Coca Cola 2006 Annual Report Download - page 96

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THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: FINANCIAL INSTRUMENTS (Continued)
We carry our non-marketable cost method investments at cost or, if a decline in the value of the investment
is deemed to be other than temporary, at fair value. Estimates of fair value are generally based upon discounted
cash flow analyses.
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 12.
The fair value of our long-term debt is estimated based on quoted prices for those or similar instruments.
As of December 31, 2006, the carrying amounts and fair values of our long-term debt, including the current
portion, were approximately $1,347 million and approximately $1,386 million, respectively. As of December 31,
2005, these carrying amounts and fair values were approximately $1,182 million and approximately
$1,240 million, respectively.
NOTE 12: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
When deemed appropriate our Company uses derivative financial instruments primarily to reduce our
exposure to adverse fluctuations in interest rates and foreign currency exchange rates, commodity prices and
other market risks. Derivative instruments used to manage fluctuations in commodity prices were not material to
the consolidated financial statements for the three years ended December 31, 2006. 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.
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