10-Q
Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Feb. 29, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
Commission file number 001-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
43-1878297
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
800 North Lindbergh Blvd.,
63167
St. Louis, MO
(Zip Code)
(Address of principal executive offices)
 
(314) 694-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 436,844,990 shares of Common Stock, $0.01 par value, outstanding as of April 4, 2016.
 


Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In the interests of our investors, this section of our report explains some of the important reasons that actual results may be materially different from those that we anticipate. In this report, and from time to time throughout the year, we share our expectations for our company’s future performance. These forward-looking statements include statements about our business plans; the potential development, regulatory approval, and public acceptance of our products; our expected financial performance, including sales performance, and the anticipated effect of our strategic actions; the anticipated benefits of recent acquisitions; the outcome of contingencies, such as litigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Overview — Executive Summary — Outlook,” “Seeds and Genomics Segment,” “Agricultural Productivity Segment,” “Financial Condition, Liquidity, and Capital Resources,” “Outlook,” “Critical Accounting Policies and Estimates” and “Legal Proceedings.” Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will,” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.
Since these statements are based on factors that involve risks and uncertainties, our company’s actual performance and results may differ materially from those described or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others: continued competition in seeds, traits and agricultural chemicals; the company’s exposure to various contingencies, including those related to intellectual property protection, regulatory compliance and the speed with which approvals are received, and public understanding and acceptance of our biotechnology and other agricultural products; the success of the company’s research and development activities; the outcomes of major lawsuits; developments related to foreign currencies and economies; pursuit of acquisitions or other transactions; fluctuations in commodity prices; compliance with regulations affecting our manufacturing; the accuracy of the company’s estimates related to distribution inventory levels; recent increases in and expected higher levels of indebtedness; the company’s ability to fund its short-term financing needs and to obtain payment for the products that it sells; the effect of weather conditions, natural disasters, accidents and security breaches, including cybersecurity incidents, on the agriculture business or the company’s facilities; and other risks and factors described or referenced in Part II — Item 1A — Risk Factors — below and Part I — Item 1A of our Report on Form 10-K for the fiscal year ended Aug. 31, 2015.
Our forward-looking statements represent our estimates and expectations and are based on currently available information at the time that we make those statements. However, circumstances change constantly, often unpredictably, and many events beyond our control will determine whether the expectations encompassed in our forward-looking statements will be realized. As a result, investors should not place undue reliance on these forward-looking statements. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so.



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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

TABLE OF CONTENTS
Page
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.

 

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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
The Statements of Consolidated Operations of Monsanto Company and its consolidated subsidiaries for the three and six months ended Feb. 29, 2016, and Feb. 28, 2015, the Statements of Consolidated Comprehensive Income (Loss) for the three and six months ended Feb. 29, 2016, and Feb. 28, 2015, the Statements of Consolidated Financial Position as of Feb. 29, 2016, and Aug. 31, 2015, the Statements of Consolidated Cash Flows for the six months ended Feb. 29, 2016, and Feb. 28, 2015, the Statements of Consolidated Shareowners’ Equity for the six months ended Feb. 29, 2016, and year ended Aug. 31, 2015, and related Notes to the Consolidated Financial Statements follow. Unless otherwise indicated, “Monsanto” and the “company” are used interchangeably to refer to Monsanto Company or to Monsanto Company and its consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, “earnings per share” and “per share” mean diluted earnings per share. In the notes to the consolidated financial statements, all dollars are expressed in millions, except per share amounts. Unless otherwise indicated, trademarks owned or licensed by Monsanto or its subsidiaries are shown in special type. Unless otherwise indicated, references to “Roundup herbicides” mean Roundup branded herbicides, excluding all lawn-and-garden herbicides and other glyphosate-based herbicides, and references to “Roundup and other glyphosate-based herbicides” exclude all lawn-and-garden herbicides.

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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

Statements of Consolidated Operations
Unaudited
(Dollars in millions, except per share amounts)
Three Months Ended
Six Months Ended
Feb. 29, 2016
Feb. 28, 2015
Feb. 29, 2016
Feb. 28, 2015
Net Sales
$
4,532

$
5,197

$
6,751

$
8,067

Cost of goods sold
1,934

2,158

3,252

3,617

Gross Profit
2,598

3,039

3,499

4,450

Operating Expenses:
 
 
 
 
Selling, general and administrative expenses
586

647

1,129

1,227

Research and development expenses
340

372

704

784

Restructuring charges
9


275


Total Operating Expenses
935

1,019

2,108

2,011

Income from Operations
1,663

2,020

1,391

2,439

Interest expense
103

92

232

207

Interest income
(17
)
(28
)
(37
)
(66
)
Other expense (income), net
170

(6
)
195

9

Income from Continuing Operations Before Income Taxes
1,407

1,962

1,001

2,289

Income tax provision
350

550

213

650

Income from Continuing Operations Including Portion Attributable to Noncontrolling Interest
$
1,057

$
1,412

$
788

$
1,639

Discontinued Operations:
 
 
 
 
Income from operations of discontinued business
4

11

24

37

Income tax provision
1

4

9

14

Income from Discontinued Operations
3

7

15

23

Net Income
$
1,060

$
1,419

$
803

$
1,662

Less: Net loss attributable to noncontrolling interest
(3
)
(6
)
(7
)
(6
)
Net Income Attributable to Monsanto Company
$
1,063

$
1,425

$
810

$
1,668

Amounts Attributable to Monsanto Company:
 
 
 
 
Income from continuing operations
$
1,060

$
1,418

$
795

$
1,645

Income from discontinued operations
3

7

15

23

Net Income Attributable to Monsanto Company
$
1,063

$
1,425

$
810

$
1,668

Basic Earnings per Share Attributable to Monsanto Company:
 
 
 
 
Income from continuing operations
$
2.42

$
2.93

$
1.78

$
3.40

Income from discontinued operations

0.02

0.03

0.05

Income Attributable to Monsanto Company
$
2.42

$
2.95

$
1.81

$
3.45

Diluted Earnings per Share Attributable to Monsanto Company:
 
 
 
 
Income from continuing operations
$
2.40

$
2.90

$
1.76

$
3.36

Income from discontinued operations
0.01

0.02

0.04

0.05

Net Income Attributable to Monsanto Company
$
2.41

$
2.92

$
1.80

$
3.41

Weighted Average Shares Outstanding:
 
 
 
 
Basic
438.6

483.4

447.2

483.9

Diluted
441.7

488.1

451.0

488.8

Dividends Declared per Share
$
1.08

$
0.98

$
1.08

$
0.98

The accompanying notes are an integral part of these consolidated financial statements.



