HP 2011 Annual Report Download - page 118

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
than the U.S. dollar. HP’s foreign currency cash flow hedges mature generally within twelve months.
However, certain leasing revenue-related forward contracts and intercompany lease loan forward
contracts extend for the duration of the lease term, which can be up to five years. For derivative
instruments that are designated and qualify as cash flow hedges, HP initially records the effective
portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or
loss as a separate component of stockholders’ equity and subsequently reclassifies these amounts into
earnings in the period during which the hedged transaction is recognized in earnings. HP reports the
effective portion of cash flow hedges in the same financial statement line item as the changes in value
of the hedged item. During fiscal years 2011, 2010 and 2009, HP did not discontinue any cash flow
hedge for which it was probable that a forecasted transaction would not occur.
Net Investment Hedges
HP uses forward contracts designated as net investment hedges to hedge net investments in certain
foreign subsidiaries whose functional currency is the local currency. These derivative instruments are
designated as net investment hedges and, as such, HP records the effective portion of the gain or loss
on the derivative instrument together with changes in the hedged items in cumulative translation
adjustment as a separate component of stockholders’ equity.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts HP
uses to hedge foreign currency balance sheet exposures. HP also uses total return swaps and, to a lesser
extent, interest rate swaps, based on the equity and fixed income indices, to hedge its executive
deferred compensation plan liability. For derivative instruments not designated as hedging instruments,
HP recognizes changes in the fair values in earnings in the period of change. HP recognizes the gain or
loss on foreign currency forward contracts used to hedge balance sheet exposures in Interest and other,
net in the same period as the remeasurement gain and loss of the related foreign currency
denominated assets and liabilities. HP recognizes the gain or loss on the total return swaps and interest
rate swaps in Interest and other, net in the same period as the gain or loss from the change in market
value of the executive deferred compensation plan liability.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the
change in fair value of the hedged debt with the change in fair value of the derivative. For foreign
currency options and forward contracts designated as cash flow or net investment hedges, HP measures
effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in
the hedged item, both of which are based on forward rates. HP recognizes any ineffective portion of
the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated
Statements of Earnings. As of October 31, 2011 and 2010, the portion of hedging instruments’ gain or
loss excluded from the assessment of effectiveness was not material for fair value, cash flow or net
investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not
material in fiscal years 2011, 2010 and 2009.
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