Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments

v3.3.1.900
Derivative Financial Instruments
12 Months Ended
Dec. 26, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments [Text Block]
Note 6: Derivative Financial Instruments
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and, to a lesser extent, equity market risk, commodity price risk, and credit risk.
Currency Exchange Rate Risk
We are exposed to currency exchange rate risk, and generally hedge our exposures with currency forward contracts, currency interest rate swaps, or currency options. Substantially all of our revenue is transacted in U.S. dollars. However, a significant portion of our operating expenditures and capital purchases is incurred in or exposed to other currencies, primarily the euro, the Chinese yuan, the Japanese yen, and the Israeli shekel. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in the fair value and the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates. Our non-U.S.-dollar-denominated investments in debt instruments and loans receivable are generally hedged with offsetting currency forward contracts or currency interest rate swaps. We may also hedge currency risk arising from funding foreign currency-denominated forecasted investments. These programs reduce, but do not eliminate, the impact of currency exchange movements.
Our currency risk management programs include:
Currency derivatives with cash flow hedge accounting designation that utilize currency forward contracts and currency options to hedge exposures to the variability in the U.S.-dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedged transaction. We utilize currency interest rate swaps to hedge exposures to the variability in the U.S.-dollar equivalent of coupon and principal payments associated with our non-U.S.-dollar-denominated indebtedness.
Currency derivatives without hedge accounting designation that utilize currency forward contracts or currency interest rate swaps to economically hedge the functional currency equivalent cash flows of recognized monetary assets and liabilities, non-U.S.-dollar-denominated debt instruments classified as trading assets, and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. A substantial majority of these instruments mature within 12 months. Changes in the functional currency equivalent cash flows of the underlying assets and liabilities are approximately offset by the changes in the fair value of the related derivatives. We record net gains or losses in the line item on the consolidated statements of income most closely associated with the related exposures, primarily in interest and other, net, except for equity-related gains or losses, which we primarily record in gains (losses) on equity investments, net.
Interest Rate Risk
Our primary objective for holding investments in debt instruments is to preserve principal while maximizing yields. We generally swap the returns on our investments in fixed-rate debt instruments with remaining maturities longer than six months into U.S. dollar three-month LIBOR-based returns, unless management specifically approves otherwise. We may elect to swap fixed coupon payments on our debt issuances for floating rate coupon payments. These swaps are settled at various interest payment times involving cash payments at each interest and principal payment date, with the majority of the contracts having quarterly payments.
Our interest rate risk management programs include:
Interest rate derivatives with cash flow hedge accounting designation that utilize interest rate swap agreements to modify the interest characteristics of debt instruments. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedged transaction.
Interest rate derivatives with fair value hedge accounting designation that utilize interest rate swap agreements to hedge against changes in fair value on certain fixed rate debt due to fluctuations in the benchmark interest rate. For these derivatives, we recognize gains and losses in interest and other, net, along with the offsetting gains and losses attributable to the changes in the benchmark interest rate on the underlying hedged items.
Interest rate derivatives without hedge accounting designation that utilize interest rate swaps and currency interest rate swaps in economic hedging transactions, including hedges of non-U.S.-dollar-denominated debt instruments classified as trading assets and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. Floating interest rates on the swaps generally reset on a quarterly basis. Changes in the fair value of the debt instruments classified as trading assets and loans receivable recognized at fair value are generally offset by changes in the fair value of the related derivatives, both of which are recorded in interest and other, net.
Equity Market Risk
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. Before we enter into hedge arrangements, we evaluate legal, market, and economic factors, as well as the expected timing of disposal, to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives. We recognize changes in the fair value of such derivatives in gains (losses) on equity investments, net.
We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains and losses from changes in fair value of these total return swaps are generally offset by the losses and gains on the related liabilities, both of which are recorded in cost of sales and operating expenses. Deferred compensation liabilities were $1.3 billion as of December 26, 2015 ($1.2 billion as of December 27, 2014), and are included in other accrued liabilities.
Commodity Price Risk
We operate facilities that consume commodities and have established forecasted transaction risk management programs to protect against fluctuations in the fair value and the volatility of future cash flows caused by changes in commodity prices, such as those for natural gas. These programs reduce, but do not always eliminate, the impact of commodity price movements.
Our commodity price risk management program may include commodity derivatives with cash flow hedge accounting designation that utilize commodity swap contracts to hedge future cash flow exposures to the variability in commodity prices. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain (loss) from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedged transaction.
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) at the end of each period were as follows:
(In Millions)
 
