Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $842 million at March 31, 2020 and $957 million at December 31, 2019, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than 18 months. Accumulated gains and losses as of March 31, 2020 are reclassified from accumulated other comprehensive income (AOCI) and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement.

In the third quarter of 2019, the company entered into treasury rate lock agreements with notional amounts totaling $10.0 billion to hedge exposure to variability in future cash flows resulting from changes in interest rates related to the issuance of long-term debt in connection with the proposed acquisition of Allergan. The treasury rate lock agreements were designated as cash flow hedges and recorded at fair value. The agreements were net settled upon issuance of the senior notes in November 2019 and the resulting net gain was recognized in other comprehensive income (loss). This gain is reclassified to interest expense, net over the term of the related debt.

In the fourth quarter of 2019, the company entered into interest rate swap contracts with notional amounts totaling $2.3 billion at March 31, 2020 and December 31, 2019. The effect of the hedge contracts is to change a floating-rate interest obligation to a fixed rate for that portion of the floating-rate debt. The contracts were designated as cash flow hedges and are recorded at fair value. Realized and unrealized gains or losses are included in AOCI and are reclassified to interest expense, net over the lives of the floating-rate debt.

The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange gain or loss in the condensed consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $8.2 billion at March 31, 2020 and $7.1 billion at December 31, 2019.

The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. The company had foreign currency forward exchange contracts with notional amounts totaling €971 million, £204 million and CHF62 million as well as €3.6 billion aggregate principal amount of senior Euro notes designated as net investment hedges at March 31, 2020 and December 31, 2019. The company uses the spot method of assessing hedge effectiveness for derivative instruments designated as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI and the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in interest expense, net over the life of the hedging instrument.

AbbVie is a party to interest rate swap contracts designated as fair value hedges with notional amounts totaling $6.3 billion at March 31, 2020 and $10.8 billion at December 31, 2019. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.



	Fair value – Derivatives in asset position					Fair value – Derivatives in liability position
(in millions)	Balance sheet caption	March 31, 2020		December 31, 2019		Balance sheet caption	March 31, 2020		December 31, 2019
Foreign currency forward exchange contracts
Designated as cash flow hedges	Prepaid expenses and other	$	35	$	3	Accounts payable and accrued liabilities	$	—	$	14
Designated as cash flow hedges	Other assets	2		—		Other long-term liabilities	—		—
Designated as net investment hedges	Prepaid expenses and other	22		—		Accounts payable and accrued liabilities	1		24
Not designated as hedges	Prepaid expenses and other	43		19		Accounts payable and accrued liabilities	12		18
Interest rate swap contracts
Designated as cash flow hedges	Other assets	—		3		Other long-term liabilities	44		—
Designated as fair value hedges	Prepaid expenses and other	—		—		Accounts payable and accrued liabilities	—		2
Designated as fair value hedges	Other assets	133		28		Other long-term liabilities	—		74
Total derivatives		$	235	$	53		$	57	$	132



	Three months ended March 31,
(in millions)	2020			2019
Foreign currency forward exchange contracts
Designated as cash flow hedges	$	49		$	3
Designated as net investment hedges	40			—
Interest rate swap contracts designated as cash flow hedges	(46		)	—

Assuming market rates remain constant through contract maturities, the company expects to reclassify pre-tax gains of $34 million into cost of products sold for foreign currency cash flow hedges, pre-tax losses of $2 million into interest expense, net for interest rate swap cash flow hedges and pre-tax gains of $24 million into interest expense, net for treasury rate lock agreement cash flow hedges during the next 12 months.

Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized in other comprehensive income (loss) pre-tax gains of $60 million for the three months ended March 31, 2020 and $84 million for the three months ended March 31, 2019.

The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the condensed consolidated statements of earnings, including the net gains (losses) reclassified out of AOCI into net earnings. See Note 10 for the amount of net gains (losses) reclassified out of AOCI.



		Three months ended March 31,
(in millions)	Statement of earnings caption	2020			2019
Foreign currency forward exchange contracts
Designated as cash flow hedges	Cost of products sold	$	—		$	40
Designated as net investment hedges	Interest expense, net	8			—
Not designated as hedges	Net foreign exchange loss	2			15
Treasury rate lock agreements designated as cash flow hedges	Interest expense, net	6			—
Interest rate swap contracts
Designated as cash flow hedges	Interest expense, net	1			—
Designated as fair value hedges	Interest expense, net	360			112
Debt designated as hedged item in fair value hedges	Interest expense, net	(360		)	(112		)



			Basis of fair value measurement
(in millions)	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and equivalents	$	41,142	$	1,272	$	39,870	$	—
Debt securities	3		—		3		—
Interest rate swap contracts	133		—		133		—
Foreign currency contracts	102		—		102		—
Total assets	$	41,380	$	1,272	$	40,108	$	—
Liabilities
Interest rate swap contracts	$	44	$	—	$	44	$	—
Foreign currency contracts	13		—		13		—
Contingent consideration	7,359		—		—		7,359
Total liabilities	$	7,416	$	—	$	57	$	7,359



			Basis of fair value measurement
(in millions)	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and equivalents	$	39,924	$	1,542	$	38,382	$	—
Debt securities	3		—		3		—
Equity securities	24		24		—		—
Interest rate swap contracts	31		—		31		—
Foreign currency contracts	22		—		22		—
Total assets	$	40,004	$	1,566	$	38,438	$	—
Liabilities
Interest rate swap contracts	$	76	$	—	$	76	$	—
Foreign currency contracts	56		—		56		—
Contingent consideration	7,340		—		—		7,340
Total liabilities	$	7,472	$	—	$	132	$	7,340

The fair value measurements of the contingent consideration liabilities were determined based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products. The potential contingent consideration payments are estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which are then discounted to present value. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of certain of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period.

