Coca Cola 2005 Annual Report Download - page 92

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THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: FINANCIAL INSTRUMENTS (Continued)
We recognize all derivative instruments as either assets or liabilities at fair value in our consolidated balance
sheets, with fair values estimated based on quoted market prices or pricing models using current market rates.
Virtually all of our derivatives are straightforward, over-the-counter instruments with liquid markets. For further
discussion of our derivatives, including a disclosure of derivative values, refer to Note 11.
The fair value of our long-term debt is estimated based on quoted prices for those or similar instruments.
As of December 31, 2005, the carrying amounts and fair values of our long-term debt, including the current
portion, were approximately $1,182 million and approximately $1,240 million, respectively. As of December 31,
2004, these carrying amounts and fair values were approximately $2,647 million and approximately
$2,736 million, respectively.
NOTE 11: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
Our Company uses derivative financial instruments primarily to reduce our exposure to adverse fluctuations
in interest rates and foreign currency exchange rates and, to a lesser extent, in commodity prices and other
market risks. When entered into, the Company formally designates and documents the financial instrument as a
hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking
the hedge transactions. The Company formally assesses, both at the inception and at least quarterly thereafter,
whether the financial instruments that are used in hedging transactions are effective at offsetting changes in
either the fair value or cash flows of the related underlying exposure. Because of the high degree of effectiveness
between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the
derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures
being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized
in earnings. Virtually all of our derivatives are straightforward over-the-counter instruments with liquid markets.
Our Company does not enter into derivative financial instruments for trading purposes.
The fair values of derivatives used to hedge or modify our risks fluctuate over time. We do not view these
fair value amounts in isolation, but rather in relation to the fair values or cash flows of the underlying hedged
transactions or other exposures. The notional amounts of the derivative financial instruments do not necessarily
represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the
financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and
by other terms of the derivatives, such as interest rates, foreign currency exchange rates or other financial
indices.
Our Company recognizes all derivative instruments as either assets or liabilities in our consolidated balance
sheets at fair value. The accounting for changes in fair value of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging
relationship. At the inception of the hedging relationship, the Company must designate the instrument as a fair
value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation. This designation is based
upon the exposure being hedged.
We have established strict counterparty credit guidelines and enter into transactions only with financial
institutions of investment grade or better. We monitor counterparty exposures daily and review any downgrade
in credit rating immediately. If a downgrade in the credit rating of a counterparty were to occur, we have
provisions requiring collateral in the form of U.S. government securities for substantially all of our transactions.
To mitigate presettlement risk, minimum credit standards become more stringent as the duration of the
derivative financial instrument increases. To minimize the concentration of credit risk, we enter into derivative
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