NOTE 7. FINANCIAL ASSETS AND LIABILITIES

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies certain assets and liabilities based on the following fair value hierarchy:

The level of an asset or liability within the fair value hierarchy is determined based on the lowest level of any input that is significant to the fair value measurement. The determination of fair value considers various factors including yield curves and time value underlying the financial instruments. For derivatives and debt securities, the Company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

In determining the fair value of financial instruments, the Company considers certain market valuation adjustments to the “base valuations” using the methodologies described below for several parameters that market participants would consider in determining fair value:

Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are recorded at fair value or at cost, as appropriate, in the period they are initially recognized, and such balances may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. The impairment models used for non-financial assets depend on the type of asset. The fair value measurements, in such instances, would be classified in Level 3 of the fair value hierarchy.

We perform a qualitative assessment of asset impairments on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value is less than carrying value. During the three months ended June 30, 2026, the company recorded an impairment of $38 million in connection with a non-financial asset that became held for sale and was sold in the quarter. There were no additional impairments of non-financial assets recognized for the three months ended June 30, 2026 or 2025.

Financial Assets and Liabilities Measured at Fair Value

The following table presents the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at June 30, 2026 and March 31, 2026.

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The gross balances of derivative assets, including accrued interest, are contained within Prepaid expenses and other current assets, and Other noncurrent assets in the Consolidated Balance Sheet. The gross balances of derivative liabilities are contained within Other accrued expenses and liabilities, and Other noncurrent liabilities in the Consolidated Balance Sheet. The Company may enter into master netting agreements with certain counterparties that allow for netting of exposures. There was no netting of derivative assets against liabilities in the Consolidated Balance Sheet at June 30, 2026 and March 31, 2026. The potential effect of such netting arrangements on the Company’s balance sheet is not material for the periods presented. The Company manages counterparty risk by seeking counterparties of high credit quality and by monitoring credit ratings, credit spreads and other relevant public information about its counterparties. The Company does not anticipate nonperformance by any of the counterparties.

Financial Assets and Liabilities Not Measured at Fair Value

Accounts receivable are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt are financial liabilities with carrying values that approximate fair value. If measured at fair value in the consolidated financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.

The Company also has time deposits that have maturities of 90 days or less, and their carrying values approximate fair value. They are measured for impairment on a recurring basis by comparing their fair value with their amortized cost basis. There were no impairments of financial assets recognized for any of the periods presented. The balances of these time deposits with maturities of 90 days or less contained within Cash and cash equivalents in the Consolidated Balance Sheet at June 30, 2026 and March 31, 2026 were $1.4 billion and $1.7 billion, respectively. If measured at fair value in the consolidated financial statements, time deposits with maturities of 90 days or less would be categorized as Level 2 in the fair value hierarchy.

The fair value of our outstanding debt (excluding finance lease obligations) is based on various methodologies, including quoted prices in active markets for identical debt instruments, which is a Level 1 measurement, or calculated fair value using an expected present value technique that uses rates currently available to the Company for debt in active markets with similar terms and remaining maturities, which is a Level 2 measurement. Our outstanding debt (excluding finance lease obligations) had a carrying value of $3.9 billion as of June 30, 2026 and March 31, 2026. The debt had an estimated fair value of $3.6 billion as of June 30, 2026 and March 31, 2026. See Note 10 – Borrowings for additional information.

Transfers of Financial Assets

The Company has entered into arrangements with third-party financial institutions to sell certain financial assets (primarily accounts receivables) without recourse. The Company has determined these are true sales. The carrying value of the financial asset sold is derecognized, and a net gain or loss on the sale is recognized, at the time of the transfer.

The net proceeds from these arrangements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows. Gross proceeds from receivables sold to third parties were $0.6 billion for the three months ended June 30, 2026 and $0.6 billion for the three months ended June 30, 2025. Of the receivables sold and derecognized from the Consolidated Balance Sheet, $0.8 billion and $0.9 billion remained uncollected from customers at June 30, 2026 and March 31, 2026, respectively. The fees associated with the transfers of receivables were $4 million for the three months ended June 30, 2026 and $5 million for the three months ended June 30, 2025.

Derivative Financial Instruments

The following table summarizes the notional amounts of the Company’s outstanding derivatives:

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The notional amounts of derivative instruments do not necessarily represent the amounts exchanged by the Company with third parties and are not necessarily a direct measure of the financial exposure.

