Apple 2010 Annual Report Download - page 64

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Table of Contents
The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-
hedge
instruments. The Company records all derivatives on the Consolidated Balance Sheets at fair value. The effective portions of cash flow hedges
are recorded in other comprehensive income until the hedged item is recognized in earnings. The effective portions of net investment hedges are
recorded in other comprehensive income as a part of the cumulative translation adjustment. Derivatives that are not designated as hedging
instruments and the ineffective portions of cash flow hedges and net investment hedges are adjusted to fair value through earnings in other
income and expense.
The Company had a net deferred loss associated with cash flow hedges of approximately $252 million and a net deferred gain of $1 million, net
of taxes, recorded in other comprehensive income as of September 25, 2010 and September 26, 2009, respectively. Other comprehensive income
associated with cash flow hedges of foreign currency revenue is recognized as a component of net sales in the same period as the related revenue
is recognized, and other comprehensive income related to cash flow hedges of inventory purchases is recognized as a component of cost of sales
in the same period as the related costs are recognized. Substantially all of the Company’
s hedged transactions as of September 25, 2010 are
expected to occur within six months.
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 significant net gains or losses related to the loss of hedge designation on discontinued
cash flow hedges during 2010, 2009 and 2008.
The Company had an unrealized net loss on net investment hedges of $9 million and $2 million, net of taxes, included in the cumulative
translation adjustment account of accumulated other comprehensive income (“AOCI”)
as of September 25, 2010 and September 26, 2009,
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 loss of $123 million and $133 million on foreign currency forward and option contracts not
designated as hedging instruments during the year ended September 25, 2010 and September 26, 2009, respectively. These amounts represent the
net gain or loss on the derivative contracts and do not include changes in the related exposures, which generally offset a portion of the gain or
loss on the derivative contracts.
The following table shows the notional principal and credit risk amounts of the Company’
s derivative instruments outstanding as of
September 25, 2010 and September 26, 2009 (in millions):
The notional principal amounts for derivative instruments provide one measure of the transaction volume outstanding and does 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
61
2010
2009
Notional
Principal
Credit
Risk
Amounts
Notional
Principal
Credit
Risk
Amounts
Instruments qualifying as accounting hedges:
Foreign exchange contracts
$
13,957
$
62
$
4,422
$
31
Instruments other than accounting hedges:
Foreign exchange contracts
$
10,727
$
45
$
3,416
$
10