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Hedging Activities
9 Months Ended
Dec. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Hedging Activities
Hedging Activities
In the normal course of business, we are exposed to interest rate and foreign exchange rate fluctuations. At times, we limit these risks through the use of derivatives such as interest rate swaps, cross currency swaps and foreign currency forward contracts. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.
Foreign currency exchange risk
We conduct our business internationally in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling and Canadian dollars. Changes in foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies. We have certain foreign currency exchange rate risk programs that use foreign currency forward contracts and cross currency swaps. These forward contracts and cross currency swaps are generally used to offset the potential income statement effects from intercompany loans denominated in non-functional currencies. These programs reduce but do not eliminate foreign exchange rate risk.
Net Investment Hedges and Derivatives Designated as Hedges
We have €1.2 billion Euro-denominated notes and £450 million British pound sterling-denominated notes which hedge portions of our net investments in non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar (“Net Investment Hedges”). For all notes that are designated as net investment hedges and meet effectiveness requirements, the changes in carrying value of the notes attributable to the change in spot rates are recorded in other comprehensive income (loss) where they offset foreign currency translation gains and losses recorded on our net investments.  To the extent foreign currency denominated notes designated as net investment hedges are ineffective, changes in value are recorded in current earnings.  Losses from net investment hedges recorded in other comprehensive income were $28 million and $205 million during the third quarter and first nine months of 2018. There was no ineffectiveness in our net investment hedges as of December 31, 2017 and March 31, 2017.
At December 31, 2017 and March 31, 2017, we had forward contracts to hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional values of $243 million, which were designated as cash flow hedges. These contracts will mature between March 2018 and March 2020.
From time to time, we enter into cross currency swaps to hedge intercompany loans denominated in non-functional currencies. For our cross currency swap transactions, we agree with another party to exchange, at specified intervals, one currency for another currency at a fixed exchange rate, generally set at inception, calculated by reference to agreed upon notional amounts. These cross currency swaps are designed to reduce the income statement effects arising from fluctuations in foreign exchange rates and have been designated as cash flow hedges.
At December 31, 2017 and March 31, 2017, we had cross currency swaps with total gross notional amounts of $3,411 million and $2,663 million, which are designated as cash flow hedges. These swaps will mature between February 2018 and January 2024.
For forward contracts and cross currency swaps that are designated as cash flow hedges, the effective portion of changes in the fair value of the hedges is recorded into other comprehensive income (loss) and reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in fair values representing hedge ineffectiveness are recognized in current earnings. Gains or losses on these hedges recorded in other comprehensive income and earnings were not material in the third quarters and first nine months of 2018 and 2017.
Derivatives Not Designated as Hedges
At March 31, 2017, we had forward contracts to hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional value of $173 million. These contracts matured in April 2017 and none of these contracts were designated for hedge accounting. Losses from these contracts were not material for the third quarters and first nine months of 2018 and 2017.
We also have a number of forward contracts to hedge the Euro against cash flows denominated primarily in British pound sterling and other European currencies. At December 31, 2017 and March 31, 2017, the total gross notional amounts of these contracts were $34 million and $62 million.
These contracts will mature through July 2018 and none of these contracts were designated for hedge accounting. Changes in the fair values of contracts not designated as hedges are recorded directly into current earnings. Gains from these contracts were recorded within operating expenses and were not material for the third quarters and first nine months of 2018 and 2017. The gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans.
Information regarding the fair value of derivatives on a gross basis is as follows:
 
Balance Sheet
Caption
December 31, 2017
 
March 31, 2017
 
Fair Value of
Derivative
U.S. Dollar Notional
 
Fair Value of
Derivative
U.S. Dollar Notional
(In millions)
Asset
Liability
 
Asset
Liability
Derivatives designated for hedge accounting
 
 
 
 
 
 
 
 
Foreign exchange contracts (current)
Prepaid expenses and other
$
14

$

$
81

 
$
17

$

$
81

Foreign exchange contracts (non-current)
Other Noncurrent Assets
27


162

 
32


162

Cross currency swaps (current)
Prepaid expenses and other


307

 
17


174

Cross currency swaps (non-current)
Other Noncurrent Assets/Liabilities

163

3,104

 
90


2,489

Total
 
$
41

$
163

 
 
$
156

$

 
Derivatives not designated for hedge accounting
 
 
 
 
 
 
 
 
Foreign exchange contracts (current)
Prepaid expenses and other
$

$

$
28

 
$
1

$

$
198

Foreign exchange contracts (current)
Other accrued liabilities


6

 


37

Total
 
$

$

 
 
$
1

$

 

Refer to Financial Note 15, "Fair Value Measurements," for more information on these recurring fair value measurements.