Derivatives and Fair Value | Note 5. Derivatives and Fair Value Foreign Exchange Risk Management The Company transacts business in more than 100 countries and is subject to risks associated with fluctuating foreign exchange rates. The Company’s objective is to reduce earnings and cash flow volatility associated with foreign exchange rate movements. Accordingly, the Company enters into foreign currency forward contracts to minimize the impact of foreign exchange movements on non–functional currency assets and liabilities The forward contracts entered into for balance sheet risk management purposes are not designated as hedges and are carried at fair value, with changes in the fair value recorded to Other income (loss), net in the Condensed Consolidated Statements of Comprehensive Income (Loss). These contracts do not subject the Company to material balance sheet risk because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. The forward contracts entered into for Royalty Hedging purposes are designated as hedges and are carried at fair value, with changes in the fair value recorded to The following table details the components of foreign exchange gain (loss) included in Other income (loss), net on the Condensed Consolidated Statements of Comprehensive Income (Loss): Three Months Ended (in millions) 2016 2015 Revaluation of other non-functional currency assets and liabilities (1) $ (7 ) $ — Effect of derivatives 3 4 Total foreign exchange gain (loss) $ (4 ) $ 4 (1) Bolívar Net Investment Risk Management The Company designates its foreign currency denominated debt as a hedge of its net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in the Euro exchange rate with respect to the U.S. Dollar. As of March 31, 2016, these borrowings (net of original issue discount) were €1,123 million ($1,279 million). The effective portion of foreign exchange gains or losses on the remeasurement of the debt is recognized in the cumulative translation adjustment component of AOCI with the related offset in long-term debt. Those amounts would be reclassified from AOCI to earnings upon the sale or substantial liquidation of these net investments. The amount of foreign exchange (losses) gains related to the net investment hedge included in cumulative translation adjustment for the three months ended March 31, 2016 and 2015 were $(52) million and $122 million, respectively. Interest Rate Risk Management The Company purchases interest rate caps and has entered into interest rate swap agreements for purposes of managing its risk in interest rate fluctuations. In 2014, the Company purchased U.S. Dollar denominated interest rate caps (“2014 Caps”) at strike rates ranging between 2% and 3%. These caps are effective at various times through April 2016, and expire at various times between April 2017 and April 2019. The 2014 Caps are designated as cash flow hedges. The Company also entered into U.S. Dollar and Euro denominated interest rate swap agreements in 2014 (“2014 Swaps”) to hedge interest rate exposure on its borrowings. The 2014 swaps expire at various times from March 2017 through March 2021. On these agreements, the Company pays a fixed rate ranging from 1.4% to 2.1% and receives a variable rate of interest equal to the greater of three-month U.S. Dollar London Interbank Offered Rate (“LIBOR”) or three-month Euro Interbank Offered Rate (“EURIBOR”), and 1%. The 2014 Swaps are designated as cash flow hedges. The Company also entered into interest rate swap agreements in 2010 (“2010 Swaps”) to hedge interest rate exposure on its borrowings. The 2010 Swaps expired at various times through January 2016. On these agreements, the Company paid a fixed rate ranging from 3% to 3.3% and received a variable rate of interest equal to the three-month LIBOR. The 2010 Swaps were not designated as cash flow hedges. The fair values of derivative instruments in the Condensed Consolidated Statements of Financial Position are as follows: March 31, 2016 December 31, 2015 Fair Value of Derivative U.S. Dollar Notional Fair Value of Derivative U.S. Dollar Notional (in millions) Balance Sheet Caption Asset Liability Asset Liability Derivatives Designated as Hedging Instruments: Foreign exchange contracts Accounts receivable/ Accounts payable $ 1 $ 8 $ 180 $ 4 $ 2 $ 178 Interest rate caps Non-Current Assets 1 — 1,000 4 — 1,000 Interest rate swaps See below (1) — 13 530 — 10 517 Derivatives not Designated as Hedging Instruments: Foreign