| DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Time Warner uses derivative instruments, primarily forward contracts, to manage the risk associated with the volatility of future cash flows denominated in foreign currencies and changes in fair value resulting from changes in foreign currency exchange rates. The principal currencies being hedged include the British Pound, Euro, Australian Dollar and Canadian Dollar. Time Warner uses foreign exchange contracts that generally have maturities of three to 18 months to hedge various foreign exchange exposures, including the following: (i) variability in foreign-currency-denominated cash flows, such as the hedges of unremitted or forecasted royalty and license fees owed to Time Warner’s domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency (i.e., cash flow hedges), and (ii) currency risk associated with foreign-currency-denominated operating assets and liabilities (i.e., fair value hedges). The Company also enters into derivative contracts that economically hedge certain of its foreign currency risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. These economic hedges are used primarily to offset the change in certain foreign-currency-denominated intercompany debt due to changes in the underlying foreign exchange rates. The translation of revenues and expenses denominated in the functional currency of a foreign subsidiary may result in fluctuations in the U.S. Dollar-equivalent value of such revenues and expenses as compared to prior periods. Such transactions are not eligible for qualifying hedge accounting treatment, and the Company does not economically hedge this exposure. Net gains and losses from hedging activities recognized in the Consolidated Statement of Operations were as follows (millions): | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | | | 2017 | | 2016 | | 2017 | | 2016 | Gains (losses) recognized in: | | | | | | | | Cost of revenues | $ | (15 | ) | | $ | — |
| | $ | (16 | ) | | $ | 9 |
| Selling, general and administrative | (9 | ) | | 2 |
| | (12 | ) | | 5 |
| Other income (loss), net | 15 |
| | (2 | ) | | 16 |
| | — |
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Amounts included in Other income (loss), net include the impact of forward points and option premiums, which are excluded from the assessment of hedge effectiveness. Other amounts included in Other income (loss), net relate to hedge of foreign-currency-denominated debt and hedge ineffectiveness, which are not material. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to its financial transactions and has entered into collateral agreements with these counterparties to further protect the Company in the event of deterioration of the credit quality of such counterparties on outstanding transactions. Additionally, netting provisions are included in agreements in situations where the Company executes multiple contracts with the same counterparty. For such foreign exchange contracts, the Company offsets the fair values of the amounts owed to or due from the same counterparty and classifies the net amount as a net asset or net liability within Prepaid expenses and other current assets or Accounts payable and accrued liabilities, respectively, in the Consolidated Balance Sheet. The following is a summary of amounts recorded in the Consolidated Balance Sheet pertaining to Time Warner’s use of foreign currency derivatives at June 30, 2017 and December 31, 2016 (millions): | | | | | | | | | | | | | Prepaid expenses and other current assets | $ | 32 |
| | $ | 153 |
| Accounts payable and accrued liabilities | (5 | ) | | (9 | ) |
________________________ | | (a) | Includes $99 million ($93 million of qualifying hedges and $6 million of economic hedges) and $72 million ($68 million of qualifying hedges and $4 million of economic hedges) of foreign exchange derivative contracts in asset and liability positions, respectively. |
| | (b) | Includes $297 million ($272 million of qualifying hedges and $25 million of economic hedges) and $153 million ($141 million of qualifying hedges and $12 million of economic hedges) of foreign exchange derivative contracts in asset and liability positions, respectively. |
At June 30, 2017 and December 31, 2016, $8 million of losses and $46 million of gains, respectively, related to cash flow hedges are recorded in Accumulated other comprehensive loss, net and are expected to be recognized in earnings at the same time the hedged items affect earnings. Included in Accumulated other comprehensive loss, net at June 30, 2017 and December 31, 2016 are net gains of $8 million and net losses of $3 million, respectively, related to hedges of cash flows associated with films that are not expected to be released within the next twelve months. At June 30, 2017, the carrying amount of the Company’s €700 million aggregate principal amount of debt due 2023 is designated as a hedge of the variability in the Company’s Euro-denominated net investments. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within Accumulated other comprehensive loss, net in the Consolidated Balance Sheet. For the three and six months ended June 30, 2017, such amounts totaled $38 million and $51 million of losses, respectively. For the three and six months ended June 30, 2016, such amounts totaled $10 million and $17 million of losses, respectively. |
