2012 Annual Report  Qualifying Hedges and Non-Qualifying Derivatives  The following summarizes the fair value of outstanding derivatives:  December 31, 2012 December 31, 2011 $_{ }$  Fair Value  Fair Value  Dollars in Millions Balance Sheet Location  Notional  (Level 2)  Notional  (Level 2)  Derivatives designated as hedging instruments: Interest rate swap contracts Other assets  $  573 $  146 $   579 $  135  Foreign currency forward contracts  735  59  1,347  88  Accrued expenses   916  (30)  480  (29) Cash Flow Hedges —  Foreign currency forward contracts are primarily utilized to hedge forecasted intercompany inventory purchase  transactions in certain foreign currencies. These forward contracts are designated as cash flow hedges with the effective portion of  changes in fair value being temporarily reported in accumulated OCI and recognized in earnings when the hedged item affects  earnings. The notional amount of outstanding foreign currency forward contracts was primarily attributed to the Euro ($929 million)  and Japanese yen ($413 million) at December 31, 2012.  The net gains on foreign currency forward contracts qualifying for cash flow hedge accounting are expected to be reclassified to cost  of products sold within the next two years, including $25 million of pre-tax gains to be reclassified within the next 12 months. Cash  flow hedge accounting is discontinued when the forecasted transaction is no longer probable of occurring on the originally forecasted  date, or 60 days thereafter, or when the hedge is no longer effective. Assessments to determine whether derivatives designated as  qualifying hedges are highly effective in offsetting changes in the cash flows of hedged items are performed at inception and on a  quarterly basis. Any ineffective portion of the change in fair value is included in current period earnings. The earnings impact related  to discontinued cash flow hedges and hedge ineffectiveness was not significant during all periods presented.  Net Investment Hedges  − Non-U.S. dollar borrowings of €541 million ($714 million) are designated to hedge the foreign currency  exposures of the net investment in certain foreign affiliates. These borrowings are designated as net investment hedges and  recognized in long term debt. The effective portion of foreign exchange gains or losses on the remeasurement of the debt is  recognized in the foreign currency translation component of accumulated OCI with the related offset in long term debt.  Fair Value Hedges –  Fixed-to-floating interest rate swap contracts are designated as fair value hedges and are used as part of an  interest rate risk management strategy to create an appropriate balance of fixed and floating rate debt. The swaps and underlying debt  for the benchmark risk being hedged are recorded at fair value. The effective interest rate paid on fixed-to-floating interest rate swaps  is one-month LIBOR (0.210% as of December 31, 2012) plus an interest rate spread ranging from 1.3% to 2.9%. When the  underlying swap is terminated prior to maturity, the fair value basis adjustment to the underlying debt instrument is amortized into  earnings as a reduction to interest expense over the remaining life of the debt.  During 2011, fixed-to-floating interest rate swap contracts of $1.6 billion notional amount and €1.0 billion notional amount were  terminated generating total proceeds of $356 million (including accrued interest of $66 million). During 2010, fixed-to-floating  interest rate swap contracts of $237 million notional amount and €500 million notional amount were terminated generating total  proceeds of $116 million (including accrued interest of $18 million).  Non-Qualifying Foreign Exchange Contracts  − Foreign currency forward contracts are used to offset exposure to foreign currency- denominated monetary assets, liabilities and earnings. The primary objective of these contracts is to protect the U.S. dollar value of  foreign currency-denominated monetary assets, liabilities and earnings from the effects of volatility in foreign exchange rates that  might occur prior to their receipt or settlement in U.S. dollars. These contracts are not designated as hedges and are adjusted to fair  value through other (income)/expense as they occur, and substantially offset the change in fair value of the underlying foreign  currency denominated monetary asset, liability or earnings. The effect of non-qualifying hedges on earnings was not significant for all  periods presented. Short-term borrowings and the current portion of long-term debt includes:  Debt Obligations  December 31,  Dollars in Millions 2012 2011 Bank drafts $   162 $  113 Other short-term borrowings   -  2 Current portion of long-term debt   664  - Total  $   826 $  115 51 