The fair value of the company's contingent consideration liabilities as of March 31, 2020 was calculated using the following significant unobservable inputs:



	Range	Weighted average^(a)
Discount rate	2.2% - 3.5%	2.8	%
Probability of payment for unachieved milestones	16% - 57%	54	%
Probability of payment for royalties by indication^(b)	16% - 100%	89	%
Projected year of payments	2020 - 2034	2027

(b) Excludes early stage indications with 0% estimated probability of payment and includes approved indications with 100% probability of payment. Excluding approved indications, the estimated probability of payment ranged from 16% to 56% at March 31, 2020.

There have been no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy. The following table presents the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs:

Certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of March 31, 2020 are shown in the table below:



					Basis of fair value measurement
(in millions)	Book value		Approximate fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Liabilities
Short-term borrowings	$	6	$	6	$	—	$	6	$	—
Current portion of long-term debt and finance lease obligations, excluding fair value hedges	3,756		3,757		3,750		7		—
Long-term debt and finance lease obligations, excluding fair value hedges	62,974		66,176		66,157		19		—
Total liabilities	$	66,736	$	69,939	$	69,907	$	32	$	—



					Basis of fair value measurement
(in millions)	Book value		Approximate fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Liabilities
Current portion of long-term debt and finance lease obligations, excluding fair value hedges	$	3,755	$	3,760	$	3,753	$	7	$	—
Long-term debt and finance lease obligations, excluding fair value hedges	63,021		66,651		66,631		20		—
Total liabilities	$	66,776	$	70,411	$	70,384	$	27	$	—

AbbVie also holds investments in equity securities that do not have readily determinable fair values. The company records these investments at cost and remeasures them to fair value based on certain observable price changes or impairment events as they occur. The carrying amount of these investments was $75 million as of March 31, 2020 and $66 million as of December 31, 2019. No significant cumulative upward or downward adjustments have been recorded for these investments as of March 31, 2020.

Of total net accounts receivable, three U.S. wholesalers accounted for 70% as of March 31, 2020 and 68% as of December 31, 2019, and substantially all of AbbVie’s net revenues in the United States were to these three wholesalers.

In connection with the proposed acquisition of Allergan, in November 2019, the company issued $30.0 billion aggregate principal amount of unsecured senior notes. Additional information on the terms of these notes is included in the company’s Annual Report on Form 10-K for the year ended December 31, 2019. AbbVie expects to use the net proceeds to fund a portion of the aggregate cash consideration due to Allergan shareholders in connection with the proposed acquisition described in Note 4 and to pay related fees and expenses. Pending the consummation of the proposed Allergan acquisition, the net proceeds from the offering are permitted to be invested temporarily in short-term investments. All of the notes are subject to special mandatory redemption at a redemption price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest if the proposed acquisition of Allergan is not completed by January 30, 2021 or the company notifies the trustee in respect of the notes that it will not pursue the consummation of the proposed Allergan acquisition.

In July 2019, AbbVie entered into a term loan credit agreement with an aggregate principal amount of $6.0 billion consisting of a $1.5 billion 364-day term loan tranche, a $2.5 billion three-year term loan tranche and a $2.0 billion five-year term loan tranche. No amounts were drawn under the term loan credit agreement at March 31, 2020.

In October 2019, AbbVie commenced offers to exchange any and all outstanding notes of certain series issued by Allergan for up to $15.5 billion aggregate principal amount and €3.7 billion aggregate principal amount of new notes to be issued by AbbVie and cash, subject to conditions including the closing of the pending acquisition of Allergan. Concurrently with the offers to exchange the Allergan notes for AbbVie notes, the company solicited consents to adopt certain proposed amendments to each of the indentures governing the Allergan notes to, among other things, eliminate substantially all of the restrictive covenants in such indentures. In November 2019, the company announced that the requisite number of consents had been received to adopt the proposed amendments with respect to all Allergan notes and that Allergan executed a supplemental indenture with respect to each Allergan indenture implementing the amendments, which will become operative only upon settlement of the exchange offers. The expiration of the exchange offers is expected to occur on or about the closing date of AbbVie’s acquisition of Allergan.

There were no commercial paper borrowings outstanding as of March 31, 2020 and December 31, 2019. There were no commercial paper borrowings issued during the three months ended March 31, 2020. The weighted-average interest rate on commercial paper borrowings was 2.8% for the three months ended March 31, 2019.