7. 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, 2013.

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 September 30, 2013 and June 30, 2013 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
	September 30, 2013		June 30, 2013		September 30, 2013		June 30, 2013		September 30, 2013		June 30, 2013		September 30, 2013		June 30, 2013
Assets recorded at fair value:
Investments:
U.S. government securities	$	—	$	—	$	1,580	$	1,571	$	—	$	—	$	1,580	$	1,571
Other investments	31		23		—		—		24		24		55		47
Derivatives relating to:
Foreign currency hedges	—		—		164		168		—		—		164		168
Other foreign currency instruments⁽¹⁾	—		—		35		19		—		—		35		19
Interest rates	—		—		167		191		—		—		167		191
Net investment hedges	—		—		224		233		—		—		224		233
Total assets recorded at fair value⁽²⁾	31		23		2,170		2,182		24		24		2,225		2,229
Liabilities recorded at fair value:
Derivatives relating to:
Foreign currency hedges	—		—		—		—		—		—		—		—
Other foreign currency instruments⁽¹⁾	—		—		37		90		—		—		37		90
Interest rates	—		—		64		59		—		—		64		59
Net investment hedges	—		—		1		—		—		—		1		—
Liabilities recorded at fair value⁽³⁾	—		—		102		149		—		—		102		149
Liabilities not recorded at fair value:
Long-term debt⁽⁴⁾	23,865		22,671		3,092		3,022		—		—		26,957		25,693
Total liabilities recorded and not recorded at fair value	$	23,865	$	22,671	$	3,194	$	3,171	$	—	$	—	$	27,059	$	25,842


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

⁽²⁾

All derivative assets are presented in prepaid expenses and other current assets and other noncurrent assets. Investment securities are presented in available-for-sale investment securities and other noncurrent assets. The U.S government securities are included in other noncurrent assets in our Consolidated Balance Sheet at June 30, 2013. The amortized cost of the U.S. government securities was $1,604 as of September 30, 2013 and June 30, 2013. All U.S. government securities have contractual maturities between one and five years. Fair values are generally estimated based upon quoted market prices for similar instruments.


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


⁽⁴⁾	Long-term debt includes the current portion ($2,064 and $4,540 as of September 30, 2013 and June 30, 2013, respectively) of debt instruments. Long-term debt is not recorded at fair value on a recurring basis, but is measured at fair value for disclosure purposes. Fair values are generally estimated based on quoted market prices for identical or similar instruments.

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the periods presented. Also, there was no significant activity within the Level 3 assets and liabilities during the periods presented and there were no assets or liabilities that were remeasured at fair value on a non-recurring basis for the period ended September 30, 2013.

Substantially all 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 September 30, 2013, was not material. The Company has not been required to post any collateral as a result of these contractual features.

Disclosures about Derivative Instruments

The notional amounts and fair values of qualifying and non-qualifying financial instruments used in hedging transactions as of September 30, 2013 and June 30, 2013 are as follows:



	Notional Amount		Fair Value Asset/(Liability)
	September 30, 2013	June 30, 2013	September 30, 2013	June 30, 2013
Derivatives in Cash Flow Hedging Relationships
Foreign currency contracts	$951	$951	$164	$168
Derivatives in Fair Value Hedging Relationships
Interest rate contracts	$10,226	$9,117	$103	$132
Derivatives in Net Investment Hedging Relationships
Net investment hedges	$1,303	$1,303	$223	$233
Derivatives Not Designated as Hedging Instruments
Foreign currency contracts	$6,496	$7,080	$(2)	$(71)



	Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)
	September 30, 2013		June 30, 2013
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	6	$	7
Foreign currency contracts	17		14
Total	$	23	$	21
Derivatives in Net Investment Hedging Relationships
Net investment hedges	$	139	$	145

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive income (OCI) during the three months ended September 30, 2013 and 2012, was not material. During the next 12 months, the amount of the September 30, 2013 accumulated OCI (AOCI) 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 months ended September 30, 2013 and 2012 are as follows:



	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income⁽¹⁾
	Three Months Ended September 30
	2013			2012
Derivatives in Cash Flow Hedging Relationships
Interest rate contracts	$	2		$	2
Foreign currency contracts	(2		)	(18		)
Total	$	—		$	(16	)

	Amount of Gain/(Loss) Recognized in Income
	Three Months Ended September 30
	2013			2012
Derivatives in Fair Value Hedging Relationships ⁽²⁾
Interest rate contracts	$	(29	)	$	40
Debt	29			(38		)
Total	—			2
Derivatives Not Designated as Hedging Instruments⁽³⁾
Foreign currency contracts ⁽⁴⁾	109			279
Commodity contracts	—			2
Total	$	109		$	281

⁽¹⁾

The gain or loss on the effective portion of cash flow hedging relationships is reclassified from AOCI 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 (SG&A) 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 SG&A 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.