Fair Value Measurements and Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements and Fair Value of Financial Instruments [Text Block]

Note 14. Fair Value Measurements and Fair Value of Financial Instruments

Fair Value Measurements

The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2019. The company’s financial assets and liabilities carried at fair value are primarily comprised of insurance contracts, investments in derivative contracts, mutual funds holding publicly traded securities and other investments in unit trusts held as assets to satisfy outstanding deferred compensation and retirement liabilities; and acquisition-related contingent consideration.

The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities that the company has the ability to access.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates and yield curves.

Level 3: Inputs are unobservable data points that are not corroborated by market data.

The following tables present information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and December 31, 2018:

	December 31,		Quoted Prices in Active Markets		Significant Other Observable  Inputs		Significant Unobservable Inputs
(In millions)	2019		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	1,280	$	1,280	$	—	$	—
Investments in common stock, mutual funds and other similar instruments	19		19		—		—
Warrants	6		—		6		—
Insurance contracts	131		—		131		—
Derivative contracts	37		—		37		—
Total Assets	$	1,473	$	1,299	$	174	$	—
Liabilities
Derivative contracts	$	24	$	—	$	24	$	—
Contingent consideration	55		—		—		55
Total Liabilities	$	79	$	—	$	24	$	55

	December 31,		Quoted Prices in  Active Markets		Significant Other Observable  Inputs		Significant  Unobservable  Inputs
(In millions)	2018		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	769	$	769	$	—	$	—
Bank time deposits	2		2		—		—
Investments in mutual funds and other similar instruments	10		10		—		—
Warrants	8		—		8		—
Insurance contracts	113		—		113		—
Derivative contracts	31		—		31		—
Total Assets	$	933	$	781	$	152	$	—
Liabilities
Derivative contracts	$	145	$	—	$	145	$	—
Contingent consideration	37		—		—		37
Total Liabilities	$	182	$	—	$	145	$	37

The company uses the Black-Scholes model to value its warrants. The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The fair value of derivative contracts is the estimated amount that the company would receive/pay upon liquidation of the contracts, taking into account the change in interest rates and currency exchange rates. The company determines the fair value of acquisition-related contingent consideration based on the probability-weighted discounted cash flows associated with such future payments. Changes to the fair value of contingent consideration are recorded in selling, general and administrative expense. The following table provides a rollforward of the fair value, as determined by level 3 inputs, of the contingent consideration.

(In millions)	2019		2018
Contingent Consideration
Beginning Balance	$	37	$	35
Acquisitions (including assumed balances)	24		11
Payments	(3)		(8)
Change in fair value included in earnings	(3)		(1)
Ending Balance	$	55	$	37

Derivative Contracts

The following table provides the aggregate notional value of outstanding derivative contracts.

	December 31,		December 31,
(In millions)	2019		2018
Notional Amount
Interest rate swaps (described in Note 10)	$	1,000	$	3,100
Cross-currency interest rate swaps - designated as net investment hedges	900		1,500
Currency exchange contracts	2,846		3,424

While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheet. The following tables present the fair value of derivative instruments in the consolidated balance sheet and statement of income.

	Fair Value – Assets				Fair Value – Liabilities
	December 31,		December 31,		December 31,		December 31,
(In millions)	2019		2018		2019		2018
Derivatives Designated as Hedging Instruments
Interest rate swaps (a)	$	—	$	—	$	13	$	129
Cross-currency interest rate swaps (b)	33		28		—		—
Derivatives Not Designated as Hedging Instruments
Currency exchange contracts (c)	4		3		11		16
Total Derivatives	$	37	$	31	$	24	$	145

(a)The fair value of the interest rate swaps is included in the consolidated balance sheet under the caption other long-term liabilities.

(b)The fair value of the cross-currency interest rate swaps is included in the consolidated balance sheet under the caption other assets.

(c)The fair value of the currency exchange contracts is included in the consolidated balance sheet under the captions other current assets or other accrued expenses.

The following amounts related to cumulative basis adjustments for fair value hedges were included in the consolidated balance sheet under the caption long-term obligations:

	Carrying Amount of the Hedged Liability				Cumulative Amount of Fair Value Hedging Adjustment - Increase (Decrease) Included in Carrying Amount of Liability (d)
	December 31,		December 31,		December 31,		December 31,
(In millions)	2019		2018		2019		2018
Long-term Obligations	$	980	$	3,291	$	(13)	$	(93)

(d)Includes increase in the carrying amount of $30 million at December 31, 2018 on discontinued hedging relationships.

	Gain (Loss) Recognized
(In millions)	2019		2018
Fair Value Hedging Relationships
Interest rate swaps
Hedged long-term obligations - included in other expense, net	$	(93)	$	7
Derivatives designated as hedging instruments - included in other expense, net	97		(5)
Derivatives Designated as Cash Flow Hedges
Interest rate swaps
Included in unrealized losses on hedging instruments within other comprehensive items	(50)		—
Amount reclassified from accumulated other comprehensive items to other expense, net	(25)		(12)
Financial Instruments Designated as Net Investment Hedges
Foreign currency-denominated debt
Included in currency translation adjustment within other comprehensive items	60		336
Cross-currency interest rate swaps
Included in currency translation adjustment within other comprehensive items	49		28
Included in other expense, net	48		21
Derivatives Not Designated as Hedging Instruments
Currency exchange contracts
Included in cost of product revenues	1		2
Included in other expense, net	52		37

Gains and losses recognized on currency exchange contracts and the interest rate swaps designated as fair value hedges are included in the consolidated statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.

The company also uses foreign currency-denominated debt and cross-currency interest rate swaps to partially hedge its net investments in foreign operations against adverse movements in exchange rates. The majority of the company’s euro-denominated senior notes and cross-currency interest rate swaps have been designated as, and are effective as, economic hedges of part of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments and contract fair value changes on the cross-currency interest rate swaps, excluding interest accruals, are included in currency translation adjustment within other comprehensive items and shareholders’ equity.

See Note 1 and Note 10 for additional information on the company's risk management objectives and strategies.

Cash Flow Hedge Arrangements

In 2019, the company entered into interest rate swap arrangements to mitigate the risk of interest rates rising prior to the completion of debt offerings. Based on the company's conclusion that the debt offerings were probable, the swaps hedged the cash flow risk for each of the interest payments on €1.80 billion plus $900 million aggregate principal amounts of the planned fixed-rate debt issues. The hedges were terminated in 2019, in connection with the debt offerings. The aggregate fair value of the hedges at that time, $38 million, net of tax, has been classified as a reduction to accumulated other comprehensive items and will be amortized to interest expense over the terms of the related debt issuances. The company had a cash outlay of $50 million in 2019 associated with termination of the arrangements, included in other financing activities, net, in the accompanying statement of cash flows.

Fair Value of Other Financial Instruments

The carrying value and fair value of the company’s notes receivable and debt obligations are as follows:

	December 31, 2019				December 31, 2018
	Carrying		Fair		Carrying		Fair
(In millions)	Value		Value		Value		Value
Debt Obligations:
Senior notes	$	17,736	$	18,650	$	18,276	$	18,322
Commercial paper	—		—		693		693
Other	16		16		21		21
	$	17,752	$	18,666	$	18,990	$	19,036

The fair value of debt obligations was determined based on quoted market prices and on borrowing rates available to the company at the respective period ends which represent level 2 measurements.