Coca Cola 2013 Annual Report Download - page 93

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 product 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, 2013 2012
Raw materials and packaging $ 1,692 $ 1,773
Finished goods 1,240 1,171
Other 345 320
Total inventories $ 3,277 $ 3,264
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, or alternatively
buys a call option and sells (writes) a put 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 our consolidated balance sheets in the following line items, as applicable: prepaid
expenses and other assets; other assets; accounts payable and accrued expenses; and other liabilities. 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
our 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 our consolidated statement of income 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.
The Company determines the fair values of its derivatives based on quoted market prices or using standard valuation models.
Refer to Note 16. 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
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