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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

Statements of Consolidated Comprehensive Income (Loss)
Unaudited
(Dollars in millions)
Three Months Ended
Six Months Ended
Feb. 29, 2016
Feb. 28, 2015
Feb. 29, 2016
Feb. 28, 2015
Comprehensive (Loss) Income Attributable to Monsanto Company
 
 
 
 
Net Income Attributable to Monsanto Company
$
1,063

$
1,425

$
810

$
1,668

Other Comprehensive (Loss) Income, Net of Tax:
 
 
 
 
Foreign currency translation, net of tax of $(2), $(24), $(1), and $(30), respectively
(37
)
(621
)
(266
)
(1,105
)
Postretirement benefit plan activity, net of tax of $4, $6, $9, and $12, respectively
6

10

16

20

Unrealized net gain (losses) on investment holdings, net of tax of $0, $3, $(1), and $0, respectively

5

(2
)

Unrealized net derivative losses, net of tax of $(17), $(25), $(21), and $(27), respectively
(31
)
(32
)
(31
)
(27
)
Realized net derivative losses, net of tax of $21, $15, $26, and $15, respectively
29

24

33

23

Total Other Comprehensive Loss, Net of Tax
(33
)
(614
)
(250
)
(1,089
)
Comprehensive Income Attributable to Monsanto Company
$
1,030

$
811

$
560

$
579

Comprehensive Loss Attributable to Noncontrolling Interests
 
 
 
 
Net Loss Attributable to Noncontrolling Interests
(3
)
(6
)
(7
)
(6
)
Other Comprehensive Loss
 
 
 
 
Foreign currency translation
(1
)

(2
)
(1
)
Total Other Comprehensive Loss
(1
)

(2
)
(1
)
Comprehensive Loss Attributable to Noncontrolling Interests
$
(4
)
$
(6
)
$
(9
)
$
(7
)
Total Comprehensive Income
$
1,026

$
805

$
551

$
572

The accompanying notes are an integral part of these consolidated financial statements.



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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

Statements of Consolidated Financial Position
Unaudited
(Dollars in millions, except share amounts)
As of
Feb. 29, 2016
Aug. 31, 2015
Assets
 
 
Current Assets:
 
 
Cash and cash equivalents (variable interest entity restricted - 2016: $20 and 2015: $112)
$
1,050

$
3,701

Short-term investments
12

47

Trade receivables, net (variable interest entity restricted - 2016: $95 and 2015: $0)
1,828

1,636

Miscellaneous receivables
699

803

Deferred tax assets
760

743

Inventory, net
3,704

3,496

Other current assets
430

199

Total Current Assets
8,483

10,625

Total property, plant and equipment
10,530

10,428

Less accumulated depreciation
5,638

5,455

Property, Plant and Equipment, Net (variable interest entity restricted - 2016: $1 and 2015: $2)
4,892

4,973

Goodwill
3,994

4,061

Other Intangible Assets, Net
1,182

1,332

Noncurrent Deferred Tax Assets
236

277

Long-Term Receivables, Net
35

42

Other Assets
591

610

Total Assets
$
19,413

$
21,920

Liabilities and Shareowners’ Equity
 
 
Current Liabilities:
 
 
Short-term debt, including current portion of long-term debt (variable interest entity restricted - 2016: $94 and 2015: $0)
$
1,083

$
615

Accounts payable (variable interest entity restricted - 2016: $7 and 2015: $6)
635

836

Income taxes payable
273

234

Accrued compensation and benefits (variable interest entity restricted - 2016: $2 and 2015: $2)
190

304

Accrued marketing programs
1,219

1,492

Deferred revenue
1,161

370

Grower production accruals
197

39

Dividends payable
236

254

Customer payable
19

72

Restructuring reserves
243

170

Miscellaneous short-term accruals (variable interest entity restricted - 2016: $9 and 2015: $7)
683

791

Total Current Liabilities
5,939

5,177

Long-Term Debt (variable interest entity restricted - 2016: $0 and 2015: $96)
7,945

8,429

Postretirement Liabilities
335

336

Long-Term Deferred Revenue
44

47

Noncurrent Deferred Tax Liabilities
352

340

Long-Term Portion of Environmental and Litigation Liabilities
192

194

Long-Term Restructuring Reserves
122

47

Other Liabilities
333

345

Shareowners’ Equity:
 
 
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
 
 
Issued 610,376,659 and 609,350,452 shares, respectively
 
 
Outstanding 436,736,829 and 467,903,711 shares, respectively
6

6

Treasury stock 173,639,830 and 141,446,741 shares, respectively, at cost
(15,053
)
(12,053
)
Additional contributed capital
11,541

11,464

Retained earnings
10,709

10,374

Accumulated other comprehensive loss
(3,051
)
(2,801
)
Total Monsanto Company Shareowners’ Equity
4,152

6,990

Noncontrolling Interest
(1
)
15

Total Shareowners’ Equity
4,151

7,005

Total Liabilities and Shareowners’ Equity
$
19,413

$
21,920

The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

Statements of Consolidated Cash Flows
Unaudited
(Dollars in millions)
Six Months Ended
Feb. 29, 2016
Feb. 28, 2015
Operating Activities:
 
 
Net Income
$
803

$
1,662

Adjustments to reconcile cash provided by operating activities:
 
 
Items that did not require (provide) cash:
 
 
Depreciation and amortization
364

362

Bad-debt expense
25

31

Stock-based compensation expense
69

61

Excess tax benefits from stock-based compensation
(8
)
(33
)
Deferred income taxes
(1
)
(74
)
Restructuring impairments
104


Equity affiliate expense, net
3

5

Net gain on sale of a business or other assets

(2
)
Other items
88

69

Changes in assets and liabilities that (required) provided cash, net of acquisitions:
 
 
Trade receivables, net
(275
)
(482
)
Inventory, net
(384
)
(697
)
Deferred revenue
813

657

Accounts payable and other accrued liabilities
(334
)
188

Restructuring, net
152


Pension contributions
(13
)
(18
)
Other items
(17
)
(211
)
Net Cash Provided by Operating Activities
1,389

1,518

Cash Flows Provided (Required) by Investing Activities:
 
 
Maturities of short-term investments
35

40

Capital expenditures
(489
)
(511
)
Acquisition of businesses, net of cash acquired

(8
)
Purchases of long-term debt and equity securities

(30
)
Technology and other investments
(33
)
(26
)
Other proceeds
4

3

Net Cash Required by Investing Activities
(483
)
(532
)
Cash Flows Provided (Required) by Financing Activities:
 
 
Net change in financing with less than 90-day maturities
203

145

Short-term debt proceeds
4

15

Short-term debt reductions
(231
)
(36
)
Long-term debt proceeds
9

368

Long-term debt reductions
(4
)
(5
)
Debt issuance costs

(4
)
Treasury stock purchases
(3,001
)
(492
)
Stock option exercises
23

94

Excess tax benefits from stock-based compensation
8

33

Tax withholding on restricted stock and restricted stock units
(21
)
(29
)
Dividend payments
(491
)
(475
)
Payments to noncontrolling interests
(1
)
(20
)
Net Cash Required by Financing Activities
(3,502
)
(406
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(55
)
(215
)
Net (Decrease) Increase in Cash and Cash Equivalents
(2,651
)
365

Cash and Cash Equivalents at Beginning of Period
3,701

2,367

Cash and Cash Equivalents at End of Period
$
1,050

$
2,732

See Note 18Supplemental Cash Flow Information for further details.
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q

Statements of Consolidated Shareowners’ Equity
  
Monsanto Shareowners
  
  
Unaudited
(Dollars in millions, except per share data)
Common Stock
Treasury Stock
Additional Contributed Capital
Retained Earnings
Accumulated Other Comprehensive (Loss) (1)
Non-Controlling
Interest
Total
Balance as of Aug. 31, 2014
$
6

$
(10,032
)
$
10,003

$
9,012

$
(1,114
)
$
39

$
7,914

Net income



2,314


11

2,325

Other comprehensive loss




(1,687
)
(4
)
(1,691
)
Treasury stock purchases

(2,021
)
1,200




(821
)
Restricted stock withholding


(29
)



(29
)
Issuance of shares under employee stock plans


138




138

Net excess tax benefits from stock-based compensation


40




40

Stock-based compensation expense


112




112

Cash dividends of $2.01 per common share



(952
)


