Risk Management Activities and Fair Value Measurements

As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices.

For details on the Company’s risk management activities and fair value measurement policies under the fair value hierarchy, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

Fair Value Hierarchy

The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

The following table sets forth the Company’s financial assets and liabilities as of December 31 and June 30, 2011 that are measured at fair value on a recurring basis during the period, segregated by level within the fair value hierarchy:



	Level 1				Level 2				Level 3				Total
Amounts in millions	December 31, 2011		June 30, 2011		December 31, 2011		June 30, 2011		December 31, 2011		June 30, 2011		December 31, 2011		June 30, 2011
Assets at fair value:
Investment securities	$	7	$	16	$	—	$	—	$	22	$	23	$	29	$	39
Derivatives relating to:
Foreign currency hedges	—		—		—		1		—		—		—		1
Other foreign currency instruments⁽¹⁾	—		—		30		182		—		—		30		182
Interest rates	—		—		275		163		—		—		275		163
Net investment hedges	—		—		6		—		—		—		6		—
Commodities	—		—		1		4		—		—		1		4
Total assets at fair value⁽²⁾	7		16		312		350		22		23		341		389
Liabilities at fair value:
Derivatives relating to:
Foreign currency hedges	—		—		169		119		—		—		169		119
Other foreign currency instruments⁽¹⁾	—		—		272		43		—		—		272		43
Net investment hedges	—		—		70		138		—		—		70		138
Commodities	—		—		—		1		—		—		—		1
Total liabilities at fair value⁽³⁾	—		—		511		301		—		—		511		301


(1)	Other foreign currency instruments are comprised of foreign currency financial instruments that do not qualify as hedges.


(2)	Investment securities are presented in other noncurrent assets and all derivative assets are presented in prepaid expenses and other current assets or other noncurrent assets.


(3)	All liabilities are presented in accrued and other liabilities or other noncurrent liabilities.

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There was no significant activity within the Level 3 assets and liabilities during the periods presented. Except for the goodwill and intangible assets discussed in Note 4, there were no assets or liabilities that were re-measured at fair value on a non-recurring basis during the periods presented.

Certain of the Company’s financial instruments used in hedging transactions are governed by industry standard netting agreements with counterparties. If the Company’s credit rating were to fall below the levels stipulated in the agreements, the counterparties could demand either collateralization or termination of the arrangement. The aggregate fair value of the instruments covered by these contractual features that are in a net liability position as of December 31, 2011 was $377 million. The Company has never been required to post any collateral as a result of these contractual features.

Fair Values of Other Financial Instruments

Other financial instruments, including cash equivalents, other investments and short-term debt, are recorded at cost, which approximates fair value. The fair value of the long-term debt was $21,950 million and $23,418 million at December 31 and June 30, 2011, respectively.

Disclosures about Derivative Instruments

The notional amounts and fair values of qualifying and non-qualifying financial instruments used in hedging transactions as of December 31 and June 30, 2011 are as follows:



	Notional Amount				Fair Value Asset (Liability)
Amounts in Millions	December 31, 2011		June 30, 2011		December 31, 2011			June 30, 2011
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	—	$	—	$	—		$	—
Foreign currency contracts	831		831		(169		)	(118		)
Commodity contracts	27		16		1			4
Total	858		847		(168		)	(114		)
Derivatives in Fair Value Hedging Relationships
Interest rate contracts	8,852		10,308		275			163
Derivatives in Net Investment Hedging Relationships
Net investment hedges	1,809		1,540		(64		)	(138		)
Derivatives Not Designated as Hedging Instruments
Foreign currency contracts	13,811		14,957		(242		)	139
Commodity contracts	16		39		—			(1		)
Total	13,827		14,996		(242		)	138

The total notional amount of contracts outstanding at the end of the period is indicative of the level of the Company’s derivative activity during the period.



	Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)
Amounts in Millions	December 31, 2011			June 30, 2011
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	13		$	15
Foreign currency contracts	17			32
Commodity contracts	1			3
Total	31			50
Derivatives in Net Investment Hedging Relationships
Net investment hedges	(37		)	(88		)

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive income (OCI) during the three and six months ended December 31, 2011 and 2010 was not material. During the next 12 months, the amount of the December 31, 2011 accumulated OCI balance that will be reclassified to earnings is expected to be immaterial.

The amounts of gains and losses on qualifying and non-qualifying financial instruments used in hedging transactions for the three and six months ended December 31, 2011 and 2010 are as follows:



	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income⁽¹⁾
	Three Months Ended December 31						Six Months Ended December 31
Amounts in Millions	2011			2010			2011			2010
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	1		$	2		$	3		$	4
Foreign currency contracts	18			(19		)	(27		)	(68		)
Commodity contracts	—			4			1			18
Total	19			(13		)	(23		)	(46		)

	Amount of Gain (Loss) Recognized in Income
	Three Months Ended December 31						Six Months Ended December 31
Amounts in Millions	2011			2010			2011			2010
Derivatives in Fair Value Hedging Relationships ⁽²⁾
Interest rate contracts	(19		)	(87		)	112			(25		)
Debt	19			89			(114		)	26
Total	—			2			(2		)	1
Derivatives in Net Investment Hedging Relationships⁽²⁾
Net investment hedges	(5		)	(1		)	(8		)	(1		)
Derivatives Not Designated as Hedging Instruments⁽³⁾
Foreign currency contracts ⁽⁴⁾	(410		)	(110		)	(991		)	626
Commodity contracts	—			2			(1		)	4
Total	(410		)	(108		)	(992		)	630

(1)

The gain or loss on the effective portion of cash flow hedging relationships is reclassified from accumulated OCI into net income in the same period during which the related item affects earnings. Such amounts are included in the Consolidated Statements of Earnings as follows: interest rate contracts in interest expense, foreign currency contracts in selling, general and administrative expense and interest expense and commodity contracts in cost of products sold.


(2)	The gain or loss on the ineffective portion of interest rate contracts and net investment hedges, if any, is included in the Consolidated Statements of Earnings in interest expense.


(3)	The gain or loss on contracts not designated as hedging instruments is included in the Consolidated Statements of Earnings as follows: foreign currency contracts in selling, general and administrative expense and commodity contracts in cost of products sold.


(4)	The gain or loss on non-qualifying foreign currency contracts substantially offsets the foreign currency mark-to-market impact of the related exposure.