Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.3.0.814
Fair Value Measurements
 9 Months Ended
Oct. 02, 2015
Fair Value Measurements [Abstract]  
Fair Value Measurements
FAIR VALUE MEASUREMENTS
Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Observable inputs other than quoted prices included in Level 1. We value assets and liabilities included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Recurring Fair Value Measurements
In accordance with accounting principles generally accepted in the United States, certain assets and liabilities are required to be recorded at fair value on a recurring basis. For our Company, the only assets and liabilities that are adjusted to fair value on a recurring basis are investments in equity and debt securities classified as trading or available-for-sale and derivative financial instruments. Additionally, the Company adjusts the fair value of certain long-term debt as a result of the Company's fair value hedging strategy.
Investments in Trading and Available-for-Sale Securities
The fair values of our investments in trading and available-for-sale securities using quoted market prices from daily exchange traded markets are based on the closing price as of the balance sheet date and are classified as Level 1. The fair values of our investments in trading and available-for-sale securities classified as Level 2 are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. Inputs into these valuation techniques include actual trade data, benchmark yields, broker/dealer quotes, and other similar data. These inputs are obtained from quoted market prices, independent pricing vendors or other sources.
Derivative Financial Instruments
The fair values of our futures contracts are primarily determined using quoted contract prices on futures exchange markets. The fair values of these instruments are based on the closing contract price as of the balance sheet date and are classified as Level 1.
The fair values of our derivative instruments other than exchange-traded contracts are determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments other than futures include the applicable exchange rates, forward rates, interest rates and discount rates. The standard valuation model for options also uses implied volatility as an additional input. The discount rates are based on the historical U.S. Deposit or U.S. Treasury rates, and the implied volatility specific to options is based on quoted rates from financial institutions.
Included in the fair value of derivative instruments is an adjustment for nonperformance risk. The adjustment is based on the current one-year credit default swap ("CDS") rate applied to each contract, by counterparty. We use our counterparty's CDS rate when we are in an asset position and our own CDS rate when we are in a liability position. The adjustment for nonperformance risk did not have a significant impact on the estimated fair value of our derivative instruments.
The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of October 2, 2015 (in millions):
 
Level 1

Level 2

Level 3

 
Netting
Adjustment1

 
Fair Value
Measurements

 
Assets:
 
 
 
 
 
 
 
 
Trading securities2
$
180

$
136

$
3

 
$
—

 
$
319

 
Available-for-sale securities2
2,859

3,610

117

3 
—

 
6,586

 
Derivatives4
7

1,500

—

 
(606
)
5 
901

6 
Total assets
$
3,046

$
5,246

$
120

 
$
(606
)
 
$
7,806

 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives4
$
16

$
590

$
—

 
$
(434
)
 
$
172

6 
Total liabilities
$
16

$
590

$
—

 
$
(434
)
 
$
172

 
1 Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and also cash collateral held or placed with the same counterparties. There are no amounts subject to legally enforceable master netting agreements that management has chosen not to offset or that do not meet the offsetting requirements. Refer to Note 5.
2 
Refer to Note 3 for additional information related to the composition of our trading securities and available-for-sale securities.
3 Primarily related to long-term debt securities that mature in 2018.
4 Refer to Note 5 for additional information related to the composition of our derivative portfolio.
5 The Company is obligated to return $183 million in cash collateral it has netted against its net asset derivative position.
6 
The Company's derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet as follows: $130 million in the line item prepaid expenses and other assets; $771 million in the line item other assets; $11 million in the line item accounts payable and accrued expenses; and $161 million in the line item other liabilities. Refer to Note 5 for additional information related to the composition of our derivative portfolio.
The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 (in millions):
 
Level 1

Level 2

Level 3

 
Netting
Adjustment1

Fair Value
Measurements

 
Assets:
 
 
 
 
 
 
 
Trading securities2
$
228

$
177

$
4

 
$
—

$
409

 
Available-for-sale securities2
4,116

3,627

136

3 
—

7,879

 
Derivatives4
9

1,721

—

 
(437
)
1,293

5 
Total assets
$
4,353

$
5,525

$
140

 
$
(437
)
$
9,581

 
Liabilities:
 
 
 
 
 
 
 
