Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
 9 Months Ended
Sep. 27, 2013
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 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
Derivatives classified as Level 1 consist of exchange-traded futures and listed options. The fair values of these instruments are based on quoted market prices on exchange markets.
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 September 27, 2013 (in millions):
 
Level 1

Level 2

Level 3

 
Netting
Adjustment1

Fair Value
Measurements

 
Assets
 
 
 
 
 
 
 
Trading securities2
$
139

$
172

$
3

 
$
—

$
314

 
Available-for-sale securities2
1,357

3,216

114

3 
—

4,687

 
Derivatives4
20

729

—

 
(144
)
605

5 
Total assets
$
1,516

$
4,117

$
117

 
$
(144
)
$
5,606

 
Liabilities
 
 
 
 
 
 
 
Derivatives4
$
5

$
162

$
—

 
$
(145
)
$
22

5 
Total liabilities
$
5

$
162

$
—

 
$
(145
)
$
22

 
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.
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: $103 million in the line item prepaid expenses and other assets; $502 million in the line item other assets; $8 million in the line item accounts payable and accrued expenses; and $14 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, 2012 (in millions):
 
Level 1

Level 2

Level 3

 
Netting
Adjustment1

Fair Value
Measurements

 
Assets
 
 
 
 
 
 
 
Trading securities2
$
146

$
116

$
4

 
$
—

$
266

 
Available-for-sale securities2
1,390

3,068

135

3 
—

4,593

 
Derivatives4
47

583

—

 
(116
)
514

5 
Total assets
$
1,583

$
3,767

$
139

 
$
(116
)
$
5,373

 
Liabilities
 
 
 
 
 
 
 
Derivatives4
$
35

$
98

$
—

 
$
(121
)
$
12

5 
Total liabilities
$
35

$
98

$
—

 
$
(121
)
$
12

 
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.
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: $137 million in the line item prepaid expenses and other assets; $377 million in the line item other assets; $4 million in the line item accounts payable and accrued expenses; and $8 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 September 27, 2013, and September 28, 2012.
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 September 27, 2013, and September 28, 2012.
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 for the three and nine months ended September 27, 2013, and September 28, 2012, are summarized in the table below (in millions):
 
Gains (Losses)  
  
 
Three Months Ended
 
Nine Months Ended
  
 
September 27,
2013

 
September 28,
2012

 
September 27,
2013

 
September 28,
2012

  
Intangible assets
$
(190
)
1 
$
—

 
$
(190
)
1 
$
—

 
Valuation of shares in equity method investee
—

 
—

 
139

3 
92

3 
Exchange of investment in equity securities
30

2 
—

 
(114
)
4 
—

 
Total
$
(160
)
 
$
—

 
$
(165
)
 
$
92

 
1 
The Company recognized a loss of $190 million due to impairment charges on certain intangible assets. The charges were primarily 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 10.
2 
The Company recognized a gain of $30 million on the exchange of shares it previously owned in certain equity method investees for shares in CCEJ, a newly formed entity. The gain represents the difference between the carrying value of the shares the Company relinquished and the fair value of the CCEJ shares received as a result of the transaction. The gain and the initial carrying value of the Company's investment were calculated based on Level 1 inputs. The Company accounts for its investment in CCEJ under the equity method of accounting. Refer to Note 10.
3 
The Company recognized a gain of $139 million and $92 million during the nine months ended September 27, 2013, and September 28, 2012, respectively. These gains resulted from Coca-Cola FEMSA issuing additional shares of its own stock at a per share amount greater than the carrying value of the Company's per share investment. Accordingly, the Company is required to treat this type of transaction as if the Company had sold a proportionate share of its investment in Coca-Cola FEMSA. These gains were determined using Level 1 inputs. Refer to Note 10.
4 
The Company recognized a net loss of $114 million on the exchange of shares it previously owned in certain equity method investees for shares in the newly formed entity CCEJ. CCEJ is also an equity method investee. The net loss represents the difference between the carrying value of the shares the Company relinquished and the fair value of the CCEJ shares received as a result of the transaction. The net loss and the initial carrying value of the Company's investment were calculated based on Level 1 inputs. Refer to 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 or similar instruments. As of September 27, 2013, the carrying amount and fair value of our long-term debt, including the current portion, were $17,367 million and $17,764 million, respectively. As of December 31, 2012, the carrying amount and fair value of our long-term debt, including the current portion, were $16,313 million and $17,157 million, respectively.