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0000320193
20200129
10-Q
32
2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”).
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ASU 2017-12 expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, eliminates the separate measurement and presentation of hedge ineffectiveness, and updates disclosure requirements related to hedging.
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The Company adopted ASU 2017-12 utilizing the modified retrospective transition method.
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Upon adoption, the Company recorded a $136 million increase in accumulated other comprehensive income/(loss) (“AOCI”) and a corresponding decrease in retained earnings in the Condensed Consolidated Statement of Shareholders’ Equity.
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Apple Inc. | Q1 2020 Form 10-Q | 6 Earnings Per Share The following table shows the computation of basic and diluted earnings per share for the three months ended December 28, 2019 and December 29, 2018 (net income in millions and shares in thousands): Potentially dilutive securities representing 28.8 million shares of...
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Note 2 - Revenue Recognition Net sales consist of revenue from the sale of iPhone®, Mac®, iPad®, Services and other products.
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The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers.
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Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers.
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For most of the Company’s Products net sales, control transfers when products are shipped.
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For the Company’s Services net sales, control transfers over time as services are delivered.
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Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.
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The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
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For arrangements with multiple performance obligations, which represent promises within an arrangement that are capable of being distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”).
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10-Q
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When available, the Company uses observable prices to determine SSPs.
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When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis.
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The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar...
0000320193-20-000010/full-submission.txt
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10-Q
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The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products.
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The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale.
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The second performance obligation is the right to receive certain product-related bundled services, which include iCloud®, Siri® and Maps.
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The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device.
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The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs.
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Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs.
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Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped.
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Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided.
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10-Q
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Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale.
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Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.
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Apple Inc. | Q1 2020 Form 10-Q | 7 For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered.
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For these arrangements, the Company does not have a right to bill for the undelivered services.
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The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services.
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Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.
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For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers.
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The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product.
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For third-party applications sold through the App Store®, Mac App Store, TV App Store and Watch App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer.
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Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.
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The Company has elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.
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10-Q
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Deferred Revenue As of December 28, 2019 and September 28, 2019, the Company had total deferred revenue of $9.1 billion and $8.1 billion, respectively.
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As of December 28, 2019, the Company expects 61% of total deferred revenue to be realized in less than a year, 29% within one-to-two years, 8% within two-to-three years and 2% in greater than three years.
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Disaggregated Revenue Net sales disaggregated by significant products and services for the three months ended December 28, 2019 and December 29, 2018 were as follows (in millions): (1) Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales pr...
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(2) Wearables, Home and Accessories net sales include sales of AirPods®, Apple TV®, Apple Watch®, Beats® products, HomePod™, iPod touch® and Apple-branded and third-party accessories.
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(3) Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare®, licensing and other services.
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Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud and Apple TV + services, which are bundled in the sales price of certain products.
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(4) Includes $1.9 billion of revenue recognized in the three months ended December 28, 2019 that was included in deferred revenue as of September 28, 2019 and $2.4 billion of revenue recognized in the three months ended December 29, 2018 that was included in deferred revenue as of September 29, 2018.
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The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for the three months ended December 28, 2019 and December 29, 2018.
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10-Q
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Apple Inc. | Q1 2020 Form 10-Q | 8 Note 3 - Financial Instruments Cash, Cash Equivalents and Marketable Securities The following tables show the Company’s cash and marketable securities by significant investment category as of December 28, 2019 and September 28, 2019 (in millions): (1) Level 1 fair value estimates are ...
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(2) Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for subs...
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(3) As of December 28, 2019 and September 28, 2019, total marketable securities included $19.1 billion and $18.9 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements.
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10-Q
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Apple Inc. | Q1 2020 Form 10-Q | 9 The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation.
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10-Q
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The maturities of the Company’s non-current marketable debt securities generally range from one to five years.
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The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss.
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The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.
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Fair values were determined for each individual security in the investment portfolio.
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When evaluating a marketable debt security for other-than-temporary impairment, the Company reviews factors such as the duration and extent to which the fair value of the security is less than its cost, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it will m...
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As of December 28, 2019, the Company does not consider any of its marketable debt securities to be other-than-temporarily impaired.
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Non-Marketable Securities The Company holds non-marketable equity securities of certain privately held companies without readily determinable fair values.
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10-Q
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As of both December 28, 2019 and September 28, 2019, the Company’s non-marketable equity securities had a carrying value of $2.9 billion.
