Dell 2008 Annual Report Download - page 69

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Instruments
As part of its risk management strategy, Dell uses derivative instruments, primarily forward contracts and options, to hedge certain foreign currency
exposures. Dell's objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge
them, thereby reducing volatility of earnings and protecting fair values of assets and liabilities. Dell applies hedge accounting based upon the criteria
established by SFAS 133, whereby Dell designates its derivatives as fair value hedges or cash flow hedges. Dell estimates the fair values of
derivatives based on quoted market prices or pricing models using current market rates and records all derivatives in the Consolidated Statements of
Financial Position at fair value.
Cash Flow Hedges
Dell uses a combination of forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks
inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. The risk of loss associated with purchased options is
limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential
from the time the contract is entered into until the time it is settled. These contracts typically expire in 12 months or less. For derivative instruments
that are designated and qualify as cash flow hedges, Dell records the effective portion of the gain or loss on the derivative instrument in accumulated
other comprehensive income (loss) as a separate component of stockholders' equity and reclassifies these amounts into earnings in the period during
which the hedged transaction is recognized in earnings. Dell reports the effective portion of cash flow hedges in the same financial statement line
item, within earnings, as the changes in value of the hedged item.
For foreign currency option and forward contracts designated as cash flow hedges, Dell assesses hedge effectiveness both at the onset of the hedge
as well as at the end of each fiscal quarter throughout the life of the derivative. Dell measures hedge ineffectiveness by comparing the cumulative
change in the fair value of the hedge contract with the cumulative change in the fair value of the hedged item, both of which are based on forward
rates. Dell recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness, currently in earnings
as a component of investment and other income, net. Hedge ineffectiveness for cash flow hedges was not material for Fiscal 2009, 2008, and 2007.
During Fiscal 2009, 2008, and 2007, Dell did not discontinue any cash flow hedges that had a material impact on Dell's results of operations as
substantially all forecasted foreign currency transactions were realized in Dell's actual results.
Changes in the aggregate unrealized net gain (loss) of Dell's cash flow hedges that are recorded as a component of comprehensive income (loss), net
of tax, are presented in the table below. Dell expects to reclassify substantially all of the unrealized net gain recorded in accumulated other
comprehensive income (loss) at January 30, 2009, into earnings during the next fiscal year, providing an offsetting economic impact against the
settlement of the underlying transactions.
Fiscal Year Ended
January 30, February 1, February 2,
2009 2008 2007
(in millions)
Aggregate unrealized net (losses) gains at beginning of year $ (25) $ 13 $ (17)
Net gains (losses) reclassified to earnings 603 (392) (260)
Change in fair value of cash flow hedges (254) 354 290
Aggregate unrealized net gains (losses) at end of year $ 324 $ (25) $ 13
Other Foreign Currency Derivative Instruments
Dell uses forward contracts to hedge monetary assets and liabilities, primarily receivables and payables, denominated in a foreign currency. The
change in the fair value of these instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the
monetary assets and liabilities due to movements in currency exchange rates. These contracts generally
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