AbbVie 2012 Annual Report Download - page 84

non-exchange-traded contracts accounted for at fair value. In the ordinary course of business, AbbVie
has periodically entered into third-party agreements, such as the assignment of product rights, which
have resulted in AbbVie becoming secondarily liable for obligations for which AbbVie had previously
been primarily liable. Since AbbVie no longer maintains a business relationship with the other parties,
AbbVie is unable to develop an estimate of the maximum potential amount of future payments, if any,
under these obligations. Based upon past experience, the likelihood of payments under these
agreements is remote. AbbVie periodically acquires a business or product rights in which AbbVie
agrees to pay contingent consideration based on attaining certain thresholds or based on the occurrence
of certain events.
Note 8 Financial Instruments and Fair Value Measures
Risk Management Policy
The company is exposed to foreign currency exchange rate and interest rate risks related to its business
operations. The company’s hedging policy attempts to manage these risks to an acceptable level based
on the company’s judgment of the appropriate trade-off between risk, opportunity and costs. The
company uses derivative instruments to reduce its exposure to foreign currency exchange rates. The
company is also exposed to the risk that its earnings and cash flows could be adversely impacted by
fluctuations in interest rates. The company periodically enters into interest rate swaps, based on
judgment, to manage interest costs in which the company agrees to exchange, at specified intervals, the
difference between fixed and floating interest amounts calculated by reference to an agreed-upon
notional amount. Derivative instruments are not used for trading purposes or to manage exposure to
changes in interest rates for investment securities, and none of the company’s outstanding derivative
instruments contain credit risk related contingent features.
Financial Instruments
Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage
exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated
in a currency other than the functional currency of the local entity. These contracts, totaling $1.0 billion
and $249 million at December 31, 2012 and 2011, respectively, are designated as cash flow hedges and
are recorded at fair value. Accumulated gains and losses as of December 31, 2012 will be included in
cost of products sold at the time the products are sold, generally through the next twelve months.
The company enters into foreign currency forward exchange contracts to manage its exposure to
foreign currency denominated trade payables and receivables and intercompany loans. The contracts
are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by
losses or gains on the foreign currency exposure being managed. At December 31, 2012 and 2011,
AbbVie held $4.3 billion and $3.0 billion, respectively, of such foreign currency forward exchange
contracts.
AbbVie was a party to interest rate hedge contracts, designated as fair value hedges, totaling
$8.0 billion at December 31, 2012. The effect of the hedge is to change a fixed-rate interest obligation
to a floating rate for that portion of the debt. AbbVie recorded the contracts at fair value and adjusted
the carrying amount of the fixed-rate debt by an offsetting amount.
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