RISK MANAGEMENT ACTIVITIES AND FAIR VALUE MEASUREMENTS

12 Months Ended

Jun. 30, 2012

Notes to Financial Statements [Abstract]

Risk Management & Fair Value Measurement [Text Block]

NOTE 5

RISK MANAGEMENT ACTIVITIES AND FAIR VALUE MEASUREMENTS

As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. We evaluate exposures on a centralized basis to take advantage of natural exposure correlation and netting. To the extent we choose to manage volatility associated with the net exposures, we enter into various financial transactions that we account for using the applicable accounting guidance for derivative instruments and hedging activities. These financial transactions are governed by our policies covering acceptable counterparty exposure, instrument types and other hedging practices.

At inception, we formally designate and document qualifying instruments as hedges of underlying exposures. We formally assess, at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposures. Fluctuations in the value of these instruments generally are offset by changes in the value or cash flows of the underlying exposures being hedged. This offset is driven by the high degree of effectiveness between the exposure being hedged and the hedging instrument. The ineffective portion of a change in the fair value of a qualifying instrument is immediately recognized in earnings. The amount of ineffectiveness recognized is immaterial for all years presented.

Credit Risk Management

We have counterparty credit guidelines and normally enter into transactions with investment grade financial institutions. Counterparty exposures are monitored daily and downgrades in counterparty credit ratings are reviewed on a timely basis. We have not incurred, and do not expect to incur, material credit losses on our risk management or other financial instruments.

Certain of the Company's financial instruments used in hedging transactions are governed by industry standard netting and collateral agreements with counterparties. If the Company's credit rating were to fall below the levels stipulated in the agreements, the counterparties could demand either collateralization or termination of the arrangements. The aggregate fair value of the instruments covered by these contractual features that are in a net liability position as of June 30, 2012, was $52. The Company has not been required to post collateral as a result of these contractual features.

Interest Rate Risk Management

Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage this risk in a cost-efficient manner, we enter into interest rate swaps whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional amount.

Interest rate swaps that meet specific accounting criteria are accounted for as fair value or cash flow hedges. For fair value hedges, the changes in the fair value of both the hedging instruments and the underlying debt obligations are immediately recognized in interest expense. For cash flow hedges, the effective portion of the changes in fair value of the hedging instrument is reported in OCI and reclassified into interest expense over the life of the underlying debt obligation. The ineffective portion for both cash flow and fair value hedges, which is not material for any year presented, is immediately recognized in earnings.

Foreign Currency Risk Management

We manufacture and sell our products and finance operations in a number of countries throughout the world. As a result, we are exposed to movements in foreign currency exchange rates.

To manage the exchange rate risk primarily associated with our financing operations, we have historically used a combination of forward contracts, options and currency swaps. As of June 30, 2012, we had currency swaps with maturities up to five years, which are intended to offset the effect of exchange rate fluctuations on intercompany loans denominated in foreign currencies. These swaps are accounted for as cash flow hedges. The effective portion of the changes in fair value of these instruments is reported in OCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the related hedged transactions affect earnings. The ineffective portion, which is not material for any year presented, is immediately recognized in earnings.

The change in fair values of certain non-qualifying instruments used to manage foreign exchange exposure of intercompany financing transactions and certain balance sheet items subject to revaluation are immediately recognized in earnings, substantially offsetting the foreign currency mark-to-market impact of the related exposures.

Net Investment Hedging

We hedge certain net investment positions in foreign subsidiaries. To accomplish this, we either borrow directly in foreign currencies and designate all or a portion of the foreign currency debt as a hedge of the applicable net investment position or enter into foreign currency swaps that are designated as hedges of net investments. Changes in the fair value of these instruments are recognized in OCI to offset the change in the value of the net investment being hedged. Currency effects of these hedges reflected in OCI were an after-tax gain of $740 and an after-tax loss of $1,176 in 2012 and 2011, respectively. Accumulated net balances were after-tax losses of $3,706 and $4,446 as of June 30, 2012 and 2011, respectively.

