Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.19.2
Fair Value Measurements
 6 Months Ended
Jun. 28, 2019
Fair Value Measurements [Abstract]  
Fair Value Disclosures [Text Block] FAIR VALUE MEASUREMENTS
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 fair values of our derivative instruments.
The following tables summarize those assets and liabilities measured at fair value on a recurring basis (in millions):
June 28, 2019
Level 1

Level 2

Level 3

 
Other3

Netting
Adjustment

4 
Fair Value
Measurements

 
Assets:
 
 
 
 
 
 
 
 
 
Equity securities with readily determinable values1
$
1,810

$
208

$
10

 
$
60

$
—

 
$
2,088

 
Debt securities1
—

4,030

19


—

—

 
4,049

 
Derivatives2
16

667

—

 
—

(446
)
5 
237

6 
Total assets
$
1,826

$
4,905

$
29

 
$
60

$
(446
)
 
$
6,374

 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives2
$
(18
)
$
(210
)
$
—

 
$
—

$
197

 
$
(31
)
6 
Total liabilities
$
(18
)
$
(210
)
$
—

 
$
—

$
197

 
$
(31
)
 
1Refer 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.
3 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 4.
4 Amounts 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.
5 
The Company is obligated to return $258 million in cash collateral it has netted against its derivative position.
6 
The Company's derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet as follows: $237 million in the line item other assets and $31 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
)
 
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.
3 
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 4.
4 Amounts 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.
5 The Company is obligated to return $96 million in cash collateral it has netted against its derivative position.
6 
The Company has the right to reclaim $4 million in cash collateral it has netted against its derivative position.
7 
The Company's derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet as follows: $54 million in the line item other assets; $3 million in the line item current liabilities 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 three and six months ended June 28, 2019 and June 29, 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 three and six months ended June 28, 2019 and June 29, 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. Refer to Note 4.
The gains and losses on assets measured at fair value on a nonrecurring basis are summarized in the table below (in millions):
 
Gains (Losses)  
  
 
Three Months Ended
 
Six Months Ended
  
 
June 28,
2019

 
June 29,
2018

 
June 28,
2019

 
June 29,
2018

  
Other-than-temporary impairment charges
$
(49
)
1 
$
(52
)
1 
$
(392
)
1 
$
(52
)
1 
Investment in former equity method investee
—

 
—

 
(121
)
4 
—

 
CCBA asset adjustments
(160
)
2 
—

 
(160
)
2 
—

 
Other long-lived asset impairment charges
—

 
(60
)
3 
—

 
(312
)
3 
Intangible asset impairment charges
—

 
—

 
—

 
(138
)
3 
Total
$
(209
)
 
$
(112
)
 
$
(673
)
 
$
(502
)
 

1 The Company recognized an other-than-temporary impairment charge of $49 million during the three and six months ended June 28, 2019 and $52 million during the three and six months ended June 29, 2018 related to one of our equity method investees in Latin America, primarily driven by revised projections of future operating results. The fair value of this investment was derived using discounted cash flow analyses based on Level 3 inputs. During the six months ended June 28, 2019, the Company recognized an other-than-temporary impairment charge of $286 million related to our investment in CCBJHI, an equity method investee. Based on the length of time and the extent to which the market value of our investment in CCBJHI had been less than our carrying value as well as the financial condition and near-term prospects of the issuer, management determined that the decline in fair value was other than temporary in nature. This impairment charge was determined using the quoted market price (a Level 1 measurement) of CCBJHI. During the six months ended June 28, 2019, the Company also recognized 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.
2 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.
3 The Company recognized charges of $60 million related to CCR's property, plant and equipment during the three months ended June 29, 2018 and charges of $312 million and $138 million related to CCR's property, plant and equipment and intangible assets, respectively, during the six months ended June 29, 2018. 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.
4 The Company recognized a loss of $121 million in conjunction with our acquisition of the remaining equity ownership interest in CHI, primarily driven by foreign currency exchange rate fluctuations. The fair value of this investment was derived using discounted cash flow analyses based on Level 3 inputs. Refer to Note 2.
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 short-term maturities of these financial instruments. As of June 28, 2019, the carrying amount and fair value of our long-term debt, including the current portion, were $32,045 million and $32,934 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.