Dec 26,
2015
 
Dec 27,
2014
 
Dec 28,
2013
Currency forwards
 
$
11,212

 
$
15,578

 
$
13,404

Currency interest rate swaps
 
5,509

 
5,446

 
4,377

Embedded debt derivatives
 
3,600

 
3,600

 
3,600

Interest rate swaps
 
5,212

 
1,347

 
1,377

Total return swaps
 
1,061

 
1,056

 
914

Other
 
61

 
49

 
67

Total
 
$
26,655


$
27,076


$
23,739

The gross notional amounts for currency forwards and currency interest rate swaps (presented by currency) at the end of each period were as follows:
(In Millions)
 
Dec 26,
2015
 
Dec 27,
2014
 
Dec 28,
2013
Chinese yuan
 
$
2,231

 
$
3,097

 
$
1,116

Euro
 
6,084

 
7,486

 
6,874

Israeli shekel
 
1,674

 
2,489

 
2,244

Japanese yen
 
2,663

 
3,779

 
4,116

Other
 
4,069

 
4,173

 
3,431

Total
 
$
16,721


$
21,024


$
17,781


During the fourth quarter of 2014, we entered into $1.5 billion of forward contracts to hedge our anticipated equity funding of the UniSpreadtrum investment. The hedges were designated as cash flow hedges and the related gains and losses attributable to changes in the spot rates were recognized in accumulated other comprehensive income (loss). Hedge gains and losses attributable to changes in the forward rates were recognized in interest and other, net. During 2015, we discontinued cash flow hedge accounting treatment for $478 million of forward contracts since we could no longer assert that funding is probable to occur within the initially specified timeline. Hedge losses accumulated in other comprehensive income and subsequently released to interest and other, net, related to these de-designated forward contracts were insignificant.
During 2015, we entered into $4.4 billion of interest rate swap agreements to hedge against changes in the fair value attributable to the benchmark interest rates related to $4.4 billion of our outstanding senior notes. These hedges were designated as fair value hedges. During 2015, we entered into $577 million of currency interest rate swap agreements to hedge against the variability in the U.S.-dollar equivalent of coupon and principal payments associated with our non-U.S.-dollar-denominated indebtedness. These hedges were designated as cash flow hedges.

Fair Value of Derivative Instruments in the Consolidated Balance Sheets
The fair value of our derivative instruments at the end of each period were as follows:
 
 
December 26, 2015
 
December 27, 2014
(In Millions)
 
Other
Current
Assets
 
Other
Long-Term
Assets
 
Other
Accrued
Liabilities
 
Other
Long-Term
Liabilities
 
Other
Current
Assets
 
Other
Long-Term
Assets
 
Other
Accrued
Liabilities
 
Other
Long-Term
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forwards
 
$
20

 
$
3

 
$
83

 
$
2

 
$
6

 
$
1

 
$
497

 
$
9

Interest rate swaps
 

 
1

 

 
14

 

 

 

 

Currency interest rate swaps
 

 
7

 

 

 

 

 

 

Total derivatives designated as hedging instruments
 
20


11


83


16


6


1


497


9

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forwards
 
20

 

 
63

 

 
207

 

 
44

 

Currency interest rate swaps
 
370

 
18

 
52

 

 
344

 
34

 
7

 

Embedded debt derivatives
 

 

 

 
17

 

 

 
4

 
8

Interest rate swaps
 
2

 

 
12

 

 
3

 

 
11

 

Total return swaps
 
32

 

 
2

 

 

 

 

 

Other
 
1

 
11

 

 

 
1

 
22

 

 