(952
)
Acquisition of noncontrolling interest





(3
)
(3
)
Payments to noncontrolling interest





(28
)
(28
)
Balance as of Aug. 31, 2015
$
6

$
(12,053
)
$
11,464

$
10,374

$
(2,801
)
$
15

$
7,005

Net income (loss)



810


(7
)
803

Other comprehensive loss




(250
)
(2
)
(252
)
Treasury stock purchases

(3,000
)
(1
)



(3,001
)
Restricted stock and restricted stock unit withholding


(21
)



(21
)
Issuance of shares under employee stock plans


23




23

Net excess tax benefits from stock-based compensation


7




7

Stock-based compensation expense


69




69

Cash dividends of $1.08 per common share



(475
)


(475
)
Acquisition of noncontrolling interest





(5
)
(5
)
Payments to noncontrolling interest





(2
)
(2
)
Balance as of Feb. 29, 2016
$
6

$
(15,053
)
$
11,541

$
10,709

$
(3,051
)
$
(1
)
$
4,151

(1)
See Note 16Accumulated Other Comprehensive Loss — for further details of the components of accumulated other comprehensive (loss).
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED



NOTE 1.
BACKGROUND AND BASIS OF PRESENTATION
Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Monsanto’s seeds, biotechnology trait products, herbicides and digital agriculture tools provide farmers with solutions that help improve productivity, reduce the costs of farming and produce better food for consumers and better feed for animals.
Monsanto manages its business in two segments: Seeds and Genomics and Agricultural Productivity. Through the Seeds and Genomics segment, Monsanto produces leading seed brands, including DEKALB, Asgrow, Deltapine, Seminis and De Ruiter, and Monsanto develops biotechnology traits that assist farmers in controlling insects and weeds and digital agriculture to assist farmers in decision making. Monsanto also provides other seed companies with genetic material and biotechnology traits for their seed brands. Through the Agricultural Productivity segment, the company manufactures Roundup and Harness brand herbicides and other herbicides. See Note 20Segment Information — for further details.
In the fourth quarter of 2008, the company announced plans to divest its animal agricultural products business, which focused on dairy cow productivity and was previously reported as part of the Agricultural Productivity segment. This transaction was consummated on Oct. 1, 2008, and included a 10-year earn-out with potential annual payments being earned by Monsanto if certain revenue levels are exceeded. As a result, financial data for this business has been presented as discontinued operations.
On Nov. 2, 2015, the company signed a definitive agreement with Deere & Company to sell the Precision Planting equipment business for approximately $190 million in cash, subject to customary working capital adjustments. As of Feb. 29, 2016, Monsanto has $193 million of assets and $7 million of liabilities classified as held for sale within other current assets and miscellaneous short-term accruals, respectively, on the Statement of Consolidated Financial Position. The assets were primarily classified as inventory, net; trade receivables, net; property, plant, and equipment, net; goodwill; and other intangible assets, net as of Aug. 31, 2015, and the liabilities were primarily classified as accrued marketing programs and accounts payable as of Aug. 31, 2015. Closing is expected to occur in fiscal year 2016 and remains subject to customary closing conditions including regulatory approvals.
The accompanying consolidated financial statements have not been audited but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Report on Form 10-Q should be read in conjunction with Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2015. Financial information for the second quarter and first six months of fiscal year 2016 should not be annualized because of the seasonality of the company’s business.
Significant Accounting Policy Update
Promotional, Advertising and Customer Incentive Program Costs: Promotional and advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the Statements of Consolidated Operations. Customer incentive program costs are recorded in accordance with the Revenue Recognition topic of the Accounting Standards Codification ("ASC"), based on specific performance criteria met by our customers, such as purchase volumes, promptness of payment and share increases. The company introduced new Agricultural Productivity customer incentive programs during first quarter 2016 providing certain customers price protection consideration if standard published prices are lowered from the price the distributor was charged on eligible products on or before Apr. 30, 2016. The associated cost of these programs is recorded in net sales in the Statement of Consolidated Operations. As actual expenses are not known at the time of sale, an estimate based on the best available information (such as historical experience and market research) is used as a basis for recording customer incentive program liabilities. Management analyzes and reviews the customer incentive program balances on a quarterly basis and adjustments are recorded as appropriate.
NOTE 2.
NEW ACCOUNTING STANDARDS
In March 2016, the Financial Accounting Standards Board ("FASB") issued accounting guidance, "Improvements to Employee Share-Based Payment Accounting" which will simplify the income tax consequences, accounting for forfeitures and classification on the Statements of Consolidated Cash Flows. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2016, with early adoption permitted. Monsanto is required to adopt the standard in the first quarter of fiscal year 2018. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued accounting guidance, "Leases" which will supersede the existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing

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Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018, with early adoption permitted. This standard will be adopted on a modified retrospective basis. Monsanto is required to adopt the standard in the first quarter of fiscal year 2020. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In January 2016, the FASB issued accounting guidance, "Recognition and Measurement of Financial Assets and Financial Liabilities" which would require equity investments not accounted for as an equity method investment or that result in consolidation to be recorded at their fair value with changes in fair value recognized in the Statements of Consolidated Operations. Those equity investments that do not have a readily determinable fair value may be measured at cost less impairment, if any, plus or minus changes resulting from observable price changes. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017, with early adoption prohibited. Monsanto is required to adopt the standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In November 2015, the FASB issued accounting guidance, "Balance Sheet Classification of Deferred Taxes" which removes the requirement to separate deferred tax liabilities and assets into current and noncurrent amounts and instead requires all such amounts be classified as noncurrent on the Statements of Consolidated Financial Position. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2016, with early adoption permitted, including adoption in an interim period, for financial periods not yet reported. The standard may be adopted on a prospective or retrospective basis. Monsanto anticipates early adopting this guidance in the third quarter of fiscal year 2016 on a prospective basis. The company expects the adoption of this guidance will result in a material decrease in working capital upon adoption.
In September 2015, the FASB issued accounting guidance, "Simplifying the Accounting for Measurement-Period Adjustments" in business combinations. This standard eliminates the need for an acquirer in a business combination to recognize measurement-period adjustments retrospectively, but instead measurement-period adjustments are to be recorded during the period in which the amount of the adjustment is determined, including the effect on earnings of any amount that would have been recorded in a previous period had the amount been recorded at the acquisition date. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2015, with early adoption permitted. Accordingly, Monsanto will adopt this standard in the first quarter of fiscal year 2017. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In July 2015, the FASB issued accounting guidance, "Simplifying the Measurement of Inventory" which requires inventory to be carried at the lower of cost or net realizable value if the FIFO or average cost method is used. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after Dec. 15, 2016, with early adoption permitted. Monsanto will adopt this standard in the first quarter of fiscal year 2018. Adoption will be applied prospectively from the beginning of the reporting period in which the standard is adopted. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In April 2015, the FASB issued accounting guidance, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" which provides explicit guidance on the recognition of fees paid by a customer for cloud computing arrangements as either the acquisition of a software license or a service contract. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after Dec. 15, 2015. Monsanto must elect to adopt either retrospectively or prospectively, with early adoption permitted. Accordingly, Monsanto is required to adopt this standard in the first quarter of fiscal year 2017. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In February 2015, the FASB issued accounting guidance, "Amendments to the Consolidation Analysis" which changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary determination and (5) certain investment funds. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after Dec. 15, 2015. Accordingly, Monsanto is required to adopt this standard in the first quarter of fiscal year 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this guidance using a modified retrospective approach by recording a cumulative effect adjustment to equity as of the beginning of the fiscal year of adoption.

