| DERIVATIVE FINANCIAL INSTRUMENTS |
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7. |
DERIVATIVE FINANCIAL INSTRUMENTS |
We held the following derivative and non-derivative instruments that were accounted for pursuant to ASC 815, Derivatives and Hedging (ASC 815):
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interest rate swap agreements, which are used to protect us against changes in the fair values of certain of our fixed-rate borrowings attributable to the movements in benchmark interest rates. We have designated these swap agreements as qualifying hedging instruments and are accounting for them as fair value hedges pursuant to ASC 815; |
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cross-currency interest rate swap agreements, which are used to protect us against changes in the fair values of certain of our fixed-rate Euro-denominated borrowings attributable to the movements in benchmark interest rates and foreign currency exchange rates by effectively converting the fixed-rate, Euro-denominated borrowings, including the annual interest payments and the payment of principal at maturity, to variable-rate, U.S. Dollar denominated debt based on LIBOR. We have designated these swap agreements as qualifying hedging instruments and are accounting for them as fair value hedges pursuant to ASC 815. As a result of our adoption of ASU 2017-12, we have elected to exclude the portion of the change in fair value of these swap agreements attributable to the related cross-currency basis spread in our assessment of hedge effectiveness. The change in fair value of these swap agreements attributable to the cross-currency basis spread is included in accumulated other comprehensive loss; |
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cross-currency swap agreements, which are used to manage foreign currency exchange risk by converting certain of our fixed-rate Euro-denominated borrowings to fixed-rate U.S. Dollar denominated debt and are accounted for as cash flow hedges pursuant to ASC 815; and |
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foreign currency borrowings, which were used to reduce the volatility in stockholders’ equity caused by the changes in the foreign currency exchange rates of the Euro with respect to the U.S. Dollar and were accounted for as net investment hedges pursuant to ASC 815 in the first quarter of fiscal 2018. In the fourth quarter of fiscal 2018, we de-designated the foreign currency borrowings as a net investment hedge. |
We also held certain foreign currency contracts that were not designated as hedges pursuant to ASC 815. As of February 28, 2019 and May 31, 2018, the notional amounts of such forward contracts we held to purchase U.S. Dollars in exchange for other major international currencies were $3.8 billion and $3.4 billion, respectively, and the notional amount of forward contracts we held to sell U.S. Dollars in exchange for other major international currencies were $3.2 billion and $1.4 billion, respectively. The fair values of our outstanding foreign currency forward contracts were nominal as of February 28, 2019 and May 31, 2018. The cash flows related to these foreign currency contracts are classified as operating activities. Net gains or losses related to these forward contracts are included in non-operating income, net.
Our adoption of ASU-2017-12 during fiscal 2019 did not have a material impact on our previously existing hedge designations. See Note 10 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018 for additional information regarding the purpose, accounting and classification of our derivative and non-derivative instruments. None of our derivative instruments are used for trading purposes. The effects of derivative and non-derivative instruments designated as hedges on certain of our condensed consolidated financial statements were as follows as of or for each of the respective periods presented below (amounts presented exclude any income tax effects):
Fair Values of Derivative Instruments Designated as Hedges in Condensed Consolidated Balance Sheets
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Fair Value as of |
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(in millions) |
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Balance Sheet Location |
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February 28,
2019 |
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May 31,
2018 |
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Derivative assets: |
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Interest rate swap agreements designated as fair value hedges |
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Other non-current assets |
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$ |
— |
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$ |
24 |
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Cross-currency interest rate swap agreements designated as fair value hedges |
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Other non-current assets |
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— |
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5 |
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Total derivative assets |
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$ |
— |
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$ |
29 |
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Derivative liabilities: |
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Interest rate swap agreements designated as fair value hedges |
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Other current liabilities |
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$ |
11 |
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$ |
7 |
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Interest rate swap agreements designated as fair value hedges |
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Other non-current liabilities |
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15 |
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48 |
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Cross-currency interest rate swap agreements designated as fair value hedges |
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Other non-current liabilities |
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15 |
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— |
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Cross-currency swap agreements designated as cash flow hedges |
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Other non-current liabilities |
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165 |
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103 |
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Total derivative liabilities |
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$ |
206 |
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$ |
158 |
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Effects of Fair Value Hedging Relationships on Hedged Items in Condensed Consolidated Balance Sheet
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(in millions) |
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February 28,
2019 |
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May 31,
2018 |
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Notes payable and other borrowings, current: |
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Carrying amount of hedged item |
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$ |
1,988 |
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$ |
1,492 |
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Cumulative hedging adjustments included in the carrying amount |
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(11 |
) |
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(7 |
) |
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Notes payable and other borrowings, non-current: |
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Carrying amounts of hedged items |
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3,631 |
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5,584 |
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Cumulative hedging adjustments included in the carrying amount |
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24 |
