American Airlines 2000 Annual Report Download - page 27

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denominated in the same foreign currency in which the
projected foreign cash flows are expected to occur.
These contracts are designated and effective as hedges
of probable quarterly foreign cash flows for various
periods through December 31, 2001, which otherwise
would expose the Company to foreign currency risk.
Realized gains on the currency put option agreements
are recognized as a component of passenger revenues.
At December 31, 2000 and 1999, the notional amount
related to these options totaled approximately $456 mil-
lion and $445 million, respectively, and the fair value,
representing the amount AMR would receive to termi-
nate the agreements, totaled approximately $20 million
and $14 million, respectively.
The Company has entered into Japanese yen
currency exchange agreements to effectively convert
certain yen-based lease obligations into dollar-based
obligations. Changes in the value of the agreements
due to exchange rate fluctuations are offset by changes
in the value of the yen-denominated lease obligations
translated at the current exchange rate. Discounts or
premiums are accreted or amortized as an adjustment to
interest expense over the lives of the underlying lease
obligations. The related amounts due to or from coun-
terparties are included in other liabilities or other assets.
The net fair values of the Company’s yen currency
exchange agreements, representing the amount the
Company would pay or receive to terminate the agree-
ments, were (in millions):
December 31,
200 0 1999
Notion al Fair Notional Fair
Amount Value Amount Value
Japanese yen 31 .0 billion $ (5) 33.6 billion $ 41
The exchange rates on the Japanese yen agree-
ments range from 66.5 to 113.5 yen per U.S. dollar.
Fair Values of Financial Instruments The fair values of
the Company’s long-term debt were estimated using
quoted market prices where available. For long-term
debt not actively traded, fair values were estimated
using discounted cash flow analyses, based on the
Company’s current incremental borrowing rates for sim-
ilar types of borrowing arrangements.
The carrying amounts and estimated fair values of the
Company’s long-term debt, including current maturities,
were (in millions):
December 31,
200 0 1999
Car r y in g Fair Carrying Fair
Value Value Value Value
Secured variable and fixed
rate indebtedness $3,366 $ 3,455 $2,651 $ 2,613
7.875%–10.62% notes 749 759 1,014 1,024
9.0%–10.20% debentures 332 358 437 469
6.0%–7.10% bonds 1 76 1 79 176 174
Unsecured variable rate
indebtedness 86 86 86 86
Other 1 1 1 1 16 16
$4,720 $ 4,848 $4,380 $ 4,382
All other financial instruments, except for the
investment in Equant, are either carried at fair value or
their carrying value approximates fair value.
Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities”, as
amended (SFAS 133), was adopted by the Company on
January 1, 2001. SFAS 133 requires the Company to rec-
ognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in
other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a
derivative’s change in fair value will be immediately
recognized in earnings. The adoption of SFAS 133 did
not have a material impact on the Company’s net earn-
ings. However, the Company recorded a transition
adjustment of approximately $100 million in accumu-
lated other comprehensive income in the first quarter
of 2001.