HP 2012 Annual Report Download - page 126

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
limits for credit exposure and continually assessing the creditworthiness of counterparties. Master
agreements with counterparties include master netting arrangements as further mitigation of credit
exposure to counterparties. These arrangements permit HP to net amounts due from HP to a
counterparty with amounts due to HP from the same counterparty.
To further mitigate credit exposure to counterparties, HP may enter into collateral security
arrangements with its counterparties. These arrangements require HP to post collateral or to hold
collateral from counterparties when the derivative fair values exceed contractually established
thresholds which are generally based on the credit ratings of HP and its counterparties. Such funds are
generally transferred within two business days of the due date. As of October 31, 2012, HP held
$198 million of collateral and posted $72 million under these collateralized arrangements, of which
$49 million was through re-use of counterparty cash collateral and $23 million in cash. As of
October 31, 2011, HP had posted $96 million associated with the counterparties under these
collateralized arrangements. As of October 31, 2012 and 2011, HP did not have any derivative
instruments under these collateralized arrangements that were in a significant net liability position.
Fair Value Hedges
HP enters into fair value hedges to reduce the exposure of its debt portfolio to interest rate risk.
HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP uses
interest rate swaps to mitigate the market risk exposures in connection with the debt to achieve
primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve
principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose
not to swap fixed for floating interest payments or may terminate a previously executed swap if it
believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate
instruments, HP may enter into interest rate swaps that convert the fixed interest payments into
variable interest payments and would classify these swaps as fair value hedges. For derivative
instruments that are designated and qualify as fair value hedges, HP recognizes the gain or loss on the
derivative instrument, as well as the offsetting loss or gain on the hedged item, in Interest and other,
net in the Consolidated Statements of Earnings in the current period.
Cash Flow Hedges
HP 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 net revenue and, to a lesser
extent, cost of sales, operating expense, and intercompany lease loan denominated in currencies other
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 year 2012, there was no significant impact to results of operations as
a result of discontinued cash flow hedges. During fiscal years 2011 and 2010, HP did not discontinue
any cash flow hedge for which it was probable that a forecasted transaction would not occur.
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