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






A reporting entity also may apply the amendments retrospectively. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In June 2014, the FASB issued accounting guidance, "Compensation - Stock Compensation" which seeks to resolve the diversity in practice that exists when accounting for share-based payments. The new guidance requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. This standard is effective for fiscal years, and interim periods within those years, beginning after Dec. 15, 2015, with early adoption permitted. Monsanto will adopt this standard in the first quarter of fiscal year 2017. The guidance may be adopted either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In May 2014, the FASB issued accounting guidance, "Revenue from Contracts with Customers" which was further clarified in March 2016. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and clarify guidance for multiple-element arrangements. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Consolidated Financial Position. In August 2015, the FASB amended the guidance to allow for the deferral of the effective date of this standard. The standard is effective for fiscal years, and interim periods within those years, beginning after Dec. 15, 2017. Accordingly, Monsanto will adopt this standard in the first quarter of fiscal year 2019. One-year early adoption is permitted. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In April 2014, the FASB issued accounting guidance, "Presentation of Financial Statements and Property, Plant, and Equipment." The new standard raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This standard is effective prospectively for all disposals of components that occur within annual periods beginning on or after Dec. 15, 2014, and interim periods within those years. Accordingly, Monsanto adopted this standard in the first quarter of fiscal year 2016.
NOTE 3.
RESTRUCTURING
Restructuring charges were recorded in the Statements of Consolidated Operations as follows:
 
Three Months Ended
Six Months Ended
(Dollars in millions)
Feb. 29, 2016
Feb. 29, 2016
Cost of Goods Sold(1)
$

$
(52
)
Restructuring Charges(1)
(9
)
(275
)
Income from Continuing Operations Before Income Taxes
$
(9
)
$
(327
)
Income Tax Provision
3

111

Net Income
$
(6
)
$
(216
)
(1)
For the six months ended Feb. 29, 2016, $52 million of restructuring charges in cost of goods sold was recorded to the Seeds and Genomics segment. For the three months ended Feb. 29, 2016, $9 million of restructuring charges was recorded to the Seeds and Genomics segment. For the six months ended Feb. 29, 2016, the $275 million of restructuring charges was split by segment as follows: $246 million in Seeds and Genomics and $29 million in Agricultural Productivity.
On Oct. 6, 2015, the company approved actions to realign resources to increase productivity, enhance competitiveness by delivering cost improvements and support long-term growth. On Jan. 5, 2016, the company approved additional actions which together with the Oct. 6, 2015, actions comprise the 2015 Restructuring Plan. Actions include streamlining and reprioritizing some commercial, enabling, supply chain and research and development efforts.

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






Cumulative pretax charges related to the 2015 Restructuring Plan are estimated to be $1.1 billion to $1.2 billion. Implementation of the 2015 Restructuring Plan is expected to be completed by the end of fiscal year 2018, and substantially all of the cash payments are expected to be made by the end of fiscal year 2018. These pretax charges are currently estimated to be comprised of the following categories: $475 million to $510 million in work force reductions, including severance and related benefits; $175 million to $205 million in facility closures/exit costs, including contract termination costs; $450 million to $485 million in asset impairments and write-offs related to property, plant and equipment, inventory and goodwill and other intangible assets. These pretax charges are currently estimated to be incurred primarily by the Seeds and Genomics segment.
The following table displays the pretax charges incurred by segment under the 2015 Restructuring Plan. There were no charges incurred during the three months and six months ended Feb. 28, 2015.
 
Three months ended Feb. 29, 2016
Six months ended Feb. 29, 2016
Cumulative Amount through Feb. 29, 2016
(Dollars in millions)
Seeds and
Genomics
Agricultural
Productivity
Total
Seeds and
Genomics
Agricultural
Productivity
Total
Seeds and
Genomics
Agricultural
Productivity
Total
Work Force Reductions
$

$

$

$
208

$
9

$
217

$
412

$
22

$
434

Facility Closures/Exit Costs
4


4

6


6

6


6

Asset Impairments and Write-offs:
 
 
 
 
 
 
 
 
 
Property, plant and equipment
5


5

29


29

110


110

Inventory



37


37

88


88

Goodwill and other intangible assets



18

20

38

162

20

182

Total Restructuring Charges
$
9

$

$
9

$
298

$
29

$
327

$
778

$
42

$
820

The company’s written human resource policies are indicative of an ongoing benefit arrangement with respect to severance packages. Benefits paid pursuant to an ongoing benefit arrangement are specifically excluded from the Exit or Disposal Cost Obligations topic of the ASC; therefore, severance charges incurred in connection with the 2015 Restructuring Plan are accounted for when probable and estimable as required under the Compensation - Nonretirement Postemployment Benefits topic of the ASC. In addition, when the decision to commit to a restructuring plan requires an asset impairment review, Monsanto evaluates such impairment issues under the Property, Plant and Equipment topic of the ASC.
The following table summarizes the activities related to the company's 2015 Restructuring Plan.
(Dollars in millions)
Work Force Reductions(1)
Facility Closures/Exit Costs
Asset Impairments and Write-offs
Total
Beginning Liability as of Aug. 31, 2015
$
217

$

$

$
217

Restructuring charges recognized in first six months of fiscal year 2016
217

6

104

327

Cash payments
(65
)
(6
)

(71
)
Asset impairments and write-offs


(104
)
(104
)
Foreign currency impact
(4
)


(4
)
Ending Liability as of Feb. 29, 2016
$
365

$

$

$
365

(1)
The restructuring liability balance included $122 million and $47 million that were recorded in long-term restructuring reserves in the Statements of Consolidated Financial Position as of Feb. 29, 2016, and Aug. 31, 2015, respectively.

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






NOTE 4.
CUSTOMER FINANCING PROGRAMS
Monsanto participates in customer financing programs as follows:
 
As of
(Dollars in millions)
Feb. 29, 2016
Aug. 31, 2015
Transactions that Qualify for Sales Treatment
 
 
U.S. agreement to sell trade receivables(1)
 
 
Outstanding balance
$
39

$
851

Maximum future payout under recourse provisions
6

125

European and Latin American agreements to sell trade receivables(2)
 
 
Outstanding balance
$
26

$
124

Maximum future payout under recourse provisions
5

22

Agreements with Lenders(3)
 
 
Outstanding balance
$
80

$
75

Maximum future payout under the guarantee
54

62

The gross amounts of receivables sold under transactions that qualify for sales treatment were: 
  
Gross Amounts of Receivables Sold
 
Three Months Ended
Six Months Ended
(Dollars in millions)
Feb. 29, 2016
Feb. 28, 2015
Feb. 29, 2016
Feb. 28, 2015
Transactions that Qualify for Sales Treatment
 
 
 