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(19 |
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Effects of Derivative Instruments Designated as Hedges on Income
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Three Months Ended
February 28, |
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2019 |
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2018 |
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(in millions) |
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Non-operating
income, net |
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Interest
expense |
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Non-operating
income, net |
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Interest
expense |
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Condensed consolidated statements of income line amounts
in which the hedge effects were recorded |
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$ |
198 |
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$ |
(509 |
) |
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$ |
409 |
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$ |
(533 |
) |
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Gain (loss) on hedges recognized in income: |
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Interest rate swaps designated as fair value hedges: |
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Derivative instruments |
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$ |
— |
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$ |
43 |
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$ |
— |
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$ |
(47 |
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Hedged items |
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— |
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(43 |
) |
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— |
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47 |
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Cross-currency interest rate swaps designated as fair value hedges: |
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Derivative instruments |
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7 |
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9 |
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— |
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— |
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Hedged items |
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(4 |
) |
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(9 |
) |
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— |
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— |
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Cross-currency swap agreements designated as cash flow hedges: |
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Amount of gain reclassified from accumulated OCI or OCL |
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11 |
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— |
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51 |
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— |
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Total gain on hedges recognized in income |
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$ |
14 |
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$ |
— |
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$ |
51 |
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$ |
— |
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Nine Months Ended
February 28, |
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2019 |
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2018 |
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(in millions) |
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Non-operating
income, net |
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Interest
expense |
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Non-operating
income, net |
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Interest
expense |
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Condensed consolidated statements of income line amounts
in which the hedge effects were recorded |
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$ |
681 |
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$ |
(1,557 |
) |
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$ |
891 |
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$ |
(1,477 |
) |
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Gain (loss) on hedges recognized in income: |
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Interest rate swaps designated as fair value hedges: |
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Derivative instruments |
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$ |
— |
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$ |
5 |
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$ |
— |
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$ |
(94 |
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Hedged items |
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— |
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(5 |
) |
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— |
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94 |
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Cross-currency interest rate swaps designated as fair value hedges: |
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Derivative instruments |
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(21 |
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10 |
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— |
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— |
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Hedged items |
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22 |
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(10 |
) |
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— |
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— |
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Cross-currency swap agreements designated as cash flow hedges: |
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Amount of gain (loss) reclassified from accumulated OCI or OCL |
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(26 |
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— |
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142 |
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— |
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Total gain (loss) on hedges recognized in income |
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$ |
(25 |
) |
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$ |
— |
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$ |
142 |
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$ |
— |
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Gain (Loss) on Derivative and Non-Derivative Instruments Designated as Hedges included in Other Comprehensive Income (OCI) or Loss (OCL)
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Three Months Ended
February 28, |
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Nine Months Ended
February 28, |
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(in millions) |
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2019 |
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2018 |
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2019 |
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2018 |
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Cross-currency swap agreements designated as cash flow hedges |
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$ |
(7 |
) |
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$ |
57 |
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$ |
(62 |
) |
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$ |
161 |
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Foreign currency borrowings designated as net investment hedge |
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— |
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(31 |
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— |
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(85 |
) |
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