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Table of Contents
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. Deferred gains and losses in other
comprehensive income associated with such derivative instruments are reclassified immediately into earnings through other income and expense.
Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings unless they are re-
designated as hedges
of other transactions. The Company did not recognize any material net gains or losses related to the loss of hedge designation on discontinued
cash flow hedges during 2009, 2008 and 2007.
The Company had an unrealized net loss on net investment hedges of $2 million and $1 million, net of taxes, included in the cumulative
translation adjustment account of accumulated other comprehensive income (“AOCI”)
as of September 26, 2009 and September 27, 2008,
respectively. The ineffective portions and amounts excluded from the effectiveness test of net investment hedges are recorded in current earnings
in other income and expense.
The Company recognized in earnings a net gain of $133 million on foreign currency forward and option contracts not designated as hedging
instruments during the year ended September 26, 2009.
The following table shows the notional principal and credit risk amounts of the Company’
s derivative instruments outstanding as of
September 26, 2009 and September 27, 2008 (in millions):
The notional principal amounts for derivative instruments provide one measure of the transaction volume outstanding as of September 26, 2009,
and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’
s gross
exposure to potential accounting loss on these transactions if all counterparties failed to perform according to the terms of the contract, based on
then-current currency exchange rates at each respective date. The Company’
s gross exposure on these transactions may be further mitigated by
collateral received from certain counterparties. The Company’
s exposure to credit loss and market risk will vary over time as a function of
currency exchange rates. Although the table above reflects the notional principal and credit risk amounts of the Company’
s foreign exchange
instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange instruments are
intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the
underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The Company generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the
same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to
be received when the net fair value of certain financial instruments exceeds contractually established thresholds. The Company presents its
derivative assets and derivative liabilities at their gross fair values. The Company did not record a material amount of cash collateral related to
the derivative instruments under its master netting arrangements as of September 26, 2009. The Company did not have any derivative
instruments with credit risk-related contingent features that would require it to post additional collateral as of September 26, 2009.
The estimates of fair value are based on applicable and commonly used pricing models and prevailing financial market information as of
September 26, 2009. Refer to Note 3, “Fair Value Measurements” of this Form 10-K,
69
2009
2008
Notional
Principal
Credit
Risk
Amounts
Notional
Principal
Credit
Risk
Amounts
Instruments qualifying as accounting hedges:
Foreign exchange contracts
$
4,422
$
31
$
5,902
$
107
Instruments other than accounting hedges:
Foreign exchange contracts
$
3,416
$
10
$
2,868
$
8