America Online 2015 Annual Report Download - page 65

Fair Value of Short-term and Long-term Debt
The fair value of our debt is determined using various methods, including quoted prices for identical terms and maturities, which is a Level 1 mea-
surement, as well as quoted prices for similar terms and maturities in inactive markets and future cash flows discounted at current rates, which
are Level 2 measurements. The fair value of our short-term and long-term debt, excluding capital leases, was as follows:
(dollars in millions)
At December31, 2015 2014
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Short- and long-term debt, excluding capital leases $ 109,237 $ 118,216 $ 112,755 $ 126,549
Derivative Instruments
Interest Rate Swaps
We enter into domestic interest rate swaps to achieve a targeted mix of
fixed and variable rate debt. We principally receive fixed rates and pay
variable rates based on LIBOR, resulting in a net increase or decrease
to Interest expense. These swaps are designated as fair value hedges
and hedge against changes in the fair value of our debt portfolio. We
record the interest rate swaps at fair value on our consolidated balance
sheets as assets and liabilities.
During the third quarter of 2015, we entered into interest rate swaps
with a total notional value of $3.2billion. During the fourth quarter of
2015, we entered into interest rate swaps with a total notional value of
$2.6billion. At December31, 2015 and 2014, the total notional amount of
the interest rate swaps was $7.6billion and $1.8billion, respectively. The
fair value of these contracts was $0.1billion at December31, 2015 and
was not material at December31, 2014. The ineffective portion of these
interest rate swaps was not material at December31, 2015 and 2014.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, we
have entered into forward interest rate swaps. We designated these
contracts as cash flow hedges. At December31, 2014, these swaps
had a notional value of $2.0billion. The fair value of these contracts
was $0.2billion at December31, 2014, which was included within
Other liabilities on our consolidated balance sheet. During the third
quarter of 2015, we settled these forward interest rate swaps and the
pre-tax loss was not material. During the third quarter of 2015, we
entered into forward interest rate swaps with a total notional value
of $0.8billion. The fair value of these contracts was not material at
December31, 2015.
Cross Currency Swaps
Verizon Wireless previously entered into cross currency swaps des-
ignated as cash flow hedges to exchange approximately $1.6billion
of British Pound Sterling and Euro- denominated debt into U.S. dollars
and to fix our future interest and principal payments in U.S. dollars, as
well as to mitigate the impact of foreign currency transaction gains or
losses. In June 2014, we settled $0.8billion of these cross currency
swaps and the gains with respect to these swaps were not material. In
December 2015, we settled $0.6billion of these cross currency swaps
on maturity.
During the first quarter of 2014, we entered into cross currency
swaps designated as cash flow hedges to exchange approximately
$5.4billion of Euro and British Pound Sterling denominated debt into
U.S. dollars. During the second quarter of 2014, we entered into cross
currency swaps designated as cash flow hedges to exchange approx-
imately $1.2billion of British Pound Sterling denominated debt into
U.S. dollars. During the fourth quarter of 2014, we entered into cross
currency swaps designated as cash flow hedges to exchange approxi-
mately $3.0billion of Euro denominated debt into U.S. dollars and to fix
our future interest and principal payments in U.S. dollars. Each of these
cross currency swaps was entered into in order to mitigate the impact
of foreign currency transaction gains or losses.
A portion of the gains and losses recognized in Other comprehensive
income was reclassified to Other income and (expense), net to offset
the related pre-tax foreign currency transaction gain or loss on the
underlying debt obligations. The fair value of the outstanding swaps
was $1.6billion and $0.6billion, which was primarily included within
Other liabilities on our consolidated balance sheets at December31,
2015 and 2014, respectively. At December31, 2015, the total notional
amount of the cross currency swaps was $9.7billion. During 2015
and 2014, a pre-tax loss of $1.2billion and a pre-tax loss of $0.1billion,
respectively, was recognized in Other comprehensive income with
respect to these swaps.
Net Investment Hedges
We entered into foreign currency forward contracts that are designated
as net investment hedges to mitigate foreign exchange exposure
related to non-U.S. dollar net investments in certain foreign subsidiaries
against changes in foreign exchange rates. During the third quarter of
2015, we entered into net investment hedges with a total notional value
of $0.9billion with the contract tenor maturing in 2018. The fair value of
these contracts was not material at December31, 2015.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk
consist primarily of temporary cash investments, short-term and
long-term investments, trade receivables, certain notes receivable,
including lease receivables, and derivative contracts. Our policy is to
deposit our temporary cash investments with major financial institu-
tions. Counterparties to our derivative contracts are also major financial
institutions with whom we have negotiated derivatives agreements
(ISDA master agreement) and credit support annex agreements which
provide rules for collateral exchange. We generally apply collateralized
arrangements with our counterparties for uncleared derivatives to
mitigate credit risk. At December31, 2015 and 2014, we posted collat-
eral of approximately $0.1billion and $0.6billion, respectively, related
to derivative contracts under collateral exchange arrangements, which
were recorded as Prepaid expenses and other in our consolidated
balance sheets. During the first and second quarters of 2015, we paid
an immaterial amount of cash to enter into amendments to certain
collateral exchange arrangements. These amendments suspend cash
collateral posting for a specified period of time by both counterpar-
ties. We may enter into swaps on an uncollateralized basis in certain
circumstances. While we may be exposed to credit losses due to the
nonperformance of our counterparties, we consider the risk remote and
do not expect the settlement of these transactions to have a material
effect on our results of operations or financial condition.
Nonrecurring Fair Value Measurements
The Company measures certain assets and liabilities at fair value
on a nonrecurring basis. During the fourth quarter of 2014, certain
long-lived assets met the criteria to be classified as held for sale. At
that time, the fair value of these long-lived assets was measured,
resulting in expected disposal losses of $0.1billion. The fair value of
these assets held for sale was measured with the assistance of third-
party appraisals and other estimates of fair value, which used market
63Verizon Communications Inc. and Subsidiaries
Notes to Consolidated Financial Statements continued