 
U.S. agreement to sell trade receivables(1)
$

$

$
16

$
4

European and Latin American agreements to sell trade receivables(2)
11

14

32

37

(1)
Monsanto has agreements in the United States to sell trade receivables, both with and without recourse, up to a maximum outstanding balance of $1.3 billion and to service such accounts. These receivables qualify for sales treatment under the Transfers and Servicing topic of the ASC and, accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The liability for the guarantees for sales with recourse is recorded at an amount that approximates fair value, based upon the company’s historical collection experience and a current assessment of credit exposure.
(2)
Monsanto has various agreements in European and Latin American countries to sell trade receivables, both with and without recourse. These receivables qualify for sales treatment under the Transfers and Servicing topic of the ASC and, accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The liability for the guarantees for sales with recourse is recorded at an amount that approximates fair value, based upon the company’s historical collection experience and a current assessment of credit exposure.
(3)
Monsanto has additional agreements with lenders to establish programs that provide financing for select customers in the United States, Brazil, Latin America and Europe. Monsanto provides various levels of recourse through guarantees of the accounts in the event of customer default. The term of the guarantee is equivalent to the term of the customer loans. The liability for the guarantees is recorded at an amount that approximates fair value, based on the company’s historical collection experience with customers that participate in the program and a current assessment of credit exposure. If performance is required under the guarantee, Monsanto may retain amounts that are subsequently collected from customers.
In addition to the arrangements in the above table, Monsanto also participates in a financing program in Brazil that allows Monsanto to transfer up to 1 billion Brazilian reais (approximately $251 million as of Feb. 29, 2016) for select customers in Brazil to a revolving financing program. Under the arrangement, a recourse provision requires Monsanto to cover the first credit losses within the program up to the amount of the company's investment. Credit losses above Monsanto's investment would be covered by senior interests in the entity by a reduction in the fair value of their mandatorily redeemable shares. The company evaluated its relationship with the entity under the guidance within the Consolidation topic of the ASC, and as a result, the entity has been consolidated. For further information on this topic, see Note 5Variable Interest Entities and Cost Basis Investments.
There were no significant recourse or non-recourse liabilities for all programs as of Feb. 29, 2016, and Aug. 31, 2015. There were no significant delinquent loans for all programs as of Feb. 29, 2016, and Aug. 31, 2015.

13

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






NOTE 5.
VARIABLE INTEREST ENTITIES AND COST BASIS INVESTMENTS
Variable Interest Entities
Monsanto has a financing program in Brazil that is recorded as a consolidated variable interest entity ("VIE"). For the most part, the VIE consists of a revolving financing program that is funded by investments from the company and other third parties, primarily investment funds, and has been established to service Monsanto’s customer receivables. Third parties, primarily investment funds, held senior interest of 89 percent and 90 percent in the entity as of Feb. 29, 2016, and Aug. 31, 2015, respectively, and Monsanto held the remaining 11 percent and ten percent interest, respectively. The senior interests held by third parties are mandatorily redeemable shares and are included in short-term debt in the Statement of Consolidated Financial Position as of Feb. 29, 2016, and are included in long-term debt in the Statement of Consolidated Financial Position as of Aug. 31, 2015.
Under the arrangement, Monsanto is required to maintain an investment in the VIE of at least ten percent and could be required to provide additional contributions to the VIE. Monsanto currently has no unfunded commitments to the VIE. Creditors have no recourse against Monsanto in the event of default by the VIE. The company’s financial or other support provided to the VIE is limited to its investment. Even though Monsanto holds a subordinate interest in the VIE, the VIE was established to service transactions involving the company, and the company determines the receivables that are included in the revolving financing program. Therefore, the determination is that Monsanto has the power to direct the activities most significant to the economic performance of the VIE. As a result, the company is the primary beneficiary of the VIE, and the VIE has been consolidated in Monsanto’s consolidated financial statements. The assets of the VIE may only be used to settle the obligations of the respective entity. Third-party investors in the VIE do not have recourse to the general assets of Monsanto. See Note 4Customer Financing Programs and Note 11Fair Value Measurements— for additional information.
Monsanto has entered into several agreements with third parties to establish entities to focus on research and development related to various activities including agricultural fungicides and biologicals for agricultural applications. All such entities are recorded as consolidated VIEs of Monsanto. Under each of the arrangements, Monsanto holds call options to acquire the majority of the equity interests in each VIE from the third-party owners. Monsanto will fund the operations of the VIEs in return for either additional equity interests or to retain the call options. The funding will be provided in separate research phases if research milestones are met. The VIEs were established to perform agricultural-based research and development activities for the benefit of Monsanto, and Monsanto provides all funding of the VIEs' activities. Further, Monsanto has the power to direct the activities most significant to the VIEs. As a result, Monsanto is the primary beneficiary of the VIEs and the VIEs have been consolidated in Monsanto's consolidated financial statements. The third-party owners of the VIEs do not have recourse to the general assets of Monsanto at any given time relating to the VIEs.
Cost Basis Investments
Monsanto has cost basis investments recorded in other assets in the Statements of Consolidated Financial Position. As of Feb. 29, 2016, and Aug. 31, 2015, these investments were recorded at $95 million and $90 million, respectively. Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed for impairment indicators.
NOTE 6.
RECEIVABLES
Trade receivables in the Statements of Consolidated Financial Position are net of allowances of $67 million and $59 million as of Feb. 29, 2016, and Aug. 31, 2015, respectively.
The company has financing receivables that represent long-term customer receivable balances related to past due accounts which are not expected to be collected within the current year. The long-term customer receivables were $154 million and $156 million with a corresponding allowance for credit losses on these receivables of $125 million and $120 million as of Feb. 29, 2016, and Aug. 31, 2015, respectively. These long-term customer receivable balances and the corresponding allowance are included in long-term receivables, net in the Statements of Consolidated Financial Position. For these long-term customer receivables, interest is no longer accrued when the receivable is determined to be delinquent and classified as long-term based on estimated timing of collection.

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






The following table displays a roll forward of the allowance for credit losses related to long-term customer receivables.
(Dollars in millions)
  
Balance as of Aug. 31, 2014
$
125

Incremental Provision
9

Recoveries
(3
)
Write-offs
(28
)
Other(1) 
17

Balance as of Aug. 31, 2015
$
120

Incremental Provision
3

Write-offs
(3
)
Other(1)
5

Balance as of Feb. 29, 2016
$
125

(1)Includes reclassifications from the allowance for current receivables and foreign currency translation adjustments.
On an ongoing basis, the company evaluates credit quality of its financing receivables utilizing aging of receivables, collection experience and write-offs, as well as evaluating existing economic conditions, to determine if an allowance is necessary.
NOTE 7.
INVENTORY
Components of inventory are:
 
As of
(Dollars in millions)
Feb. 29, 2016
Aug. 31, 2015
Finished Goods
$
1,839

$
1,603

Goods In Process
1,535

1,627

Raw Materials and Supplies
491

420

Inventory at FIFO Cost
3,865

3,650

Excess of FIFO over LIFO Cost
(161
)
(154
)
Total
$
3,704

$
3,496

NOTE 8.
GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the net carrying amount of goodwill for the first six months of fiscal year 2016, by segment, are as follows:
(Dollars in millions)
Seeds and
Genomics
Agricultural
Productivity
Total
Balance as of Aug. 31, 2015
$
4,004

$
57

$
4,061

Effect of foreign currency translation and other adjustments
(29
)
3

(26
)
Reclass to held for sale
(41
)

(41
)
Balance as of Feb. 29, 2016
$
3,934

$
60

$
3,994

There were no events or circumstances indicating that goodwill might be impaired as of Feb. 29, 2016. The fiscal year 2016 annual goodwill impairment test will be performed as of Mar. 1, 2016. See Note 1Background and Basis of Presentation — for further information on the reclass to held for sale.

