Philip Morris International Inc.PM
Philip Morris International Inc. Fair Value Disclosure
Fair Value Measurements:
The authoritative guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of input that may be used to measure fair value, which are as follows:
Level 1 | — | Quoted prices in active markets for identical assets or liabilities; |
Level 2 | — | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
Level 3 | — | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Equity Securities
The fair value of PMI’s equity securities, which are determined by using quoted prices in active markets, have been classified within Level 1.
Derivative Financial Instruments
PMI assesses the fair value of its foreign exchange contracts and interest rate contracts using standard valuation models that use, as their basis, readily observable market inputs. The fair value of PMI’s foreign exchange forward contracts is determined by using the prevailing foreign exchange spot rates and interest rate differentials, and the respective maturity dates of the instruments. The fair value of PMI’s currency options is determined by using a Black-Scholes methodology based on foreign exchange spot rates and interest rate differentials, currency volatilities and maturity dates. PMI’s derivative financial instruments have been classified within Level 2 at December 31, 2019 and 2018. See Note 15. Financial Instruments for additional discussion of derivative financial instruments.
Pension Plan Assets
The fair value of pension plan assets, determined by using readily available quoted market prices in active markets, has been classified within Level 1 of the fair value hierarchy at December 31, 2019 and 2018. The fair value of pension plan assets, determined by using quoted prices in markets that are not active, has been classified within Level 2 at December 31, 2019 and 2018. See Note 13. Benefit Plans for additional discussion of pension plan assets.
Debt
The fair value of PMI’s outstanding debt, which is utilized solely for disclosure purposes, is determined using quotes and market interest rates currently available to PMI for issuances of debt with similar terms and remaining maturities. The aggregate carrying value of PMI’s debt, excluding short-term borrowings and $56 million of finance leases, was $30,651 million at December 31, 2019. The aggregate carrying value of PMI’s debt, excluding short-term borrowings and $33 million of finance leases, was $30,996 million at December 31,
2018. The fair value of PMI's outstanding debt, excluding the aforementioned short-term borrowings and finance leases, was classified within Level 1 and Level 2 at December 31, 2019 and 2018.
The aggregate fair values of PMI’s investments in equity securities, derivative financial instruments, pension plan assets and PMI's debt as of December 31, 2019, were as follows:
(in millions) | Fair Value at December 31, 2019 | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
Assets: | |||||||||||||||
Equity securities (1) | $ | 332 | $ | 332 | $ | — | $ | — | |||||||
Derivative contracts | 390 | $ | — | 390 | — | ||||||||||
Pension plan assets | 7,619 | 6,059 | 1,560 | — | |||||||||||
Total assets in fair value hierarchy | $ | 8,341 | $ | 6,391 | $ | 1,950 | $ | — | |||||||
Pension plan assets measured at net asset value (2) | 309 | ||||||||||||||
Total assets | $ | 8,650 | |||||||||||||
Liabilities: | |||||||||||||||
Debt | $ | 32,988 | $ | 32,821 | $ | 167 | $ | — | |||||||
Derivative contracts | 419 | — | 419 | — | |||||||||||
Total liabilities | $ | 33,407 | $ | 32,821 | $ | 586 | $ | — | |||||||
(1) Unrealized pre-tax gain of $44 million ($35 million net of tax) on equity securities was recorded in the consolidated statement of earnings for the year ended December 31, 2019.
(2) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
The aggregate fair values of PMI’s investments in equity securities, derivative financial instruments, pension plan assets and PMI's debt as of December 31, 2018 , were as follows:
(in millions) | Fair Value at December 31, 2018 | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
Assets: | |||||||||||||||
Equity securities | $ | 288 | $ | 288 | $ | — | $ | — | |||||||
Derivative contracts | 220 | — | 220 | — | |||||||||||
Pension plan assets | 6,600 | 4,631 | 1,969 | — | |||||||||||
Total assets in fair value hierarchy | $ | 7,108 | $ | 4,919 | $ | 2,189 | $ | — | |||||||
Pension plan assets measured at net asset value (1) | 288 | ||||||||||||||
Total assets | $ | 7,396 | |||||||||||||
Liabilities: | |||||||||||||||
Debt | $ | 31,162 | $ | 30,997 | $ | 165 | $ | — | |||||||
Derivative contracts | 631 | — | 631 | — | |||||||||||
Total liabilities | $ | 31,793 | $ | 30,997 | $ | 796 | $ | — | |||||||
(1) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2019 | Feb 7, 2020 | Showing above |
| 2018 | Feb 7, 2019 | |
| 2017 | Feb 13, 2018 | |
| 2016 | Feb 14, 2017 | |
| 2015 | Feb 17, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.