is considered level 2. The Company determined the fair value of the long-term debt and related current maturities utilizing transactions in the listed markets for identical or similar liabilities. As such, the fair value of the long-term debt and related current maturities is considered level 2.

Interest rate swap agreements are designated as hedge relationships with gains or losses on the derivative recognized in interest and other financial charges offsetting the gains and losses on the underlying debt being hedged. Losses on interest rate swap agreements recognized in earnings were $37 million, $29 million and $71 million in the years ended December 31, 2018, 2017 and 2016. Gains and losses are fully offset by losses and gains on the underlying debt being hedged.

We economically hedge our exposure to changes in foreign exchange rates principally with forward contracts. These contracts are marked-to-market with the resulting gains and losses recognized in earnings offsetting the gains and losses on the non-functional currency denominated monetary assets and liabilities being hedged. We recognized $394 million of income and $207 million of expense in Other (income) expense in the years ended December 31, 2018 and 2017. We recognized $232 million of income in Other (income) expense in the year ended December 31, 2016.

The following tables summarize the location and impact to the Consolidated Statement of Operations related to fair value and cash flow hedging relationships:
Year Ended
December 31, 2018
RevenueCost of Products SoldSG&AOther (Income) ExpenseInterest and Other Financial Charges
$41,802$23,634$6,051$(1,149)$367
Gain or (loss) on cash flow hedges:
Foreign Currency Exchange Contracts:
Amount reclassified from accumulated other comprehensive income into income(9)(35)(2)47-
Amount excluded from effectiveness testing recognized in earnings using an amortization approach-6-9-
Gain or (loss) on fair value hedges:
Interest Rate Swap Agreements:
Hedged Items----37
Derivatives designated as hedges----(37)

Year Ended
December 31, 2017
RevenueCost of Products SoldSG&AInterest and Other Financial Charges
$40,534$23,176$6,087$316
Gain or (loss) on cash flow hedges:
Foreign Currency Exchange Contracts:
Amount reclassified from accumulated other comprehensive income into income153128-
Gain or (loss) on fair value hedges:
Interest Rate Swap Agreements:
Hedged Items---29
Derivatives designated as hedges---(29)

The following table summarizes the amounts of gain or (loss) on net investment hedges recognized in Accumulated
other comprehensive income (loss):
Derivatives Net InvestmentYears Ended
Hedging RelationshipsDecember 31,
20182017
Euro-denominated long-term debt $177$(582)
Euro-denominated commercial paper168(458)
Cross currency swap44-