exchange contracts Accounts receivable/ Accounts payable 3 — 150 3 — 148 Interest rate swaps See below (1) — — — — 1 100 Total Derivatives $ 5 $ 21 $ 11 $ 13 (1) $13 million included in Other liabilities at March 31, 2016 and $1 million included in Accrued and other current liabilities and $10 million included in Other liabilities at December 31, 2015 in the Condensed Consolidated Statements of Financial Position. For derivatives designated as hedges, the Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative ceases to be highly effective as a hedge, the Company will discontinue hedge accounting with respect to that derivative prospectively. When it is probable that a hedged forecasted transaction will not occur, the Company discontinues hedge accounting for the affected portion of the forecasted transaction, and reclassifies gains or losses that were accumulated in AOCI to earnings in Other income (loss), net for foreign exchange derivatives and interest expense for interest rate derivatives on the Condensed Consolidated Statements of Comprehensive Income (Loss). Cash flows are classified consistent with the underlying hedged item. The effects of derivative instruments in cash flow hedging relationships on the Condensed Consolidated Statements of Comprehensive Income (Loss) are as follows: (in millions) Effect of Derivatives on Financial Performance Amount of Income/(Loss) Location of Income/(Loss) Amount of Three Months Ended March 31, 2016 2015 2016 2015 Foreign exchange contracts $ (8 ) $ 7 Other income (loss), net $ 2 $ 6 Interest rate derivatives (4 ) (4 ) Interest expense — — The pre-tax gain (loss) recognized in other income (loss), net for foreign exchange contracts not designated as hedging instruments was $1 million and $(2) million for the first quarter of 2016 and 2015, respectively. Changes in the fair value of derivatives that are designated as cash flow hedges are recorded in AOCI to the extent effective and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings. The Company expects $15 million of pre-tax unrealized losses related to its foreign exchange contracts and interest rate derivatives included in AOCI at March 31, 2016 to be reclassified into earnings within the next twelve months. Fair Value Disclosures The Company is subject to authoritative guidance which requires a three-level hierarchy for disclosure of fair value measurements as follows: Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 2 — Quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs are observable in active markets. Level 3 — Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. The carrying values of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximated their fair values at March 31, 2016 and December 31, 2015 due to the short-term nature of these instruments. At March 31, 2016 and December 31, 2015, the fair value of total debt approximated $4,613 million and $4,229 million, respectively, as determined under Level 2 measurements based on quoted prices for these financial instruments. Recurring Measurements The following tables summarize assets and liabilities measured at fair value on a recurring basis at the dates indicated: Basis of Fair Value Measurements March 31, 2016 (in millions) Level 1 Level 2 Level 3 Total Assets Derivatives $ — $ 5 — $ 5 Total $ — $ 5 $ — $ 5 Liabilities Contingent consideration $ — $ — $ 29 $ 29 Derivatives — 21 — 21 Total $ — $ 21 $ 29 $ 50 December 31, 2015 Level 1 Level 2 Level 3 Total Assets Derivatives $ — $ 11 $ — $ 11 Total $ — $ 11 $ — $ 11 Liabilities Contingent consideration $ — $ — $ 28 $ 28 Derivatives — 13 — 13 Total $ — $ 13 $ 28 $ 41 Derivatives consist of foreign exchange contracts and interest rate caps and swaps. The fair value of foreign exchange contracts is based on observable market inputs of spot and forward rates. The fair value of the interest rate caps and swaps is the estimated amount that the Company would receive or pay to terminate such agreements, taking into account market interest rates and the remaining time to maturities. The following table summarizes Level 3 acquisition-related contingent consideration liabilities (see Note 2) carried at fair value on a recurring basis with the use of unobservable inputs for the period indicated. (in millions) Contingent Balance at December 31, 2015 $ 28 New acquisitions 2 Changes in fair value estimates and foreign currency translation adjustments (1 ) Balance at March 31, 2016 $ 29 |