Financial Instruments

Foreign Currency Contracts

Due to the global nature of operations, portions of the Company’s revenues and operating expenses are recorded in currencies other than the U.S. dollar. The value of revenues and operating expenses measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. In order to mitigate these changes, the Company uses foreign currency forward contracts to lock in exchange rates associated with a portion of its forecasted international revenues and operating expenses. The main trading currencies of the Company are the U.S. dollar, Euro, Pounds sterling, Swiss franc, Canadian dollar and Japanese yen.

Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency. Where significant exposures remain, the Company uses foreign exchange contracts (spot, forward and swap contracts) to manage the exposure for balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary.

The Company has master netting agreements with a number of counterparties to these foreign exchange contracts and on the occurrence of specified events, the Company has the ability to terminate contracts and settle them with a net payment by one party to the other. The Company has elected to present derivative assets and derivative liabilities on a gross basis in the Consolidated Balance Sheets. The Company does not have credit risk related contingent features or collateral linked to the derivatives.

Designated Derivative Instruments

Certain foreign currency forward contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in AOCI. Realized gains and losses for the effective portion of such contracts are recognized in cost of sales when the sale of product in the currency being hedged is recognized. To the extent ineffective, hedge transaction gains and losses are reported in Other income/(expense), net. The amount of ineffectiveness for the years ended December 31, 2016 and December 31, 2015 was immaterial.

As of December 31, 2016, the foreign currency forward contracts had a total notional value of $78.7 million with a maximum duration of six months. The Company did not have any designated forward contracts as of December 31, 2015. As of December 31, 2016, the fair value of these contracts was a net asset of $4.2 million (2015: $nil). The portion of the fair value of these foreign currency forward contracts that was included in AOCI in total equity reflected net gain of $14.6 million as of December 31, 2016. The Company expects all contracts to be settled over the next six months and any amounts in AOCI to be reported as an adjustment to revenue or cost of sales. The Company considers the impact of its and its counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its contractual obligations. As of December 31, 2016, credit risk did not change the fair value of the Company’s foreign currency forward contracts.

Undesignated Derivative Instruments

The Company uses forward contracts to mitigate the foreign currency risk related to certain balance sheet positions, including intercompany and third-party receivables and payables. The Company has not elected hedge accounting for these derivative instruments as the duration of these contracts is typically three months or less. The changes in fair value of these derivatives are reported in earnings. The notional amount of undesignated derivative instruments was $1,309.1 million and $645.2 million as of December 31, 2016 and 2015, respectively.

As of December 31, 2016 the undesignated derivative instruments included option contracts assumed from Baxalta that were previously designated as cash flow hedges. The notional amount of these option contracts totaled $11.2 million as of December 31, 2016. Upon acquisition, the Company did not elect to redesignate these option contracts as cash flow hedges. In addition, the company also assumed undesignated forward contracts from Baxalta, included in undesignated derivative instruments as of December 31, 2016. The notional amount of these undesignated forward contracts totaled $776.4 million as of December 31, 2016.

As of December 31, 2016, the fair value of these contracts was a net asset of $6.7 million (2015: $nil).

Interest Rate Contracts

The Company is exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in benchmark interest rates relating to its debt obligations on which interest is set at floating rates. The Company’s policy is to manage this risk to an acceptable level. The Company is principally exposed to interest rate risk on any borrowings under the Company’s various debt facilities and on part of the senior notes assumed in connection with the acquisition of Baxalta. Interest on each of these debt obligations is set at floating rates, to the extent utilized. Shire’s exposure under these facilities is to changes in U.S. dollar interest rates. For a more detailed description related to interest rates on the Company’s various debt facilities, refer to Note 17, Borrowings and Capital Lease Obligations, to the Consolidated Financial Statements set forth in this Annual Report on Form 10-K.

Designated Derivative Instruments

As of December 31, 2016, interest rate swap contracts with an aggregate notional amount of $1.0 billion and maturing in June 2020 and June 2025 were in place. These interest rate swap contracts were designated as fair value hedges. The effective portion of the changes in the fair value of interest rate swap contracts are recorded as a component of the underlying Baxalta Notes with the ineffective portion recorded as income. Any net interest payments made or received on the interest rate swap contracts are recognized as a component of interest expense in the Consolidated Statements of Operations. As of December 31, 2016, the fair value of these contracts was a net liability of $1.1 million (2015: $nil) presented within other non-current liabilities. For the year ended December 31, 2016, the Company recognized a loss of $6.0 million as ineffectiveness (2015: $nil) related to these contracts as a component of interest expense.

Undesignated Derivative Instruments

During the year ended December 31, 2016, the Company entered into interest rate swap contracts with a total notional amount of $5.1 billion related to the November 2015 Facilities Agreement, which matured during 2016. The Company did not elect hedge accounting for these contracts. As of December 31, 2016 and December 31, 2015, the Company did not have any outstanding undesignated derivative instruments. For the year ended December 31, 2016, the Company recognized $3.2 million (2015: $nil) loss related to these contracts, which was recognized as a component of Interest expense.

The following tables summarize the income statement locations and gains and losses on the Company’s designated and undesignated derivative instruments for the year ended December 31, 2016. There were no designated derivatives for the year ended December 31, 2015.

As of December 31, 2016, the Company had in total 155 swaps and forward foreign exchange contracts.



(In millions)	Gain (loss) recognized in OCI				Location in Statements of Operations	Gain (loss) reclassified from AOCI into income
Year ended December 31,	2016		2015			2016		2015
Designated Derivative Instruments
Cash flow hedges
Foreign exchange contracts	$	14.6	$	—	Cost of sales	$	4.9	$	—



(In millions)	Location of gain (loss) in Statements of Operations	Gain (loss) recognized in income
Year ended December 31,		2016			2015
Fair value hedges
Interest rate contracts	Interest expense	$	(6.0	)	$	—
Undesignated Derivative Instruments
Foreign exchange contracts	Other (expense)/income, net	(40.2		)	9.5
Interest rate swap contracts	Interest expense	(3.2		)	—

As of December 31, 2016, $6.2 million of deferred gains, net of tax, on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

The following table presents the classification and estimated fair value of the Company’s derivative instruments as of December 31, 2016:



	Derivatives in asset positions			Derivatives in liability positions
(In millions)	Balance Sheet location	Fair value		Balance Sheet location	Fair value
Designated Derivative Instruments
Foreign exchange contracts	Prepaid expenses and other current assets	$	4.3	Accounts payable and accrued expenses	$	0.1
Interest rate contracts	Long term borrowings	0.1		Long term borrowings	1.3
		4.4			1.4
Undesignated Derivative Instruments
Foreign exchange forward contracts	Prepaid expenses and other current assets	13.6		Accounts payable and accrued expenses	6.9
		$	18.0		$	8.3

As of December 31, 2016, the potential effect of rights to offset associated with the Interest rate swap and foreign exchange forward contracts would be an offset to both assets and liabilities of $1.7 million, resulting in net derivative assets and derivative liabilities of $16.3 million and $6.6 million, respectively.