AT&T Wireless 2015 Annual Report Download - page 65

AT&T INC. | 63
Investment Securities
Our investment securities include equities, fixed income
bonds and other securities. A substantial portion of the fair
values of our available-for-sale securities was estimated
based on quoted market prices. Investments in securities
not traded on a national securities exchange are valued
using pricing models, quoted prices of securities with
similar characteristics or discounted cash flows. Realized
gains and losses on securities are included in “Other income
(expense) – net” in the consolidated statements of income
using the specific identification method. Unrealized gains
and losses, net of tax, on available-for-sale securities are
recorded in accumulated OCI. Unrealized losses that are
considered other than temporary are recorded in “Other
income (expense) – net” with the corresponding reduction
to the carrying basis of the investment. Fixed income
investments of $95 have maturities of less than one year,
$320 within one to three years, $52 within three to five
years, and $213 for five or more years.
Our cash equivalents (money market securities), short-term
investments (certificate and time deposits) and customer
deposits are recorded at amortized cost, and the respective
carrying amounts approximate fair values. Short-term
investments and customer deposits are recorded in “Other
current assets” and our investment securities are recorded
in “Other assets” on the consolidated balance sheets.
Derivative Financial Instruments
We employ derivatives to manage certain market risks,
primarily interest rate risk and foreign currency exchange
risk. This includes the use of interest rate swaps, interest
rate locks, foreign exchange forward contracts and combined
interest rate foreign exchange contracts (cross-currency
swaps). We do not use derivatives for trading or speculative
purposes. We record derivatives on our consolidated balance
sheets at fair value that is derived from observable market
data, including yield curves and foreign exchange rates (all
of our derivatives are Level 2). Cash flows associated with
derivative instruments are presented in the same category
on the consolidated statements of cash flows as the item
being hedged.
The majority of our derivatives are designated either as a
hedge of the fair value of a recognized asset or liability or
of an unrecognized firm commitment (fair value hedge), or
as a hedge of a forecasted transaction or of the variability
of cash flows to be received or paid related to a recognized
asset or liability (cash flow hedge).
Fair Value Hedging We designate our fixed-to-floating
interest rate swaps as fair value hedges. The purpose of
these swaps is to manage interest rate risk by managing
our mix of fixed-rate and floating-rate debt. These swaps
involve the receipt of fixed-rate amounts for floating
interest rate payments over the life of the swaps without
exchange of the underlying principal amount. Accrued and
realized gains or losses from interest rate swaps impact
interest expense in the consolidated statements of income.
Unrealized gains on interest rate swaps are recorded at
fair market value as assets, and unrealized losses on interest
rate swaps are recorded at fair market value as liabilities.
Changes in the fair values of the interest rate swaps are
exactly offset by changes in the fair value of the underlying
debt. Gains or losses realized upon early termination of our
fair value hedges are recognized in interest expense. In the
years ended December 31, 2015, and December 31, 2014,
no ineffectiveness was measured on interest rate swaps
designated as fair value hedges.
Cash Flow Hedging We designate our cross-currency
swaps as cash flow hedges. We have entered into multiple
cross-currency swaps to hedge our exposure to variability
in expected future cash flows that are attributable to
foreign currency risk generated from the issuance of our
Euro, British pound sterling, Canadian dollar and Swiss Franc
denominated debt. These agreements include initial and
final exchanges of principal from fixed foreign denominations
to fixed U.S. denominated amounts, to be exchanged at a
specified rate, usually determined by the market spot rate
upon issuance. They also include an interest rate swap of
a fixed or floating foreign-denominated rate to a fixed
U.S. denominated interest rate.
December 31, 2014
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,160 $ — $ — $ 1,160
International equities 553 — — 553
Fixed income bonds — 836 — 836
Asset Derivatives1
Interest rate swaps — 157 — 157
Cross-currency swaps — 1,243 — 1,243
Interest rate locks — 5 — 5
Liability Derivatives1
Cross-currency swaps — (1,506) — (1,506)
Interest rate locks — (133) — (133)
1 Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets”
in our consolidated balance sheets.