Google 2015 Annual Report Download - page 72

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Table of Contents Alphabet Inc. and Google Inc.
68
assessment of hedge effectiveness. We record the premium paid or time value of an option on the date of purchase
as an asset. Thereafter, we recognize changes to this time value in other income (expense), net.
As of December 31, 2015, the effective portion of our cash flow hedges before tax effect was $375 million, of
which $293 million is expected to be reclassified from AOCI into earnings within the next 12 months.
Fair Value Hedges
We use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments
denominated in currencies other than the U.S. dollar. We exclude changes in the time value for forward contracts from
the assessment of hedge effectiveness. The notional principal of these contracts was $1.5 billion and $1.8 billion as
of December 31, 2014 and 2015.
We use interest rate swaps designated as fair value hedges to hedge interest rate risk for certain fixed rate
securities. The notional principal of these contracts was $175 million and $295 million as of December 31, 2014 and
2015.
Gains and losses on these forward contracts and interest rate swaps are recognized in other income (expense),
net, along with the offsetting losses and gains of the related hedged items.
Other Derivatives
Other derivatives not designated as hedging instruments consist of forward and option contracts that we use to
hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the
local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in other
income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities. The notional
principal of foreign exchange contracts outstanding was $6.2 billion and $7.5 billion as of December 31, 2014 and
2015.
We also use exchange-traded interest rate futures contracts and “To Be Announced” (TBA) forward purchase
commitments of mortgage-backed assets to hedge interest rate risks on certain fixed income securities. The TBA
contracts meet the definition of derivative instruments in cases where physical delivery of the assets is not taken at
the earliest available delivery date. Our interest rate futures and TBA contracts (together interest rate contracts) are
not designated as hedging instruments. We recognize gains and losses on these contracts, as well as the related
costs, in other income (expense), net. The gains and losses are generally economically offset by unrealized gains and
losses in the underlying available-for-sale securities, which are recorded as a component of AOCI until the securities
are sold or other-than-temporarily impaired, at which time the amounts are moved from AOCI into other income
(expense), net. The total notional amounts of interest rate contracts outstanding were $150 million and $50 million as
of December 31, 2014 and 2015.