Coca Cola 2007 Annual Report Download - page 94

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THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: 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 12.
The fair value of our long-term debt is estimated based on quoted prices for those or similar instruments. As of
December 31, 2007, the carrying amounts and fair values of our long-term debt, including the current portion, were
approximately $3,410 million and $3,416 million, respectively. As of December 31, 2006, these carrying amounts and
fair values were approximately $1,347 million and $1,386 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 certain commodity prices were not material to the consolidated
financial statements for the years ended December 31, 2007, 2006 and 2005. 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 transactions with a portfolio of financial
institutions. The Company has master netting agreements with most of the financial institutions that are counterparties
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