Coca Cola 2005 Annual Report Download - page 93

Download and view the complete annual report

Please find page 93 of the 2005 Coca Cola annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 142

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142

THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
transactions with a portfolio of financial institutions. The Company has master netting agreements with most of
the financial institutions that are counterparties to the derivative instruments. These agreements allow for the
net settlement of assets and liabilities arising from different transactions with the same counterparty. Based on
these factors, we consider the risk of counterparty default to be minimal.
Interest Rate Management
Our Company monitors our mix of fixed-rate and variable-rate debt as well as our mix of term debt versus
non-term debt. This monitoring includes a review of business and other financial risks. We also enter into
interest rate swap agreements to manage our mix of fixed-rate and variable-rate debt. Interest rate swap
agreements that meet certain conditions required under SFAS No. 133 for fair value hedges are accounted for as
such, with the offset recorded to adjust the fair value of the underlying exposure being hedged. During 2005,
2004 and 2003, there was no ineffectiveness related to fair value hedges. At December 31, 2005, our Company
had no outstanding interest rate swap agreements. At December 31, 2004, the fair value of our Company’s
interest rate swap agreements was approximately $6 million. The Company estimates the fair value of its interest
rate derivatives based on quoted market prices.
Foreign Currency Management
The purpose of our foreign currency hedging activities is to reduce the risk that our eventual U.S. dollar net
cash inflows resulting from sales outside the United States will be adversely affected by changes in foreign
currency exchange rates.
We enter into forward exchange contracts and purchase foreign currency options (principally euro and
Japanese yen) and collars to hedge certain portions of forecasted cash flows denominated in foreign currencies.
The effective portion of the changes in fair value for these contracts, which have been designated as cash flow
hedges, are reported in AOCI and reclassified into earnings in the same financial statement line item and in the
same period or periods during which the hedged transaction affects earnings. Any ineffective portion (which was
not significant in 2005, 2004 or 2003) of the change in fair value of these instruments is immediately recognized
in earnings. These contracts had maturities up to one year as of December 31, 2005.
Additionally, the Company enters into forward exchange contracts that are not designated as hedging
instruments under SFAS No. 133. These instruments are used to offset the earnings impact relating to the
variability in foreign currency exchange rates on certain monetary assets and liabilities denominated in
nonfunctional currencies. Changes in the fair value of these instruments are immediately recognized in earnings
in the line item other loss—net of our consolidated statements of income to offset the effect of remeasurement
of the monetary assets and liabilities.
The Company also enters into forward exchange contracts to hedge its net investment position in certain
major currencies. Under SFAS No. 133, changes in the fair value of these instruments are recognized in foreign
currency translation adjustment, a component of AOCI, to offset the change in the value of the net investment
being hedged. For the years ended December 31, 2005, 2004 and 2003, approximately $40 million, $8 million and
$29 million, respectively, of losses relating to derivative financial instruments were recorded in foreign currency
translation adjustment.
91