Apple 2011 Annual Report Download - page 59

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investment hedges are recorded in other income and expense. Derivatives that are not designated as hedging instruments are adjusted to fair
value through earnings in the financial statement line item the derivative relates to.
The Company had a net deferred gain associated with cash flow hedges of approximately $290 million and a net deferred loss associated with
cash flow hedges of approximately $252 million, net of taxes, recorded in AOCI as of September 24, 2011 and September 25, 2010,
respectively. 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 the same period as the related costs are recognized. Substantially all of the Company’
s hedged
transactions as of September 24, 2011 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 AOCI associated
with such derivative instruments are reclassified immediately into other income and expense. Any subsequent changes in fair value of such
derivative instruments are reflected in other income and expense 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 2011, 2010 and
2009.
The Company’
s unrealized net gains and losses on net investment hedges, included in the cumulative translation adjustment account of AOCI,
were not significant as of September 24, 2011 and September 25, 2010, respectively. The ineffective portions and amounts excluded from the
effectiveness test of net investment hedges are recorded in other income and expense.
The Company recognized in other income and expense a net loss of $158 million, $123 million and $133 million on foreign currency forward
and option contracts not designated as hedging instruments during 2011, 2010 and 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 summarizes the notional principal amounts of the Company’
s outstanding derivative instruments and credit risk amounts
associated with outstanding or unsettled derivative instruments as of September 24, 2011 and September 25, 2010 (in millions):
The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding 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 derivative instruments that are outstanding or unsettled 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
57
2011
2010
Notional
Principal
Credit Risk
Amounts
Notional
Principal
Credit Risk
Amounts
Instruments qualifying as accounting hedges:
Foreign exchange contracts
$
13,705
$
537
$
13,957
$
62
Instruments other than accounting hedges:
Foreign exchange contracts
$
9,891
$
56
$
10,727
$
45