Commodity Risk Management

Certain raw materials used in our products or production processes are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To manage the volatility related to anticipated purchases of certain of these materials, we may, on a limited basis, use futures and options with maturities generally less than one year and swap contracts with maturities up to five years. These market instruments generally are designated as cash flow hedges. The effective portion of the changes in fair value for these instruments is reported in OCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the hedged transactions affect earnings. The ineffective and non-qualifying portions, which are not material for any year presented, are immediately recognized in earnings. As of and during the year ended June 30, 2012, we did not have material commodity hedging activity.

Insurance

We self-insure for most insurable risks. However, we purchase insurance for Directors and Officers Liability and certain other coverage in situations where it is required by law, by contract or deemed to be in the best interest of the Company.

Fair Value Hierarchy

Accounting guidance on fair value measurements for certain financial assets and liabilities requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs reflecting the reporting entity's own assumptions or external inputs from inactive markets.

When applying fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during the year. Our fair value estimates take into consideration the credit risk of both the Company and our counterparties.

When active market quotes are not available for financial assets and liabilities, we use industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including credit risk, interest rate curves, foreign currency rate and forward and spot prices for currencies. In circumstances where market-based observable inputs are not available, management judgment is used to develop assumptions to estimate fair value.

Generally, the fair value of our Level 3 instruments is estimated as the net present value of expected future cash flows based on external inputs.

The following table sets forth the Company's financial assets and liabilities as of June 30, 2012 and 2011 that were measured at fair value on a recurring basis during the period, segregated by level within the fair value hierarchy:



	Level 1				Level 2				Level 3				Total
As of June 30	2012		2011		2012		2011		2012		2011		2012		2011
ASSETS RECORDED AT FAIR VALUE
Investment securities	$	9	$	16	$	—	$	—	$	24	$	23	$	33	$	39
Derivatives relating to:
Foreign currency hedges	—		—		—		1		—		—		—		1
Other foreign currency instruments⁽¹⁾	—		—		86		182		—		—		86		182
Interest rates	—		—		298		163		—		—		298		163
Net investment hedges	—		—		32		—		—		—		32		—
Commodities	—		—		3		4		—		—		3		4
TOTAL ASSETS RECORDED AT FAIR VALUE⁽²⁾	9		16		419		350		24		23		452		389

LIABILITIES RECORDED AT FAIR VALUE
Derivatives relating to:
Foreign currency hedges	$	—	$	—	$	142	$	119	$	—	$	—	$	142	$	119
Other foreign currency instruments⁽¹⁾	—		—		23		43		—		—		23		43
Net investment hedges	—		—		19		138		—		—		19		138
Commodities	—		—		2		1		—		—		2		1
TOTAL LIABILITIES AT FAIR VALUE⁽³⁾	—		—		186		301		—		—		186		301
LIABILITIES NOT RECORDED AT FAIR VALUE
Long-term debt ⁽⁴⁾	25,829		24,940		2,119		1,486		—		—		27,948		26,426
TOTAL LIABILITIES RECORDED AND NOT RECORDED AT FAIR VALUE	25,829		24,940		2,305		1,787		—		—		28,134		26,727


⁽¹⁾	Other foreign currency instruments are comprised of foreign currency financial instruments that do not qualify as hedges.


⁽²⁾	Investment securities are presented in other noncurrent assets and all derivative assets are presented in prepaid expenses and other current assets or other noncurrent assets.


⁽³⁾	All liabilities are presented in accrued and other liabilities or other noncurrent liabilities.


⁽⁴⁾	Long-term debt includes the current portion ($4,095 and $3,008 as of June 30, 2012 and 2011, respectively) of debt instruments. Long-term debt is not recorded at fair value on a recurring basis, but is measured at fair value for disclosure purposes. Fair values are generally estimated based on quoted market prices for identical or similar instruments.