Total derivatives not designated as hedging instruments
 
425


29


129


17


555


56


66


8

Total derivatives
 
$
445


$
40


$
212


$
33


$
561


$
57


$
563


$
17


Amounts Offset in the Consolidated Balance Sheets
The gross amounts of our derivative instruments and reverse repurchase agreements subject to master netting arrangements with various counterparties, and cash and non-cash collateral posted under such agreements at the end of each period were as follows:
 
 
December 26, 2015
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
(In Millions)
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
 
Financial Instruments
 
Cash and Non-Cash Collateral Received or Pledged
 
Net Amount
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets subject to master netting arrangements
 
$
482

 
$

 
$
482

 
$
(201
)
 
$
(188
)
 
$
93

Reverse repurchase agreements
 
3,368

 

 
3,368

 

 
(3,368
)
 

Total assets
 
3,850




3,850


(201
)

(3,556
)

93

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities subject to master netting arrangements
 
242

 

 
242

 
(201
)
 
(27
)
 
14

Total liabilities
 
$
242


$


$
242


$
(201
)

$
(27
)

$
14

 
 
December 27, 2014
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
(In Millions)
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
 
Financial Instruments
 
Cash and Non-Cash Collateral Received or Pledged
 
Net Amount
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets subject to master netting arrangements
 
$
559

 
$

 
$
559

 
$
(365
)
 
$
(78
)
 
$
116

Reverse repurchase agreements
 
718

 

 
718

 

 
(718
)
 

Total assets
 
1,277




1,277


(365
)

(796
)

116

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities subject to master netting arrangements
 
559

 

 
559

 
(365
)
 
(80
)
 
114

Total liabilities
 
$
559


$


$
559


$
(365
)

$
(80
)

$
114


We obtain and secure available collateral from counterparties against obligations, including securities lending transactions and reverse repurchase agreements, when we deem it appropriate.

Derivatives in Cash Flow Hedging Relationships
The before-tax gains (losses), attributed to the effective portion of cash flow hedges, recognized in other comprehensive income (loss) for each period were as follows:
 
 
Gains (Losses)
Recognized in OCI on
Derivatives (Effective Portion)
Years Ended
(In Millions)
 
Dec 26,
2015
 
Dec 27,
2014
 
Dec 28,
2013
Currency forwards
 
$
(305
)
 
$
(587
)
 
$
(167
)
Currency interest rate swaps and other
 
7

 
(2
)
 
1

Total
 
$
(298
)

$
(589
)

$
(166
)

Gains and losses on derivative instruments in cash flow hedging relationships related to hedge ineffectiveness and amounts excluded from effectiveness testing were insignificant during all periods presented in the preceding tables. Additionally, for all periods presented, there was an insignificant impact on results of operations from discontinued cash flow hedges, which arises when forecasted transactions are probable of not occurring.
For information on the unrealized holding gains (losses) on derivatives reclassified out of accumulated other comprehensive income into the consolidated statements of income, see "Note 24: Other Comprehensive Income (Loss)."
Derivatives in Fair Value Hedging Relationships
The effects of derivative instruments designated as fair value hedges, recognized in interest and other, net for each period were as follows:
 
 
Gains (Losses)
Recognized in Statement of Income on
Derivatives
Years Ended
(In Millions)
 
Dec 26,
2015
 
Dec 27,
2014
 
Dec 28,
2013
Interest rate swap
 
$
(13
)
 
$

 
$

Hedged item
 
13

 

 

Total
 
$


$


$


There was no ineffectiveness during all periods presented in the preceding table.
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the consolidated statements of income for each period were as follows:
Years Ended
(In Millions)
 
Location of Gains (Losses)
Recognized in Income on Derivatives
 
Dec 26,
2015
 
Dec 27,
2014
 
Dec 28,
2013
Currency forwards
 
Interest and other, net
 
$
(50
)
 
$
144

 
$
44

Currency interest rate swaps
 
Interest and other, net
 
346

 
456

 
29

Interest rate swaps
 
Interest and other, net
 
(6
)
 
(3
)
 

Total return swaps
 
Various
 
(27
)
 
68

 
140

Other
 
Gains (losses) on equity investments, net
 
(11
)
 
(6
)
 
6

Other
 
Interest and other, net
 
(2
)
 

 

Total
 
$
250


$
659


$
219