AbbVie 2014 Annual Report Download - page 59

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The company is exposed to risk that its earnings, cash flows, and equity could be adversely impacted
by changes in foreign exchange rates and interest rates. Certain derivative instruments are used when
available on a cost-effective basis to hedge the company’s underlying economic exposures. Refer to Note 10
entitled ‘‘Financial Instruments and Fair Value Measures’’ of the Notes to Consolidated Financial Statements
included under Item 8, ‘‘Financial Statements and Supplementary Data’’ for further information regarding
the company’s financial instruments and hedging strategies.
Foreign Currency Risk
AbbVie’s primary net foreign currency exposures are the Euro, British pound, and Japanese yen.
Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage
exposures to changes in foreign exchange rates for anticipated transactions denominated in a currency
other than the functional currency of the local entity. These contracts are designated as cash flow hedges
of the variability of the cash flows due to changes in foreign currency exchange rates, and are
marked-to-market with the resulting gains or losses reflected in accumulated other comprehensive loss in
AbbVie’s consolidated balance sheets. Deferred gains or losses on these contracts are included in cost of
products sold at the time the products are sold to a third party, generally not exceeding twelve months. At
December 31, 2014 and 2013, AbbVie held $1.4 billion and $1.5 billion, respectively, in notional amounts of
such contracts.
AbbVie enters into foreign currency forward exchange contracts to manage its exposure to foreign
currency denominated trade payables and receivables and intercompany loans. The contracts, which are not
designated as hedges, are marked-to-market, and resulting gains or losses are reflected in net foreign
exchange on AbbVie’s consolidated statements of earnings and are generally offset by losses or gains on
the foreign currency exposure being managed. At December 31, 2014 and 2013, AbbVie held notional
amounts of $6.8 billion and $5.3 billion, respectively, of such foreign currency forward exchange contracts.
The following table reflects the total foreign currency forward contracts outstanding at December 31,
2014 and 2013.
2014 2013
Fair and Fair and
Weighted carrying Weighted carrying
average value average value
Contract exchange receivable/ Contract exchange receivable/
(in millions) amount rate (payable) amount rate (payable)
Receive primarily U.S. dollars in exchange for
the following currencies:
Euro $6,342 1.263 $114 $4,650 1.359 $(56)
British pound 563 1.618 21 492 1.638 (3)
Japanese yen 333 116.9 6 401 103.2 7
All other currencies 930 N/A 7 1,308 N/A (4)
Total $8,168 $148 $6,851 $(56)
The company estimates that a 10 percent appreciation in the underlying currencies being hedged from
their levels against the U.S. dollar, with all other variables held constant, would decrease the fair value of
foreign exchange forward contracts by $790 million at December 31, 2014. If realized, this appreciation
would negatively affect earnings over the remaining life of the contacts. A 10 percent appreciation is
believed to be a reasonably possible near-term change in foreign currencies. Gains and losses on the
hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and
stockholders’ equity volatility relating to foreign exchange.
2014 Form 10-K 53