Coca Cola 2010 Annual Report Download - page 111

NOTE 4: INVENTORIES
Inventories consist primarily of raw materials and packaging (which includes ingredients and supplies) and finished
goods (which include concentrates and syrups in our concentrate operations, and finished beverages in our finished
products operations). Inventories are valued at the lower of cost or market. We determine cost on the basis of the
average cost or first-in, first-out methods. Inventories consisted of the following (in millions):
December 31, 2010 2009
Raw materials and packaging $ 1,425 $ 1,366
Finished goods 1,029 697
Other 196 291
Total inventories $ 2,650 $ 2,354
NOTE 5: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market
conditions may adversely impact the Company’s financial performance and are referred to as ‘‘market risks.’’ Our
Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of
certain market risks. The primary market risks managed by the Company through the use of derivative instruments are
foreign currency exchange rate risk, commodity price risk and interest rate risk.
The Company uses various types of derivative instruments including, but not limited to, forward contracts, commodity
futures contracts, option contracts, collars and swaps. Forward contracts and commodity futures contracts are
agreements to buy or sell a quantity of a currency or commodity at a predetermined future date, and at a
predetermined rate or price. An option contract is an agreement that conveys the purchaser the right, but not the
obligation, to buy or sell a quantity of a currency or commodity at a predetermined rate or price during a period or at
a time in the future. A collar is a strategy that uses a combination of options to limit the range of possible positive or
negative returns on an underlying asset or liability to a specific range, or to protect expected future cash flows. To do
this, an investor simultaneously buys a put option and sells (writes) a call option. A swap agreement is a contract
between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. We
do not enter into derivative financial instruments for trading purposes.
All derivatives are carried at fair value in the consolidated balance sheets in the line items prepaid expenses and other
assets or accounts payable and accrued expenses, as applicable. The carrying values of the derivatives reflect the impact
of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as
applicable. These master netting agreements allow the Company to net settle positive and negative positions (assets and
liabilities) arising from different transactions with the same counterparty.
The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on
whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationships.
Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations.
The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are
recorded in the same line item in the consolidated statements of income as the changes in the fair values of the hedged
items attributable to the risk being hedged. The changes in fair values of derivatives that have been designated and
qualify as cash flow hedges or hedges of net investments in foreign operations are recorded in AOCI and are
reclassified into the line item in the consolidated income statement in which the hedged items are recorded in the same
period the hedged items affect earnings. Due to the high degree of effectiveness between the hedging instruments and
the underlying exposures 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. The changes in fair values of
derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized into
earnings.
For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents, at
inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the
strategy for undertaking the hedge transaction. In addition, the Company formally assesses, both at the inception and at
least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting
changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a financial
instrument’s change in fair value is immediately recognized into earnings.
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