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

The Company has foreign exchange derivative financial instruments designated as cash flow hedges to manage the volatility of cash flows that relate to operating expenses and intercompany payments for royalties denominated in certain currencies. Changes in fair value of derivatives designated as cash flow hedges are recorded, net of applicable taxes, in other comprehensive income (“OCI”) and subsequently reclassified into the same income statement line item as the hedged exposure when the underlying hedged item is recognized in earnings. The cash flows associated with derivatives designated as cash flow hedges are reported as cash flows from operating activities in the Consolidated Statement of Cash Flows.

At June 30, 2026, the maximum remaining length of time over which the Company has hedged its exposure is approximately one year. At June 30, 2026 and March 31, 2026, the weighted-average remaining maturity of these instruments was approximately 0.5 years. At June 30, 2026 and March 31, 2026, in connection with cash flow hedges of foreign currency cost transactions, the Company had unrealized losses of $1 million and $7 million (each before taxes), respectively, in accumulated other comprehensive income (“AOCI”). The Company estimates that $1 million (before taxes) of deferred net losses on derivatives in AOCI at June 30, 2026 will be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying anticipated transactions.

Net Investment Hedges

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The Company has entered into and designated cross-currency interest rate swap contracts and currency forward contracts as net investment hedges to mitigate foreign exchange exposure related to net investments. Under the terms of the cross-currency swaps, the Company makes fixed-rate payments in foreign currencies and receives fixed-rate amounts in U.S. dollars, with the exchange of the underlying notional amounts at maturity whereby the Company will receive U.S. dollars and pay foreign currencies at exchange rates which are determined at contract inception. Under the terms of the currency forward contracts, the Company commits to sell the local currency of certain subsidiaries in exchange for U.S. dollars at specified forward rates. Derivatives designated as net investment hedges are accounted for using the spot method, with changes in the fair value of the derivatives attributable to changes in spot rates recorded within foreign currency translation adjustments (“CTA”) as a component of other comprehensive income (loss) and remaining there until the hedged net investments are sold or substantially liquidated. The difference between the forward rate and spot rate is excluded from the assessment of hedge effectiveness. Excluded components are recognized in interest expense on the Consolidated Income Statement on a systematic and rational basis over the life of the derivative instruments. Cash flows from derivatives designated as net investment hedges are reported as cash flows from investing activities in the Consolidated Statement of Cash Flows, except for cash flows from the periodic interest settlements of cross-currency interest rate swaps designated as net investment hedges, which are reported as cash flows from operating activities in the Consolidated Statement of Cash Flows.

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At June 30, 2026, the maximum remaining length of time over which the Company has hedged its exposure is approximately eight years. At June 30, 2026 and March 31, 2026, the weighted-average remaining maturity of the Company’s net investment hedge instruments was approximately four and three years, respectively. At June 30, 2026 and March 31, 2026, the Company had unrealized losses of $67 million and $81 million (each before taxes), respectively, in AOCI related to net investment hedges. As of June 30, 2026, $37 million of these unrealized losses relate to settled instruments.

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Derivatives Not Designated as Hedging Instruments

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The Company enters into currency forward and swap contracts to hedge exposures related to assets, liabilities and earnings across its subsidiaries. These contracts are not designated as hedging instruments, and therefore changes in fair value of these contracts are reported in earnings in Other expense (income) in the Consolidated Income Statement. The gains and losses on these contracts generally offset the gains and losses in the underlying hedged exposures, which are also reported in Other expense (income) in the Consolidated Income Statement. Cash flows from derivatives not designated as hedges are reported as cash flows from investing activities in the Consolidated Statement of Cash Flows. The terms of these swap contracts are generally less than one year.

The Effect of Derivative Instruments in the Consolidated Income Statement

The effects of derivatives designated as hedging instruments on the Consolidated Income Statement and Other Comprehensive Income are as follows:

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For the three months ended June 30, 2026 and 2025, there were no gains or losses due to an underlying exposure that did not, or was not expected to, occur.

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The effects of derivatives not designated as hedging instruments on the Consolidated Income Statement are as follows:

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For the three months ended June 30, 2026 and 2025, our net income included a gain of $7 million and a loss of $61 million (each before taxes), respectively, from foreign currency transactions.