Financial Instruments

Foreign Currency Contracts

Due to the global nature of its 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. The main trading currencies of the Company are the U.S. dollar, Euro, British pound 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 Unaudited Consolidated Balance Sheet. The Company does not have credit risk related contingent features or collateral linked to the derivatives.

Designated Foreign Currency Derivatives

Certain foreign currency forward contracts were designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts were reported in AOCI. Realized gains and losses for the effective portion of such contracts were recognized in revenue or cost of sales when the sale of product in the currency being hedged was recognized. To the extent ineffective, hedge transaction gains and losses were reported in Other income/(expense), net.

The Company did not have any designated foreign currency contracts as of September 30, 2017. As of December 31, 2016, the Company had designated foreign currency forward contracts with a total notional value of $78.7 million, a maximum duration of six months; the fair value of these contracts was a net asset of $4.2 million.

Undesignated Foreign Currency Derivatives

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 table below presents the notional amount, maximum duration and fair value for the undesignated foreign currency derivatives:



(In millions, except duration)	September 30, 2017		December 31, 2016
Notional amount	$	1,514.6	$	1,309.1
Maximum duration (in months)	3 months		3 months
Fair value - net asset	$	7.6	$	6.7

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 September 30, 2017, credit risk did not materially change the fair value of the Company’s foreign currency contracts.

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 further details related to interest rates on the Company’s various debt facilities, refer to Note 13, Borrowings and Capital Leases, to these Unaudited Consolidated Financial Statements.

Designated Interest Rate Derivatives

The effective portion of the changes in the fair value of interest rate swap contracts are recorded as a component of the senior notes assumed in connection with the acquisition of Baxalta with the ineffective portion recorded in Interest expense. Any net interest payments made or received on the interest rate swap contracts are recognized as a component of Interest expense in the Unaudited Consolidated Statements of Operations.

The table below presents the notional amount, maturity and fair value for the designated interest rate derivatives:



(In millions, except maturity)	September 30, 2017		December 31, 2016
Notional amount	$	1,000.0	$	1,000.0
Maturity	June 2020 and June 2025		June 2020 and June 2025
Fair value - net asset/(liability)	$	0.6	$	(1.2	)

For the three and nine months ended September 30, 2017, the Company recognized losses of $1.1 million and $2.5 million, respectively, as ineffectiveness related to these contracts as a component of Interest expense.

Summary of Derivatives

The following tables summarize the income statement locations and gains and losses on the Company’s designated and undesignated derivative instruments:



(In millions)	Gain/(loss) recognized in OCI					Income Statement location	Gain reclassified from AOCI into income
Three months ended September 30,	2017			2016			2017		2016
Designated derivative instruments
Cash flow hedges
Foreign exchange contracts	$	(0.2	)	$	3.3	Cost of sales	$	0.3	$	—



(In millions)	Income Statement location	Gain/(loss) recognized in income
Three months ended September 30,		2017			2016
Fair value hedges
Interest rate contracts, net	Interest expense	$	(1.1	)	$	—
Undesignated derivative instruments
Foreign exchange contracts	Other income/(expense), net	36.7			(21.2		)
Interest rate swap contracts	Interest income	—			3.5



(In millions)	Loss recognized in OCI						Income Statement location	Gain reclassified from AOCI into income
Nine months ended September 30,	2017			2016				2017		2016
Designated derivative instruments
Cash flow hedges
Foreign exchange contracts	$	(0.9	)	$	(0.1	)	Cost of sales	$	8.6	$	—



(In millions)	Income Statement location	Gain/(loss) recognized in income
Nine months ended September 30,		2017			2016
Fair value hedges
Interest rate contracts, net	Interest (expense)/income	$	(2.5	)	$	2.1
Undesignated derivative instruments
Foreign exchange contracts	Other income/(expense), net	57.4			(50.0		)
Interest rate swap contracts	Interest expense	—			(1.1		)

Summary of Derivatives

The following table presents the classification and estimated fair value of derivative instruments:



	Asset position							Liability position
		Fair value							Fair value
(In millions)	Balance Sheet location	September 30, 2017			December 31, 2016			Balance Sheet location	September 30, 2017			December 31, 2016
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	2.4			0.1			Long term borrowings	1.8			1.3
		$	2.4		$	4.4			$	1.8		$	1.4
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	$	14.6		$	13.6		Accounts payable and accrued expenses	$	7.0		$	6.9
Total derivative fair value		$	17.0		$	18.0			$	8.8		$	8.3
Potential effect of rights to offset		(3.7		)	(1.7		)		(3.7		)	(1.7		)
Net derivative		$	13.3		$	16.3			$	5.1		$	6.6