15

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






Information regarding the company’s other intangible assets is as follows:
  
As of Feb. 29, 2016
As of Aug. 31, 2015
(Dollars in millions)
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Accumulated
Amortization
Net
Acquired Germplasm
$
1,068

$
(760
)
$
308

$
1,074

$
(750
)
$
324

Acquired Intellectual Property
1,046

(565
)
481

1,168

(598
)
570

Trademarks
341

(154
)
187

353

(152
)
201

Customer Relationships
298

(211
)
87

318

(212
)
106

Other
73

(45
)
28

176

(146
)
30

Total Other Intangible Assets, Finite Lives
$
2,826

$
(1,735
)
$
1,091

$
3,089

$
(1,858
)
$
1,231

In Process Research & Development, Indefinite Lives
91


91

101


101

Total Other Intangible Assets
$
2,917

$
(1,735
)
$
1,182

$
3,190

$
(1,858
)
$
1,332

The decrease in total other intangible assets, net during the six months ended Feb. 29, 2016, is primarily related to amortization expense and intangible impairments. See Note 11Fair Value Measurements and Note 3Restructuring — for further information on the impairments.
Total amortization expense of total other intangible assets was $28 million and $36 million for the three months ended Feb. 29, 2016, and Feb. 28, 2015, respectively, and $59 million and $73 million for the six months ended Feb. 29, 2016, and Feb. 28, 2015, respectively.
The estimated intangible asset amortization expense for fiscal year 2016 through fiscal year 2020 is as follows:
(Dollars in millions)
Amount
2016
$
145

2017
147

2018
109

2019
109

2020
106

NOTE 9.
DEFERRED REVENUE
As of Feb. 29, 2016, and Aug. 31, 2015, short-term deferred revenue was $1,161 million and $370 million, respectively. These balances primarily consist of cash received related to Monsanto's prepayment programs in the United States and Brazil. These programs allow Monsanto's customers to receive a discount if they prepay by a certain date, and the short-term deferred revenue balance is consistent with the seasonality of Monsanto's business. Prepayment options are attractive to customers given the discounted pricing and the ability to utilize cash flow from the current year grain harvest to pay for the next season seed purchases. The deferred revenue balance related to these prepayment programs is considered short-term in nature and thus classified in current liabilities as the prepayments are for products to be shipped within the next 12 months.
NOTE 10.
DEBT AND OTHER CREDIT ARRANGEMENTS
In June 2014, Monsanto filed a shelf registration with the SEC ("2014 shelf registration") that allows the company to issue an unlimited capacity of debt, equity and hybrid offerings until filing of the company's annual report on Form 10-K for the fiscal year ending Aug. 31, 2016.
Monsanto has a $3 billion credit facility agreement that provides a senior unsecured revolving credit facility through Mar. 27, 2020. As of Feb. 29, 2016, Monsanto was in compliance with all debt covenants, and there were no outstanding borrowings under this credit facility.
Monsanto's short-term debt instruments include commercial paper, the current portion of long-term debt and notes payable to banks. As of Feb. 29, 2016, Monsanto had commercial paper borrowings outstanding of $200 million which are included in short-term debt on the Statements of Consolidated Financial Position. As of Aug. 31, 2015, there were no commercial paper borrowings outstanding. Additionally, as of Feb. 29, 2016, the mandatorily redeemable shares of a VIE were classified as short-term debt instruments. These instruments were classified as long-term debt as of Aug. 31, 2015.

16

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






In April 2015, Monsanto issued $300 million of 2.85% Senior Notes due in 2025 and $500 million of 3.95% Senior Notes due in 2045. In January 2015, Monsanto issued $365 million of 4.30% Senior Notes due in 2045. All notes were issued under the 2014 shelf registration. The net proceeds from the issuances were used for general corporate purposes, which include share repurchases and capital expenditures.
The fair value of total short-term debt was $1,084 million and $619 million as of Feb. 29, 2016, and Aug. 31, 2015, respectively. The fair value of the total long-term debt was $7,720 million and $8,124 million as of Feb. 29, 2016, and Aug. 31, 2015, respectively. See Note 11Fair Value Measurements — for additional information.
NOTE 11.
FAIR VALUE MEASUREMENTS
Monsanto determines the fair market value of its financial assets and liabilities based on quoted market prices, estimates from brokers and other appropriate valuation techniques. The company uses the fair value hierarchy established in the Fair Value Measurements and Disclosures topic of the ASC, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy contains three levels as follows, with Level 3 representing the lowest level of input.
Level 1 — Values based on unadjusted quoted market prices in active markets that are accessible at the measurement date for identical assets and liabilities.
Level 2 — Values based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, discounted cash flow models, or other model-based valuation techniques adjusted, as necessary, for credit risk.
Level 3 — Values generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include use of option pricing models, discounted cash flow models and similar techniques.
The following tables set forth by level Monsanto’s assets and liabilities disclosed at fair value on a recurring basis as of Feb. 29, 2016, and Aug. 31, 2015. As required by the Fair Value Measurements and Disclosures topic of the ASC, assets and liabilities are classified in their entirety based on the lowest level of input that is a significant component of the fair value measurement. Monsanto’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.

17

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






  
Fair Value Measurements at Feb. 29, 2016, Using
(Dollars in millions)
Level 1
Level 2
Level 3
Net Balance
Assets at Fair Value:
 
 
 
 
Cash equivalents
$
433

$

$

$
433

Short-term investments
12



12

Equity securities
14



14

Derivative assets related to:
 
 
 
 
Foreign currency contracts

32


32

Commodity contracts
2

2


4

Total Assets at Fair Value
$
461

$
34

$

$
495

Liabilities at Fair Value:
 
 
 
 
Short-term debt instruments(1)
$

$
990

$
94

$
1,084

Long-term debt instruments(1)

7,720


7,720

Derivative liabilities related to:
 
 
 
 
Foreign currency contracts

12


12

Commodity contracts
23

40


63

Interest rate contracts

22


22

Total Liabilities at Fair Value
$
23

$
8,784

$
94

$
8,901

(1)
Debt instruments, excluding mandatorily redeemable shares, are not recorded at fair value on a recurring basis; however, they are measured at fair value for disclosure purposes, as required by the Fair Value Measurements and Disclosures topic of the ASC.
  
Fair Value Measurements at Aug. 31, 2015, Using
(Dollars in millions)
Level 1
Level 2
Level 3
Net Balance
Assets at Fair Value:
 
 
 
 
Cash equivalents
$
3,213

$

$

$
3,213

Short-term investments
47



47

Equity securities
17



17

Derivative assets related to:
 
 
 


Foreign currency

40


40

Commodity contracts
1

7


8

Interest rate contracts

2


2

Total Assets at Fair Value
$
3,278

$
49

$

$
3,327

Liabilities at Fair Value:
 
 
 
 
Short-term debt instruments(1)
$

$
619

$

$
619

Long-term debt instruments(1)

8,028

96

8,124

Derivative liabilities related to:
 
 
 
 
Foreign currency

11


11

Commodity contracts
35

50


85

Total Liabilities at Fair Value
$
35

$
8,708

$
96

$
8,839

(1)
Debt instruments, excluding mandatorily redeemable shares, are not recorded at fair value on a recurring basis; however, they are measured at fair value for disclosure purposes, as required by the Fair Value Measurements and Disclosures topic of the ASC.
The company’s derivative contracts are measured at fair value, including forward commodity purchase and sale contracts, exchange-traded commodity futures and option contracts, and over-the-counter ("OTC") instruments related primarily to agricultural commodities, energy and raw materials, interest rates and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified as Level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the

