Apple 2012 Annual Report Download - page 57

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 to which the derivative
relates.
The Company had a net deferred loss associated with cash flow hedges of approximately $240 million and a net
deferred gain of approximately $290 million, net of taxes, recorded in AOCI as of September 29, 2012 and
September 24, 2011, 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. The majority of the Company’s
hedged transactions as of September 29, 2012 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 2012, 2011 and 2010.
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 29, 2012 and September 24, 2011,
respectively. The ineffective portions of and amounts excluded from the effectiveness test of net investment
hedges are recorded in other income and expense.
The gain/loss recognized in other income and expense for foreign currency forward and option contracts not
designated as hedging instruments was not significant during 2012, 2011 and 2010, 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 amounts of the Company’s outstanding derivative instruments
and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 29, 2012
and September 24, 2011 (in millions):
2012 2011
Notional
Principal
Credit
Risk
Amounts
Notional
Principal
Credit
Risk
Amounts
Instruments designated as accounting hedges:
Foreign exchange contracts ............................... $41,970 $140 $13,705 $537
Instruments not designated as accounting hedges:
Foreign exchange contracts ............................... $13,403 $ 12 $ 9,891 $ 56
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
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