Derivatives4
$
2

$
558

$
—

 
$
(437
)
$
123

5 
Total liabilities
$
2

$
558

$
—

 
$
(437
)
$
123

 
1 Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and also cash collateral held or placed with the same counterparties. There are no amounts subject to legally enforceable master netting agreements that management has chosen not to offset or that do not meet the offsetting requirements. Refer to Note 5.
2 
Refer to Note 3 for additional information related to the composition of our trading securities and available-for-sale securities.
3 Primarily related to long-term debt securities that mature in 2018.
4 Refer to Note 5 for additional information related to the composition of our derivative portfolio.
5 The Company's derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet as follows: $567 million in the line item prepaid expenses and other assets; $726 million in the line item other assets; $14 million in the line item accounts payable and accrued expenses; and $109 million in the line item other liabilities. Refer to Note 5 for additional information related to the composition of our derivative portfolio.
Gross realized and unrealized gains and losses on Level 3 assets and liabilities were not significant for the three and nine months ended October 2, 2015 and September 26, 2014.
The Company recognizes transfers between levels within the hierarchy as of the beginning of the reporting period. Gross transfers between levels within the hierarchy were not significant for the three and nine months ended October 2, 2015 and September 26, 2014.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a nonrecurring basis as required by accounting principles generally accepted in the United States. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges.
The gains or losses on assets measured at fair value on a nonrecurring basis are summarized in the table below (in millions):
 
Gains (Losses)  
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 2,
2015

 
September 26,
2014

 
October 2,
2015

 
September 26,
2014

 
Assets held for sale1
$
(799
)
 
$
(236
)
 
$
(822
)
 
$
(236
)
 
Intangible assets
(41
)
2 
—

 
(473
)
2 
—

 
Investment in formerly unconsolidated subsidiary
—

 
—

 
(19
)
3 
—

 
Valuation of shares in equity method investee
—

 
—

 
(6
)
4 
—

 
Total
$
(840
)
 
$
(236
)
 
$
(1,320
)
 
$
(236
)
 
1 
The Company is required to record assets and liabilities that are held for sale at the lower of carrying value or fair value less any costs to sell based on the agreed-upon sale price. These charges primarily related to refranchising activities in North America. The charges were calculated based on Level 3 inputs. Refer to Note 2.
2 
During the three and nine months ended October 2, 2015, the Company recognized losses of $41 million and $473 million, respectively. The charges incurred during the three months ended included a $38 million impairment charge on one of the trademarks in the glacéau portfolio and a $3 million impairment charge on a Venezuelan trademark. The charges incurred during the nine months ended October 2, 2015 included $418 million of impairment charges primarily due to the discontinuation of the energy products in the glacéau portfolio as a result of the Monster Transaction and a $55 million impairment charge on a Venezuelan trademark. The charges were determined by comparing the fair value of the assets to the current carrying value. The fair value of the assets was derived using discounted cash flow analyses based on Level 3 inputs. Refer to Note 1, Note 2 and Note 10.
3 
The Company recognized a loss of $19 million on our previously held investment in a South African bottler, which had been accounted for under the equity method of accounting prior to our acquisition of the bottler in February 2015. U.S. GAAP requires the acquirer to remeasure its previously held noncontrolling equity interest in the acquired entity to fair value as of the acquisition date and recognize any gains or losses in earnings. The Company remeasured our equity interest in the South African bottler based on Level 3 inputs. Refer to Note 2 and Note 10.
4 
The Company recognized a loss of $6 million as a result of the owners of the majority interest in a Brazilian bottling entity exercising their option to acquire from us a 10 percent interest in the entity's outstanding shares. The exercise price was lower than our carrying value. This loss was determined using Level 3 inputs. Refer to Note 2 and Note 10.
Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents; short-term investments; receivables; accounts payable and accrued expenses; and loans and notes payable approximate their fair values because of the relatively short-term maturities of these instruments.
The fair value of our long-term debt is estimated using Level 2 inputs based on quoted prices for those instruments. Where quoted prices are not available, fair value is estimated using discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of the debt instruments. As of October 2, 2015, the carrying amount and fair value of our long-term debt, including the current portion, were $28,641 million and $28,793 million, respectively. As of December 31, 2014, the carrying amount and fair value of our long-term debt, including the current portion, were $22,615 million and $23,411 million, respectively.