HP 2012 Annual Report Download - page 127
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
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, 2012 and 2011, 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 2012, 2011 and 2010.
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