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the years presented. In addition, there was no significant activity within the Level 3 financial assets and liabilities during the years presented.

The Company re-measured operating real estate assets to estimated fair value of $8 during the year ended June 30, 2012, using comparable prices for similar assets, resulting in a $220 impairment. Except for this and the goodwill and intangible assets discussed in Note 2, there were no additional significant assets or liabilities that were re-measured at fair value on a non-recurring basis during the years presented.

Disclosures about Derivative Instruments

The notional amounts and fair values of qualifying and non-qualifying financial instruments used in hedging transactions as of June 30, 2012 and 2011 are as follows:



	Notional Amount				Fair Value Asset/(Liability)
As of June 30	2012		2011		2012			2011
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
Interest rate contracts	$	—	$	—	$	—		$	—
Foreign currency contracts	831		831		(142		)	(118		)
Commodity contracts	—		16		—			4
TOTAL	831		847		(142		)	(114		)

DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS
Interest rate contracts	$	10,747	$	10,308	$	298		$	163

DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS
Net investment hedges	$	1,768	$	1,540	$	13		$	(138	)

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
Foreign currency contracts	$	13,210	$	14,957	$	63		$	139
Commodity contracts	125		39		1			(1		)
TOTAL	13,335		14,996		64			138

The total notional amount of contracts outstanding at the end of the period is indicative of the level of the Company's derivative activity during the period.



	Amount of Gain/(Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)
As of June 30	2012		2011
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
Interest rate contracts	$	11	$	15
Foreign currency contracts	22		32
Commodity contracts	—		3
TOTAL	33		50

DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS
Net investment hedges	$	6	$	(88	)

The effective portion of gains and losses on derivative instruments that was recognized in OCI during the years ended June 30, 2012 and 2011 is not material. During the next 12 months, the amount of the June 30, 2012, accumulated OCI balance that will be reclassified to earnings is expected to be immaterial.

The amounts of gains and losses on qualifying and non-qualifying financial instruments used in hedging transactions for the years ended June 30, 2012 and 2011 are as follows:



	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income⁽¹⁾
Years ended June 30	2012		2011
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
Interest rate contracts	$	6	$	7
Foreign currency contracts	5		(77		)
Commodity contracts	3		20
TOTAL	14		(50		)



	Amount of Gain/(Loss) Recognized in Income
Years ended June 30	2012			2011
DERIVATIVES IN FAIR VALUE HEDGING RELATIONSHIPS⁽²⁾
Interest rate contracts	$	135		$	(28	)
Debt	(137		)	31
TOTAL	(2		)	3

DERIVATIVES IN NET INVESTMENT HEDGING RELATIONSHIPS⁽²⁾
Net investment hedges	$	(1	)	$	—

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS⁽³⁾
Foreign currency contracts⁽⁴⁾	$	(1,121	)	$	1,359
Commodity contracts	2			3
TOTAL	(1,119		)	1,362

⁽¹⁾

The gain or loss on the effective portion of cash flow hedging relationships is reclassified from accumulated OCI into net income in the same period during which the related items affect earnings. Such amounts are included in the Consolidated Statements of Earnings as follows: interest rate contracts in interest expense, foreign currency contracts in selling, general and administrative and interest expense, and commodity contracts in cost of products sold.


⁽²⁾	The gain or loss on the ineffective portion of interest rate contracts, debt and net investment hedges, if any, is included in the Consolidated Statements of Earnings in interest expense.


⁽³⁾	The gain or loss on contracts not designated as hedging instruments is included in the Consolidated Statements of Earnings as follows: foreign currency contracts in selling, general and administrative expense and commodity contracts in cost of products sold.


⁽⁴⁾	The gain or loss on non-qualifying foreign currency contracts substantially offsets the foreign currency mark-to-market impact of the related exposure.