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Restricted Cash A reconciliation of the Company’s cash and cash equivalents in the Condensed Consolidated Balance Sheets to cash, cash equivalents and restricted cash in the Condensed Consolidated Statements of Cash Flows as of December 28, 2019 and September 28, 2019 is as follows (in millions): The Company’s restrict...
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Derivative Financial Instruments The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, net investments in certain foreign subsidiaries, and certain existing assets and liabilities.
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However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures.
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There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.
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To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar may hedge a portion of forecaste...
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The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges.
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The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
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To protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates.
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In addition, the Company may use non-derivative financial instruments, such as its foreign currency-denominated debt, as hedges of its net investments in certain foreign subsidiaries.
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In both of these cases, the Company designates these instruments as net investment hedges.
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Apple Inc. | Q1 2020 Form 10-Q | 10 To protect the Company’s foreign currency-denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments.
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These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value.
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The Company may designate these instruments as either cash flow or fair value hedges.
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As of December 28, 2019, the Company’s hedged term debt- and marketable securities-related foreign currency transactions are expected to be recognized within 23 years.
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The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
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To protect the Company’s foreign currency-denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments.
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These instruments may offset a portion of the changes in interest income or expense, or changes in fair value.
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The Company designates these instruments as either cash flow or fair value hedges.
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As of December 28, 2019, the Company’s hedged interest rate transactions are expected to be recognized within 8 years.
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Cash Flow Hedges Cash flow hedge amounts that are included in the assessment of hedge effectiveness are deferred in AOCI until the hedged item is recognized in earnings.
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Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in th...
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Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in other income/(expense), net (“OI&E”) in the same period as the related income or expense is recognized.
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For options designated as cash flow hedges, the time value is excluded from the assessment of hedge effectiveness and recognized in the financial statement line item to which the hedge relates on a straight-line basis over the life of the hedge.
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Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in other comprehensive income/(loss) (“OCI”).
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Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period.
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Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into OI&E in the period of de-designation.
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Any subsequent changes in fair value of such derivative instruments are reflected in OI&E unless they are re-designated as hedges of other transactions.
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Net Investment Hedges Net investment hedge amounts that are included in the assessment of hedge effectiveness are recorded in OCI as a part of the cumulative translation adjustment.
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For foreign exchange forward contracts designated as net investment hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OCI on a straight-line basis over the life of the hedge.
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Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
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Fair Value Hedges Fair value hedge gains and losses related to amounts that are included in the assessment of hedge effectiveness are recognized in earnings along with a corresponding loss or gain related to the change in value of the hedged item in the same line in the Condensed Consolidated Statements of Operations.
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For foreign exchange forward contracts designated as fair value hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OI&E on a straight-line basis over the life of the hedge.
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Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
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The amount excluded from the effectiveness assessment of fair value hedges and recognized in OI&E was a gain of $128 million for the three months ended December 28, 2019.
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Non-Designated Derivatives Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
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Apple Inc. | Q1 2020 Form 10-Q | 11 The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value.
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The Company’s accounting treatment for these derivative instruments is based on its hedge designation.
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The following tables show the Company’s derivative instruments at gross fair value as of December 28, 2019 and September 28, 2019 (in millions): (1) The fair value of derivative assets is measured using Level 2 fair value inputs and is included in other current assets and other non-current assets in the Condensed Conso...
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(2) The fair value of derivative liabilities is measured using Level 2 fair value inputs and is included in other current liabilities and other non-current liabilities in the Condensed Consolidated Balance Sheets.
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The Company classifies cash flows related to derivative financial instruments as operating activities in its Condensed Consolidated Statements of Cash Flows.
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The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow and net investment hedges in OCI and the Condensed Consolidated Statements of Operations for the three months ended December 28, 2019 and December 29, 2018 (in millions): Apple Inc. ...
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The following tables show information about the Company’s derivative instruments designated as fair value hedges and the related hedged items for the three months ended December 28, 2019 and December 29, 2018 and as of December 28, 2019 (in millions): (1) Gains and losses related to fair value hedges are included in OI...
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(2) The carrying amounts of marketable securities that are designated as hedged items in fair value hedges are included in current marketable securities and non-current marketable securities in the Condensed Consolidated Balance Sheet.
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(3) The carrying amounts of fixed-rate debt instruments that are designated as hedged items in fair value hedges are included in current term debt and non-current term debt in the Condensed Consolidated Balance Sheet.
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The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of December 28, 2019 and September 28, 2019 (in millions): Apple Inc. | Q1 2020 Form 10-Q | 13 The notional amounts for outstandin...
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