The Coca-Cola Company Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2019

Fair Value Measurements Disclosure [Abstract]

U.S. GAAP defines 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 U.S. GAAP, 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 securities with readily determinable fair values, debt securities classified as trading or available-for-sale and derivative financial instruments. Additionally, the Company adjusts the carrying value of certain long-term debt as a result of the Company's fair value hedging strategy.

Investments in Debt and Equity Securities

The fair values of our investments in debt and equity 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 debt and equity 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 futures 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, discount rates and commodity prices. 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 values of derivative instruments is an adjustment for nonperformance risk. The adjustment is based on current credit default swap ("CDS") rates 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 values of our derivative instruments.

The following tables summarize those assets and liabilities measured at fair value on a recurring basis (in millions):



	December 31, 2019
	Level 1		Level 2			Level 3		Other³		Netting Adjustment			⁴	Fair Value Measurements
Assets:
Equity securities with readily determinable values¹	$	1,877	$	219		$	14	$	109	$	—			$	2,219
Debt securities¹	—		3,291			37		—		—				3,328
Derivatives²	9		579			—		—		(392		)	⁵	196			⁶
Total assets	$	1,886	$	4,089		$	51	$	109	$	(392	)		$	5,743
Liabilities:
Derivatives²	$	—	$	(162	)	$	—	$	—	$	130			$	(32	)	⁶
Total liabilities	$	—	$	(162	)	$	—	$	—	$	130			$	(32	)


¹	Refer to Note 4 for additional information related to the composition of our equity securities with readily determinable values and debt securities.


²	Refer to Note 6 for additional information related to the composition of our derivative portfolio.

³Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in Note 4.

⁴Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle net 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 6.

⁵The Company is obligated to return $261 million in cash collateral it has netted against its derivative position.

⁶The Company's derivative financial instruments are recorded at fair value in our consolidated balance sheet as follows: $196 million in the line item other assets and $32 million in the line item other liabilities. Refer to Note 6 for additional information related to the composition of our derivative portfolio.



	December 31, 2018
	Level 1			Level 2			Level 3		Other³		Netting Adjustment			⁴	Fair Value Measurements
Assets:
Equity securities with readily determinable values¹	$	1,681		$	186		$	6	$	61	$	—			$	1,934
Debt securities¹	—			5,018			19		—		—				5,037
Derivatives²	2			313			—		—		(261		)	⁵	54			⁷
Total assets	$	1,683		$	5,517		$	25	$	61	$	(261	)		$	7,025
Liabilities:
Derivatives²	$	(14	)	$	(221	)	$	—	$	—	$	182		⁶	$	(53	)	⁷
Total liabilities	$	(14	)	$	(221	)	$	—	$	—	$	182			$	(53	)

¹Refer to Note 4 for additional information related to the composition of our equity securities with readily determinable values and debt securities.

²Refer to Note 6 for additional information related to the composition of our derivative portfolio.

⁵The Company is obligated to return $96 million in cash collateral it has netted against its derivative position.

⁶The Company has the right to reclaim $4 million in cash collateral it has netted against its derivative position.

⁷The Company's derivative financial instruments are recorded at fair value in our consolidated balance sheet as follows: $54 million in the line item other assets; $3 million in the line item accounts payable and accrued expenses; and $50 million in the line item other liabilities. Refer to Note 6 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 years ended December 31, 2019 and 2018.

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 years ended December 31, 2019 and 2018.

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 U.S. GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges, or as a result of observable changes in equity securities using the measurement alternative.

The gains and losses on assets measured at fair value on a nonrecurring basis are summarized in the following table (in millions):



	Gains (Losses)
Year Ended December 31,	2019				2018
Other-than-temporary impairment charges	$	(767	)	¹	$	(591	)	¹
CCBA asset adjustments	(160		)	²	(554		)	²
Investment in former equity method investee	(118		)	³	(32		)	³
Other long-lived asset impairment charges	—				(312		)	⁵
Intangible asset impairment charges	(42		)	⁴	(138		)	⁵
Total	$	(1,087	)		$	(1,627	)

