Dow Chemical 2013 Annual Report Download - page 113

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For equity securities, the Company’s investments are primarily in Standard & Poor’s (“S&P”) 500 companies; however, the
Company’s policies allow investments in companies outside of the S&P 500. The largest holdings are Exchange Traded Funds
that represent the S&P 500 index or an S&P 500 sector or subset; the Company also has holdings in Exchange Traded Funds
that represent emerging markets. The Company considers the evidence to support the recovery of the cost basis of a security
including volatility of the stock, the length of time the security has been in a loss position, value and growth expectations, and
overall market and sector fundamentals, as well as technical analysis, in determining whether unrealized losses represent an
other-than-temporary impairment. In 2013, other-than-temporary impairment write-downs on investments still held by the
Company were $2 million ($7 million in 2012).
The aggregate cost of the Company's cost method investments totaled $185 million at December 31, 2013 ($176 million at
December 31, 2012). Due to the nature of these investments, either the cost basis approximates fair market value or fair value is
not readily determinable. These investments are reviewed quarterly for impairment indicators. The Company's impairment
analysis resulted in a $6 million reduction in the cost basis of these investments for the year ended December 31, 2013; the
analysis in 2012 resulted in $3 million reduction for the year ended December 31, 2012.
The following table summarizes the fair value of financial instruments at December 31, 2013 and 2012:
Fair Value of Financial Instruments at December 31
2013 2012
In millions Cost Gain Loss
Fair
Value Cost Gain Loss
Fair
Value
Marketable securities: (1)
Debt securities:
Government debt (2) $ 544 $ 28 $ (8) $ 564 $ 506 $ 59 $ — $ 565
Corporate bonds 659 43 (7) 695 676 81 (1) 756
Total debt securities $ 1,203 $ 71 $ (15) $ 1,259 $ 1,182 $ 140 $ (1) $ 1,321
Equity securities 605 196 (4) 797 634 109 (3) 740
Total marketable securities $ 1,808 $ 267 $ (19) $ 2,056 $ 1,816 $ 249 $ (4) $ 2,061
Long-term debt including debt
due within one year (3) $ (17,517) $ 296 $ (2,246) $ (19,467) $ (20,591) $ 24 $ (3,195) $ (23,762)
Derivatives relating to:
Interest rates $ — $ — $ (5) $ (5) $ — $ 1 $ (6) $ (5)
Commodities (4) $ — $ 11 $ (2) $ 9 $ — $ 26 $ (7) $ 19
Foreign currency (5) $ — $ 45 $ (13) $ 32 $ — $ 34 $ (20) $ 14
(1) Included in “Other investments” in the consolidated balance sheets.
(2) U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(3) Cost includes fair value adjustments of $22 million at December 31, 2013 and $23 million at December 31, 2012.
(4) Presented net of cash collateral, as disclosed in Note 11.
(5) For 2013, includes interest rate derivative component of cross currency swaps, which was less than $1 million at December 31, 2013.
Cost approximates fair value for all other financial instruments.
Risk Management
Dow’s business operations give rise to market risk exposure due to changes in interest rates, foreign currency exchange rates,
commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into
hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial
market risk. Derivatives used for this purpose are designated as cash flow, fair value or net foreign investment hedges where
appropriate. Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair
value. A secondary objective is to add value by creating additional nonspecific exposures within established limits and policies;
derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not
material to the Company’s results.
The Company’s risk management program for interest rate, foreign currency and commodity risks is based on fundamental,
mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments
and the mark-to-market valuations of positions are strictly monitored at all times, using value at risk and stress tests.
Counterparty credit risk arising from these contracts is not significant because the Company minimizes counterparty
concentration, deals primarily with major financial institutions of solid credit quality, and the majority of its hedging
transactions mature in less than three months. In addition, the Company minimizes concentrations of credit risk through its