18

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






listed or OTC markets and are classified as Level 2. Interest rate contracts consist of interest rate swaps measured using broker or dealer quoted prices. When observable inputs are available for substantially the full term of the contract, it is classified as Level 2. Based on historical experience with the company’s suppliers and customers, the company’s own credit risk and knowledge of current market conditions, the company does not view nonperformance risk to be a significant input to the fair value for the majority of its forward commodity purchase and sale contracts. The effective portions of changes in the fair value of derivatives designated as cash flow hedges are recognized in the Statements of Consolidated Financial Position as a component of accumulated other comprehensive loss until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur. Changes in the fair value of derivatives are recognized in the Statements of Consolidated Operations as a component of net sales, cost of goods sold and other expense, net.
The company’s short-term investments may consist of commercial paper and cash which is contractually restricted as to withdrawal or usage. The company’s equity securities consist of publicly traded equity investments. Commercial paper and publicly traded equity investments are valued using quoted market prices and are classified as Level 1. Contractually restricted cash may be held in an interest bearing account measured using prevailing interest rates and are classified as Level 1. Short-term debt instruments are classified as Level 2. The company's long-term debt securities are classified as Level 2 and valued using broker or dealer quoted prices with a maturity greater than one year.
Short-term debt instruments may consist of commercial paper, current portion of long-term debt, mandatorily redeemable shares, and notes payable to banks. Commercial paper and notes payables to banks are recorded at amortized cost in the Statements of Consolidated Financial Position, which approximates fair value. Current portion of long-term debt is measured at fair value for disclosure purposes and determined based on current market yields for Monsanto's debt traded in the secondary market. Mandatorily redeemable shares are recorded in the Statements of Consolidated Financial Position at fair value, which represents the amount of cash the consolidated variable interest entity would pay if settlement occurred as of the respective reporting date. Fair value of the mandatorily redeemable shares of the variable interest entity is calculated using observable and unobservable inputs from an interest rate market in Brazil and stated contractual terms (a Level 3 measurement).
See Note 10Debt and Other Credit Arrangements for additional disclosures. Accretion expense is included in the Statements of Consolidated Operations as interest expense.
Long-term debt was measured at fair value for disclosure purposes and determined based on current market yields for Monsanto's debt traded in the secondary market.
For the six months ended Feb. 29, 2016, and Feb. 28, 2015, the company had no transfers between Level 1, Level 2 and Level 3. Monsanto does not have any assets with fair value determined using Level 3 inputs as of Feb. 29, 2016, and Aug. 31, 2015. The following table summarizes the change in fair value of the Level 3 long-term debt instrument for the six months ended Feb. 29, 2016.
(Dollars in millions)
 
 Balance Aug. 31, 2015(1)
$
96

Reclass to short-term
(96
)
 Balance Feb. 29, 2016
$

(1)
Includes 350,000 mandatorily redeemable shares outstanding with a par value of 1,000 Brazilian reais (approximately $274) as of Aug. 31, 2015.
The following table summarizes the change in fair value of the Level 3 short-term debt instrument for the six months ended Feb. 29, 2016.
(Dollars in millions)
 
 Balance Aug. 31, 2015
$

Reclass from long-term
96

Accretion expense
6

Effect of foreign currency translation adjustments
(8
)
 Balance Feb. 29, 2016(1)
$
94

(1)
Includes 350,000 mandatorily redeemable shares outstanding with a par value of 1,000 Brazilian reais (approximately $251) as of Feb. 29, 2016.

19

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






There were no significant measurements of liabilities to their implied fair value on a nonrecurring basis during the six months ended Feb. 29, 2016, and Feb. 28, 2015.
There were no significant measurements of assets to their implied fair value on a nonrecurring basis during the six months ended Feb. 28, 2015. Significant measurements during the three and six months ended Feb. 29, 2016, of assets to their implied fair value on a nonrecurring basis were as follows:
Property, Plant and Equipment, Net: During the three months ended Feb. 29, 2016, property, plant and equipment within the Seeds and Genomics segment with a net book value of $10 million was written down to its implied fair value estimate of $5 million, resulting in an impairment charge of $5 million, with $5 million included in restructuring charges in the Statement of Consolidated Operations. The implied fair value calculations were performed using a discounted cash flow model (a Level 3 measurement). See Note 3Restructuring — for additional disclosures.
During the six months ended Feb. 29, 2016, property, plant and equipment within the Seeds and Genomics segment with a net book value of $44 million was written down to its implied fair value estimate of $15 million, resulting in an impairment charge of $29 million, with $15 million included in cost of goods sold and $14 million included in restructuring charges in the Statement of Consolidated Operations. The implied fair value calculations were performed using a discounted cash flow model (a Level 3 measurement). See Note 3Restructuring — for additional disclosures.
Other Intangible Assets, Net: During the six months ended Feb. 29, 2016, other intangible assets within the Seeds and Genomics segment with a net book value of $16 million were written down to their implied fair value of less than $1 million, resulting in an impairment charge of $16 million, with $16 million included in restructuring charges in the Statement of Consolidated Operations. The implied fair value calculations were performed using a discounted cash flow model (a Level 3 measurement). See Note 3Restructuring — for additional disclosures.
During the six months ended Feb. 29, 2016, other intangible assets within the Agricultural Productivity segment with a net book value of $20 million were written down to their implied fair value of less than $1 million, resulting in an impairment charge of $20 million, with $20 million included in restructuring charges in the Statement of Consolidated Operations. The implied fair value calculations were performed using a discounted cash flow model (a Level 3 measurement). See Note 3Restructuring — for additional disclosures.
Other Assets: During the six months ended Feb. 29, 2016, a long-term investment within the Seeds and Genomics segment with a net book value of $7 million was written down to its implied fair value estimate of $5 million, resulting in an impairment charge of $2 million, with $2 million included in restructuring charges in the Statement of Consolidated Operations. The implied fair value calculations were performed using a discounted cash flow model (a Level 3 measurement). See Note 3Restructuring — for additional disclosures.
The recorded amounts of cash, trade receivables, miscellaneous receivables, third-party guarantees, accounts payable, grower production accruals, accrued marketing programs and miscellaneous short-term accruals approximate their fair values as of Feb. 29, 2016, and Aug. 31, 2015.
Management is ultimately responsible for all fair values presented in the company’s consolidated financial statements. The company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of fair value. This process involves quantitative and qualitative analysis. As a result of the analysis, if the company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.
NOTE 12.
FINANCIAL INSTRUMENTS
Cash Flow Hedges
The company uses foreign currency options and foreign currency forward contracts as hedges of anticipated sales or purchases denominated in foreign currencies. The company enters into these contracts to protect itself against the risk that the eventual net cash flows will be adversely affected by changes in exchange rates.
Monsanto’s commodity price risk management strategy is to use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from volatility in commodity prices. Price fluctuations in commodities, mainly in corn and soybeans, can cause the actual prices paid to production growers for corn and soybean seeds to differ from anticipated cash outlays. Monsanto generally uses commodity futures and options contracts to manage these risks. Monsanto’s energy and raw

20

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






material risk management strategy is to use derivative instruments to minimize significant unanticipated manufacturing cost fluctuations that may arise from volatility in natural gas, diesel and ethylene prices.
 
