ABBOTT LABORATORIES | 2013 | FY | 3


Note 10 — 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 $137 million at December 31, 2013, and $1.6 billion at December 31, 2012, 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. Contracts totaling $1.0 billion were transferred to AbbVie as part of the separation on January 1, 2013. Accumulated gains and losses as of December 31, 2013 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 2013, 2012 and 2011.

        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, 2013, 2012 and 2011, Abbott held $13.8 billion, $18.2 billion and $15.7 billion, respectively, of such foreign currency forward exchange contracts. Contracts totaling $4.3 billion were transferred to AbbVie as part of the separation on January 1, 2013.

        Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $505 million, $615 million and $680 million as of December 31, 2013, 2012 and 2011, 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 $1.5 billion, $9.5 billion and $6.8 billion at December 31, 2013, 2012 and 2011, respectively, to manage its exposure to changes in the fair value of fixed-rate debt. $8.0 billion of the contracts outstanding at December 31, 2012 related to debt issued by AbbVie Inc. in the fourth quarter of 2012 and were transferred to AbbVie as part of the separation on January 1, 2013. 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 2013, 2012 and 2011 for these hedges.

        Gross unrealized holding gains on available-for-sale equity securities totaled $22 million, $51 million and $64 million at December 31, 2013, 2012 and 2011, respectively.

        The following table summarizes the amounts and location of certain derivative financial instruments as of December 31:

 
  Fair Value — Assets   Fair Value — Liabilities
 
  2013   2012   Balance Sheet Caption   2013   2012   Balance Sheet Caption
 
   
   
  (in millions)
   
   
   

Interest rate swaps designated as fair value hedges

  $ 87   $ 185   Deferred income taxes and other assets   $   $ 80   Post-employment obligations and other long-term liabilities

Foreign currency forward exchange contracts —

                               

Hedging instruments

    14     22   Other prepaid expenses and receivables         11   Other accrued liabilities

Others not designated as hedges

    70     98         75     135    

Debt designated as a hedge of net investment in a foreign subsidiary

          n/a     505     615   Short-term borrowings
                         

 

  $ 171   $ 305       $ 580   $ 841    
                         
                         

        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 2013, 2012 and 2011 for these hedges.

 
  Gain (loss) Recognized in
Other Comprehensive
Income (loss)
  Income (expense) and
Gain (loss) Reclassified
into Income
   
 
  2013   2012   2011   2013   2012   2011   Income Statement Caption
 
  (in millions)
   

Foreign currency forward exchange contracts designated as cash flow hedges

  $ 35   $ 13   $ 67   $ 47   $ 114   $ (44 ) Cost of products sold

Debt designated as a hedge of net investment in a foreign subsidiary

    110     65     (30 )             n/a

Interest rate swaps designated as fair value hedges

    n/a     n/a     n/a     (98 )   62     488   Interest expense

Foreign currency forward exchange contracts not designated as hedges

    n/a     n/a     n/a     88     131     (41 ) 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.

 
  2013   2012  
 
  Carrying
Value
  Fair
Value
  Carrying
Value
  Fair
Value
 
 
  (in millions)
 

Long-term Investment Securities:

                         

Equity securities

  $ 93   $ 93   $ 213   $ 213  

Other

    26     24     61     56  

Total Long-term Debt

    (3,397 )   (3,930 )   (18,394 )   (19,588 )

Foreign Currency Forward Exchange Contracts:

                         

Receivable position

    84     84     120     120  

(Payable) position

    (75 )   (75 )   (146 )   (146 )

Interest Rate Hedge Contracts:

                         

Receivable position

    87     87     185     185  

(Payable) position

            (80 )   (80 )

        The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

 
   
  Basis of Fair Value Measurement  
 
  Outstanding
Balances
  Quoted
Prices in
Active Markets
  Significant Other
Observable
Inputs
  Significant
Unobservable
Inputs
 
 
  (in millions)
 

December 31, 2013:

                         

Equity securities

  $ 26   $ 26   $   $  

Interest rate swap financial instruments

    87         87      

Foreign currency forward exchange contracts

    84         84      
                   

Total Assets

  $ 197   $ 26   $ 171   $  
                   
                   

Fair value of hedged long-term debt

  $ 1,623   $   $ 1,623   $  

Foreign currency forward exchange contracts

    75         75      

Contingent consideration related to business combinations

    208             208  
                   

Total Liabilities

  $ 1,906   $   $ 1,698   $ 208  
                   
                   

December 31, 2012:

                         

Equity securities

  $ 76   $ 76   $   $  

Interest rate swap financial instruments

    185         185      

Foreign currency forward exchange contracts

    120         120      
                   

Total Assets

  $ 381   $ 76   $ 305   $  
                   
                   

Fair value of hedged long-term debt

  $ 9,632   $   $ 9,632   $  

Interest rate swap financial instruments

    80         80      

Foreign currency forward exchange contracts

    146         146      

Contingent consideration related to business combinations

    323             323  
                   

Total Liabilities

  $ 10,181   $   $ 9,858   $ 323  
                   
                   

        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 using significant other observable inputs. 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.


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