Notes to Consolidated Financial Statements
Note 3 — Financial Instruments, Derivatives and Fair Value Measures
Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, totaling $1.6 billion, $1.3 billion and $2.0 billion at December 31, 2011, 2010 and 2009, respectively, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value. Accumulated gains and losses as of December 31, 2011 will be included in Cost of products sold at the time the products are sold, generally through the next twelve months. The amount of hedge ineffectiveness was not significant in 2011, 2010 and 2009.
Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity. For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, in exchange for primarily U.S. dollars and other European currencies. For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar, European currencies and Japanese yen. At December 31, 2011, 2010 and 2009, Abbott held $15.7 billion, $10.8 billion and $7.5 billion, respectively, of such foreign currency forward exchange contracts.
Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $680 million, $650 million and $575 million as of December 31, 2011, 2010 and 2009, respectively. Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.
Abbott is a party to interest rate hedge contracts totaling $6.8 billion, $7.3 billion and $5.5 billion at December 31, 2011, 2010 and 2009, respectively, to manage its exposure to changes in the fair value of fixed-rate debt. These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt. Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount. No hedge ineffectiveness was recorded in income in 2011, 2010 and 2009 for these hedges.
Gross unrealized holding gains (losses) on available-for-sale equity securities totaled $64 million and $(2) million, respectively, at December 31, 2011, $40 million and $(1) million, respectively, at December 31, 2010; and $42 million and $(3) million, respectively, at December 31, 2009.
The following table summarizes the amounts and location of certain derivative financial instruments as of December 31:
(dollars in millions) |
Fair Value – Assets |
Fair Value – Liabilities |
||||||
2011 |
2010 |
2009 |
Balance Sheet Caption |
2011 |
2010 |
2009 |
Balance Sheet Caption |
|
Interest rate swaps designated as fair value hedges |
$598 |
$138 |
$80 |
Deferred income taxes and other assets |
$— |
$36 |
$218 |
Post-employment obligations and other long-term liabilities |
Interest rate swaps designated as fair value hedges |
— |
8 |
— |
Other prepaid expenses and receivables |
— |
— |
— |
n/a |
Foreign currency forward exchange contracts — Hedging instruments |
115 |
16 |
— |
2 |
10 |
27 |
||
Others not designated as hedges |
165 |
109 |
31 |
Other prepaid expenses and receivables |
179 |
120 |
87 |
Other accrued liabilities |
Debt designated as a hedge of net investment in a foreign subsidiary |
— |
— |
— |
n/a |
680 |
650 |
575 |
Short-term borrowings |
$878 |
$271 |
$111 |
$861 |
$816 |
$907 |
|||
The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative financial instruments. The amount of hedge ineffectiveness was not significant in 2011, 2010 and 2009 for these hedges.
(dollars in millions) |
Gain (loss) Recognized in Other Comprehensive Income (loss) |
Income (expense) and Gain (loss) Reclassified into Income |
|||||
2011 |
2010 |
2009 |
2011 |
2010 |
2009 |
Income Statement Caption |
|
Foreign currency forward exchange contracts designated as cash flow hedges |
$65 |
$170 |
$(65) |
$(26) |
$63 |
$(64) |
Cost of products sold |
Debt designated as a hedge of net investment in a foreign subsidiary |
(30) |
(75) |
15 |
— |
— |
— |
n/a |
Interest rate swaps designated as fair value hedges |
n/a |
n/a |
n/a |
488 |
248 |
(309) |
Interest expense |
Foreign currency forward exchange contracts not designated as hedges |
n/a |
n/a |
n/a |
(11) |
155 |
(106) |
Net foreign exchange (gain) loss |
The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.
The carrying values and fair values of certain financial instruments as of December 31 are shown in the table below. The carrying values of all other financial instruments approximate their estimated fair values. The counterparties to financial instruments consist of select major international financial institutions. Abbott does not expect any losses from nonperformance by these counterparties.
(dollars in millions) |
2011 |
2010 |
2009 |
|||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|
Investment Securities: Current |
$20 |
$20 |
$— |
$— |
$— |
$— |
Long-term: Equity securities |
317 |
317 |
240 |
240 |
153 |
153 |
Note receivable |
— |
— |
— |
— |
880 |
925 |
Other |
61 |
42 |
62 |
43 |
100 |
79 |
Total Long-term Debt |
(13,067) |
(15,129) |
(14,568) |
(15,723) |
(11,477) |
(12,304) |
Foreign Currency Forward Exchange Contracts: Receivable position |
280 |
280 |
125 |
125 |
31 |
31 |
(Payable) position |
(181) |
(181) |
(130) |
(130) |
(114) |
(114) |
Interest Rate Hedge Contracts: Receivable position |
598 |
598 |
146 |
146 |
80 |
80 |
(Payable) position |
— |
— |
(36) |
(36) |
(218) |
(218) |
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:
(dollars in millions) |
Basis of Fair Value Measurement |
|||
December 31, 2011: |
Outstanding Balances |
Quoted Prices in Active Markets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
Equity securities |
$93 |
$93 |
$— |
$— |
Interest rate swap financial instruments |
598 |
— |
598 |
— |
Foreign currency forward exchange contracts |
280 |
— |
280 |
— |
Total Assets |
$971 |
$93 |
$878 |
$— |
Fair value of hedged long-term debt |
$7,427 |
$— |
$7,427 |
$— |
Foreign currency forward exchange contracts |
181 |
— |
181 |
— |
Contingent consideration related to business combinations |
423 |
— |
— |
423 |
Total Liabilities |
$8,031 |
$— |
$7,608 |
$423 |
December 31, 2010: |
||||
Equity securities |
$75 |
$75 |
$— |
$— |
Interest rate swap financial instruments |
146 |
— |
146 |
— |
Foreign currency forward exchange contracts |
125 |
— |
125 |
— |
Total Assets |
$346 |
$75 |
$271 |
$— |
Fair value of hedged long-term debt |
$7,444 |
$— |
$7,444 |
$— |
Interest rate swap financial instruments |
36 |
— |
36 |
— |
Foreign currency forward exchange contracts |
130 |
— |
130 |
— |
Contingent consideration related to business combinations |
365 |
— |
— |
365 |
Total Liabilities |
$7,975 |
$— |
$7,610 |
$365 |
December 31, 2009: |
||||
Equity and other securities |
$104 |
$75 |
$— |
$29 |
Interest rate swap financial instruments |
80 |
— |
80 |
— |
Foreign currency forward exchange contracts |
31 |
— |
31 |
— |
Total Assets |
$215 |
$75 |
$111 |
$29 |
Fair value of hedged long-term debt |
$5,362 |
$— |
$5,362 |
$— |
Interest rate swap financial instruments |
218 |
— |
218 |
— |
Foreign currency forward exchange contracts |
114 |
— |
114 |
— |
Total Liabilities |
$5,694 |
$— |
$5,694 |
$— |
The fair value of the debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis. The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money, exchange and other changes in fair value.