During the year ended December 31, 2019, the Company recorded other-than-temporary impairment charges of $406 million related to CCBJHI, an equity method investee. Based on the extent to which the market value of our investment in CCBJHI has been less than our carrying value and the financial condition and near-term prospects of the issuer, management determined that the decline in fair value was other than temporary in nature. These impairment charges were determined using the quoted market prices (a Level 1 measurement) of CCBJHI. During the year ended December 31, 2019, we also recorded other-than-temporary impairment charges of $255 million related to certain equity method investees in the Middle East. These impairment charges were derived using Level 3 inputs and were primarily driven by revised projections of future operating results largely related to instability in the region and changes in local excise taxes. During the year ended December 31, 2019, we recorded an other-than-temporary impairment charge of $57 million related to one of our equity method investees in North America. This impairment charge was derived using Level 3 inputs and was primarily driven by revised projections of future operating results. During the year ended December 31, 2019, we also recorded an other-than-temporary impairment charge of $49 million related to one of our equity method investees in Latin America. This impairment charge was derived using Level 3 inputs and was primarily driven by revised projections of future operating results. During the year ended December 31, 2018, we recognized other-than-temporary impairment charges of $334 million related to certain equity method investees in the Middle East. These impairments were primarily driven by revised projections of future operating results largely related to instability in the region, which include sanctions imposed locally. During the year ended December 31, 2018, we recognized an other-than-temporary impairment charge of $205 million related to our equity method investee in Indonesia. This impairment was primarily driven by revised projections of future operating results reflecting unfavorable macroeconomic conditions and foreign currency exchange rate fluctuations. This impairment charge was derived using discounted cash flow analyses based on Level 3 inputs. During the year ended December 31, 2018, we recognized an other-than-temporary impairment charge of $52 million related to one of our equity method investees in Latin America. This impairment was primarily driven by revised projections of future operating results. This impairment charge was derived using discounted cash flow analyses based on Level 3 inputs.

²During the year ended December 31, 2018, the Company recorded an impairment charge of $554 million related to assets held by CCBA. This charge was incurred primarily as a result of management's view of the proceeds that were expected to be received upon the sale of CCBA based on revised projections of future operating results and foreign currency exchange rate fluctuations. The fair value of these assets was derived using discounted cash flow analyses based on Level 3 inputs. As a result of CCBA no longer being classified as held for sale, during the year ended December 31, 2019, the Company was required to measure CCBA's property, plant and equipment and definite-lived intangible assets at the lower of their current fair values or their carrying amounts before they were classified as held for sale, adjusted for depreciation and amortization expense that would have been recognized had the business been classified as held and used during the period that CCBA was classified as held for sale. As a result, we reduced the carrying value of CCBA's property, plant and equipment and definite-lived intangible assets by $34 million and $126 million, respectively, based on Level 3 inputs. Refer to Note 2.

³During the year ended December 31, 2019, the Company recognized a net loss of $118 million in conjunction with our acquisition of the remaining equity ownership interest in CHI, which included the remeasurement of our previously held equity interest in CHI to fair value and the reversal of the related cumulative translation adjustments. The fair value of this investment was derived using discounted cash flow analyses based on Level 3 inputs. During the year ended December 31, 2018, the Company recognized a loss of $32 million, which included the remeasurement of our previously held equity interest in the Philippine bottling operations to fair value and the reversal of the related cumulative translation adjustments. The fair value of our previously held equity investment was determined using a discounted cash flow model based on Level 3 inputs. Refer to Note 2.

⁴The Company recorded an impairment charge of $42 million related to a trademark in Asia Pacific, which was primarily driven by revised projections of future operating results for the trademark. The fair value of this trademark was derived using discounted cash flow analyses based on Level 3 inputs.

⁵The Company recognized charges of $312 million related to CCR's property, plant and equipment and $138 million related to CCR's intangible assets. These charges were a result of management's revised estimate of the proceeds that were expected to be received for the remaining bottling territories upon their refranchising. These charges were determined by comparing the fair value of the reporting unit, based on Level 3 inputs, to its carrying value.

Fair Value Measurements for Pension and Other Postretirement Benefit Plan Assets

The fair value hierarchy discussed above is not only applicable to assets and liabilities that are included in our consolidated balance sheets but is also applied to certain other assets that indirectly impact our consolidated financial statements. For example, our Company sponsors and/or contributes to a number of pension and other postretirement benefit plans. Assets contributed by the Company become the property of the individual plans. Even though the Company no longer has control over these assets, we are indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts the Company's future net periodic benefit cost, as well as amounts recognized in our consolidated balance sheets. Refer to Note 15. The Company uses the fair value hierarchy to measure the fair value of assets held by our various pension and other postretirement benefit plans.

