The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, stock-based compensation liabilities and interest rates. Under Company policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs. In addition, refer to Note 16, "Fair Value Measurements," of the notes to consolidated financial statements for information related to the fair value measurements and valuation methods utilized by the Company for each derivative type.

The Company has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in foreign currency exchange rates. The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. As cash flow hedges under ASC 815, "Derivatives and Hedging," the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates during the three and six months ended March 31, 2019 and 2018.

The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Company’s purchases of lead, copper, tin, aluminum and polypropylene in cases where commodity price risk cannot be naturally offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. As cash flow hedges, the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. The maturities of the commodity hedge contracts coincide with the expected purchase of the commodities. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in commodity prices during the three and six months ended March 31, 2019 and 2018.

The Company enters into foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effects of the debt obligations are reflected in the AOCI account within shareholders’ equity attributable to Johnson Controls ordinary shareholders where they offset currency gains and losses recorded on the Company’s net investments globally. At March 31, 2019, the Company had one billion euro, 750 million euro, 423 million euro and 58 million euro in bonds and a 215 million euro term loan designated as net investment hedges in the Company's net investment in Europe and 35 billion yen of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan. Also, at September 30, 2018, the Company had one billion euro, 750 million euro, 423 million euro and 58 million euro in bonds and a 215 million euro term loan designated as net investment hedges in the Company's net investment in Europe and 35 billion yen of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan.

The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. These equity compensation liabilities increase as the Company’s stock price increases and decrease as the Company’s stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. As of March 31, 2019, the Company hedged approximately 1.6 million shares of its ordinary shares, which have a cost basis of $66 million.

The Company also holds certain foreign currency forward contracts which do not qualify for hedge accounting treatment. The change in fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.



	Derivatives and Hedging Activities Designated as Hedging Instruments under ASC 815				Derivatives and Hedging Activities Not Designated as Hedging Instruments under ASC 815
	March 31,		September 30,		March 31,		September 30,
	2019		2018		2019		2018
Other current assets
Foreign currency exchange derivatives	$	9	$	6	$	12	$	10
Commodity derivatives	1		1		—		—
Assets held for sale
Commodity derivatives	7		—		—		—
Other noncurrent assets
Equity swap	—		—		59		63
Total assets	$	17	$	7	$	71	$	73

Other current liabilities
Foreign currency exchange derivatives	$	7	$	10	$	5	$	2
Commodity derivatives	—		2		—		—
Liabilities held for sale
Commodity derivatives	8		12		—		—
Long-term debt
Foreign currency denominated debt	3,065		3,149		—		—
Total liabilities	$	3,080	$	3,173	$	5	$	2

The use of derivative financial instruments exposes the Company to counterparty credit risk. The Company has established policies and procedures to limit the potential for counterparty credit risk, including establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. As a matter of practice, the Company deals with major banks worldwide having strong investment grade long-term credit ratings. To further reduce the risk of loss, the Company generally enters into International Swaps and Derivatives Association ("ISDA") master netting agreements with substantially all of its counterparties. The Company's derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by the Company or the counterparties. The Company's exposure to credit risk associated with its derivative instruments is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. The Company does not anticipate any non-performance by any of its counterparties, and the concentration of risk with financial institutions does not present significant credit risk to the Company.

The Company enters into ISDA master netting agreements with counterparties that permit the net settlement of amounts owed under the derivative contracts. The master netting agreements generally provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company has not elected to offset the fair value positions of the derivative contracts recorded in the consolidated statements of financial position. Collateral is generally not required of the Company or the counterparties under the master netting agreements. As of March 31, 2019 and September 30, 2018, no cash collateral was received or pledged under the master netting agreements.



	Fair Value of Assets						Fair Value of Liabilities
	March 31,			September 30,			March 31,			September 30,
	2019			2018			2019			2018
Gross amount recognized	$	88		$	80		$	3,085		$	3,175
Gross amount eligible for offsetting	(10		)	(12		)	(10		)	(12		)
Net amount	$	78		$	68		$	3,075		$	3,163



Derivatives in ASC 815 Cash Flow Hedging Relationships	Three Months Ended March 31,					Six Months Ended March 31,
Derivatives in ASC 815 Cash Flow Hedging Relationships	2019		2018			2019		2018
Foreign currency exchange derivatives	$	9	$	(5	)	$	9	$	1
Commodity derivatives	9		(1		)	3		2
Total	$	18	$	(6	)	$	12	$	3

The following table presents the location and amount of the pre-tax gains (losses) on cash flow hedges reclassified from AOCI into the Company’s consolidated statements of income for the three and six months ended March 31, 2019 and 2018 (in millions):



Derivatives in ASC 815 Cash Flow Hedging Relationships	Location of Gain (Loss) Reclassified from AOCI into Income	Three Months Ended March 31,						Six Months Ended March 31,
Derivatives in ASC 815 Cash Flow Hedging Relationships	Location of Gain (Loss) Reclassified from AOCI into Income	2019			2018			2019			2018
Foreign currency exchange derivatives	Cost of sales	$	2		$	(3	)	$	2		$	(1	)
Foreign currency exchange derivatives	Income from discontinued operations	(1		)	1			—			1
Commodity derivatives	Cost of sales	(1		)	1			(3		)	3
Commodity derivatives	Income from discontinued operations	(4		)	3			(9		)	6
Total		$	(4	)	$	2		$	(10	)	$	9

The following table presents the location and amount of pre-tax gains (losses) on derivatives not designated as hedging instruments recognized in the Company’s consolidated statements of income for the three and six months ended March 31, 2019 and 2018 (in millions):



		Amount of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments under ASC 815	Location of Gain (Loss) Recognized in Income on Derivative	Three Months Ended March 31,						Six Months Ended March 31,
	Location of Gain (Loss) Recognized in Income on Derivative	2019			2018			2019			2018
Foreign currency exchange derivatives	Cost of sales	$	(2	)	$	(3	)	$	(6	)	$	(1	)
Foreign currency exchange derivatives	Net financing charges	(3		)	—			(24		)	3
Foreign currency exchange derivatives	Income from discontinued operations	28			(4		)	54			(1		)
Equity swap	Selling, general and administrative	12			(5		)	3			(7		)
Total		$	35		$	(12	)	$	27		$	(6	)