Monsanto’s interest rate risk management strategy is to use derivative instruments, such as forward-starting interest rate swaps and option contracts, to minimize significant unanticipated earnings fluctuations that may arise from volatility in interest rates of the company’s borrowings and to manage the interest rate sensitivity of its debt.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The maximum term over which the company is hedging exposures to the variability of cash flow (for all forecasted transactions) is 18 months for foreign currency hedges and 30 months for commodity hedges. During the next 12 months, a pretax net loss of approximately $74 million is expected to be reclassified from accumulated other comprehensive loss into earnings. No cash flow hedges were discontinued during the three and six months ended Feb. 28, 2015. No cash flow hedges were discontinued during the three months ended Feb. 29, 2016. A pretax loss of less than $1 million during the six months ended Feb. 29, 2016, was reclassified into cost of goods sold in the Statement of Consolidated Operations as a result of the discontinuance of commodity cash flow hedges because it was probable that the original forecasted transaction would not occur by the end of the originally specified time period.
Fair Value Hedges
The company uses commodity futures, forwards and options contracts as fair value hedges to manage the value of its soybean inventory, and other assets. For derivative instruments that are designated and qualify as fair value hedges, both the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. No fair value hedges were discontinued during the three and six months ended Feb. 29, 2016, and Feb. 28, 2015.
Derivatives Not Designated as Hedging Instruments
The company uses foreign currency contracts to hedge the effects of fluctuations in exchange rates on foreign currency denominated third-party and intercompany receivables and payables. Both the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.
The company uses commodity option contracts to hedge anticipated cash payments to growers in the United States, Mexico and Brazil, which can fluctuate with changes in commodity price. Because these option contracts do not meet the provisions specified by the Derivatives and Hedging topic of the ASC, they do not qualify for hedge accounting treatment. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
To reduce credit exposure in Latin America, Monsanto collects payments on certain customer accounts in grain. Such payments in grain are negotiated at or near the time Monsanto’s products are sold to the customers and are valued at the prevailing grain commodity prices. By entering into forward sales contracts related to grain, Monsanto mitigates the commodity price exposure from the time a contract is signed with a customer until the time a grain merchant collects the grain from the customer on Monsanto’s behalf. The forward sales contracts do not qualify for hedge accounting treatment under the Derivatives and Hedging topic of the ASC. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Monsanto uses interest rate contracts to minimize the variability of forecasted cash flows arising from the company’s consolidated VIE in Brazil. The interest rate contracts do not qualify for hedge accounting treatment under the Derivatives and Hedging Topic of the ASC. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Financial instruments are neither held nor issued by the company for trading purposes.





21

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






The notional amounts of the company’s derivative instruments outstanding as of Feb. 29, 2016, and Aug. 31, 2015, are as follows:
 
As of
(Dollars in millions)
Feb. 29, 2016
Aug. 31, 2015
Derivatives Designated as Hedges:
 
 
Foreign exchange contracts
$
405

$
456

Commodity contracts
649

591

Interest rate contracts
150

150

Total Derivatives Designated as Hedges
$
1,204

$
1,197

Derivatives Not Designated as Hedges:
 
 
Foreign exchange contracts
$
2,159

$
1,926

Commodity contracts
139

163

Interest rate contracts
96


Total Derivatives Not Designated as Hedges
$
2,394

$
2,089


22

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






The net presentation of the company’s derivative instruments outstanding was as follows:
 
 
 
As of Feb. 29, 2016
(Dollars in millions)
Gross Amounts Recognized
Gross Amounts Offset in the Statement of Consolidated Financial Position
Net Amounts Included in the Statement of Consolidated Financial Position
Collateral Pledged
Net Amounts Reported in the Statement of Consolidated Financial Position
Other Items Included in the Statement of Consolidated Financial Position
Statement of Consolidated Financial Position Balance
Asset Derivatives:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
2

$
(19
)
$
(17
)
$
17

$

 
 
 
 
Foreign exchange contracts
18


18


18

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
2


2


2

 
 
 
 
Foreign exchange contracts
14


14


14

 
 
Total other current assets
36

(19
)
17

17

34

$
396

$
430

Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)

(4
)
(4
)
4


 
 
Total other assets

(4
)
(4
)
4


591

591

Total Asset Derivatives
$
36

$
(23
)
$
13

$
21

$
34

 
 
Liability Derivatives:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
19

$
(19
)
$

$

$

 
 
Total other current assets
19

(19
)



 
 
Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
4

(4
)



 
 
Total other assets
4

(4
)



 
 
Miscellaneous short-term accruals
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
25


25


25

 
 
 
 
Foreign exchange contracts
1


1


1

 
 
 
 
Interest rate contracts
22


22


22

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
3


3


3

 
 
 
 
Foreign exchange contracts
11


11


11

 
 
Total miscellaneous short-term accruals
62


62


62

$
621

$
683

Other liabilities
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
12


12


12

 
 
Total other liabilities
12


12


12

321

333

Total Liability Derivatives
$
97

$
(23
)
$
74

$

$
74

 
 
(1)
As allowed by the Derivatives and Hedging topic of the ASC, derivative assets and liabilities have been offset by collateral subject to an enforceable master netting arrangement or similar arrangement. Therefore, contracts that are in an asset or liability position are included in asset accounts within the Statements of Consolidated Financial Position.

23

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MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






 
 
 
As of Aug. 31, 2015
(Dollars in millions)
Gross Amounts Recognized
Gross Amounts Offset in the Statement of Consolidated Financial Position
Net Amounts Included in the Statement of Consolidated Financial Position
Collateral Pledged
Net Amounts Reported in the Statement of Consolidated Financial Position
Other Items Included in the Statement of Consolidated Financial Position
Statement of Consolidated Financial Position Balance
Asset Derivatives:
 
 
 
 
 
 
 
Miscellaneous receivables
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
2

$

$
2

$

$
2

 
 
Total miscellaneous receivables
2


2


2

$
801

$
803

Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)

(29
)
(29
)
29


 
 
 
 
Foreign exchange contracts
25


25


25

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
7


7


7

 

 
 
Foreign exchange contracts
14


14


14

 
 
Total other current assets
46

(29
)
17

29

46

153

199

Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
1

(6
)
(5
)
6

1

 
 
 
 
Foreign exchange contracts
1


1


1

 


Total other assets
2

(6
)
(4
)
6

2

608

610

Total Asset Derivatives
$
50

$
(35
)
$
15

$
35

$
50





Liability Derivatives:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
29

$
(29
)
$

$

$

 
 
Total other current assets
29

(29
)



 
 
Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
6

(6
)



 
 
Total other assets
6

(6
)



 
 
Miscellaneous short-term accruals
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
27


27


27

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
9


9


9

 
 
 
 
Foreign exchange contracts
11


11


11

 
 
Total miscellaneous short-term accruals
47


47


47

$
744

$
791

Other liabilities
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
14


14


14

 

Total other liabilities
14


14


14

331

345

Total Liability Derivatives
$
96

$
(35
)
$
61

$

$
61





(1)
As allowed by the Derivatives and Hedging topic of the ASC, commodity derivative assets and liabilities have been offset by collateral subject to an enforceable master netting arrangement or similar arrangement. Therefore, these commodity contracts that are in an asset or liability position are included in asset accounts within the Statements of Consolidated Financial Position.

24

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2016 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






The gains and losses on the company’s derivative instruments were as follows:
 
Amount of Gain (Loss)
Recognized in AOCL(1) 
(Effective Portion)
Amount of Gain (Loss)
Recognized in Income(2)(3)
 
 
Three Months Ended
Three Months Ended
Statement of Consolidated Operations Classification
(Dollars in millions)
Feb. 29, 2016
Feb. 28, 2015
Feb. 29, 2016
Feb. 28, 2015