Pension Plan Assets

The following table summarizes the levels within the fair value hierarchy for our pension plan assets (in millions):



	December 31, 2019												December 31, 2018
	Level 1		Level 2		Level 3			Other ¹			Total		Level 1		Level 2		Level 3			Other ¹			Total
Cash and cash equivalents	$	597	$	144	$	—		$	—		$	741	$	461	$	22	$	—		$	—		$	483
Equity securities:
U.S.-based companies	1,876		7		21			—			1,904		1,728		15		17			—			1,760
International-based companies	1,354		33		—			—			1,387		1,098		23		—			—			1,121
Fixed-income securities:
Government bonds	—		536		—			—			536		—		463		—			—			463
Corporate bonds and debt securities	—		924		40			—			964		—		819		16			—			835
Mutual, pooled and commingled funds	40		258		—			600		³	898		46		130		—			699		³	875
Hedge funds/limited partnerships	—		—		—			689		⁴	689		—		—		—			828		⁴	828
Real estate	—		—		—			342		⁵	342		—		—		—			391		⁵	391
Other	—		—		273		²	346		⁶	619		—		—		270		²	403		⁶	673
Total	$	3,867	$	1,902	$	334		$	1,977		$	8,080	$	3,333	$	1,472	$	303		$	2,321		$	7,429


¹	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in Note 15.


²	Includes purchased annuity insurance contracts.


³	This class of assets includes actively managed emerging markets equity funds and a collective trust fund for qualified plans, invested primarily in equity securities of companies in developed and emerging markets. There are no liquidity restrictions on these investments.

⁴

This class of assets includes hedge funds that can be subject to redemption restrictions, ranging from monthly to semi-annually, with a redemption notice period of up to 180 days and/or initial lock-up periods of up to one year, and private equity funds that are primarily closed-end funds in which the Company's investments are generally not eligible for redemption. Distributions from these private equity funds will be received as the underlying assets are liquidated or distributed.

⁵

This class of assets includes funds invested in real estate, including a privately held real estate investment trust, a real estate commingled pension trust fund, infrastructure limited partnerships and commingled investment funds. These funds seek current income and capital appreciation through the investments and can be subject to redemption restrictions, ranging from quarterly to semi-annually, with a redemption notice period of up to 90 days.


⁶	This class of assets includes segregated portfolios of private investment funds that are invested in a portfolio of insurance-linked securities. These assets can be subject to a semi-annual redemption, with a redemption notice period of 90 days, subject to certain gate restrictions.

The following table provides a reconciliation of the beginning and ending balance of Level 3 assets for our U.S. and non-U.S. pension plans (in millions):



	Equity Securities			Fixed-Income Securities			Real Estate			Other				Total
2018
Balance at beginning of year	$	14		$	24		$	2		$	263			$	303
Actual return on plan assets held at the reporting date	(2		)	(1		)	—			19				16
Purchases, sales and settlements — net	3			(7		)	(2		)	1				(5		)
Transfers into (out of) Level 3 — net	2			—			—			—				2
Foreign currency translation adjustments	—			—			—			(13		)		(13		)
Balance at end of year	$	17		$	16		$	—		$	270		¹	$	303
2019
Actual return on plan assets held at the reporting date	1			—			—			10				11
Purchases, sales and settlements — net	1			21			—			1				23
Transfers into (out of) Level 3 — net	2			3			—			—				5
Foreign currency translation adjustments	—			—			—			(8		)		(8		)
Balance at end of year	$	21		$	40		$	—		$	273		¹	$	334


¹	Includes purchased annuity insurance contracts.

Other Postretirement Benefit Plan Assets

The following table summarizes the levels within the fair value hierarchy for our other postretirement benefit plan assets (in millions):



	December 31, 2019								December 31, 2018
	Level 1		Level 2		Other ¹		Total		Level 1		Level 2		Other ¹		Total
Cash and cash equivalents	$	56	$	1	$	—	$	57	$	73	$	—	$	—	$	73
Equity securities:
U.S.-based companies	124		—		—		124		93		—		—		93
International-based companies	9		—		—		9		7		—		—		7
Fixed-income securities:
Government bonds	—		3		—		3		—		2		—		2
Corporate bonds and debt securities	—		47		—		47		—		16		—		16
Mutual, pooled and commingled funds	—		2		82		84		—		—		82		82
Hedge funds/limited partnerships	—		—		7		7		—		—		8		8
Real estate	—		—		4		4		—		—		4		4
Other	—		—		4		4		—		—		4		4
Total	$	189	$	53	$	97	$	339	$	173	$	18	$	98	$	289


¹	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in Note 15.

Other Fair Value Disclosures

The carrying amounts of cash and cash equivalents; short-term investments; trade accounts receivable; accounts payable and accrued expenses; and loans and notes payable approximate their fair values because of the relatively short-term maturities of these financial instruments. As of December 31, 2019, the carrying amount and fair value of our long-term debt, including the current portion, were $31,769 million and $32,725 million, respectively. As of December 31, 2018, the carrying amount and fair value of our long-term debt, including the current portion, were $30,379 million and $30,456 million, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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