Intel 2004 Annual Report Download - page 56

Table of Contents
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Financial Instruments
The company’
s primary objective for holding derivative financial instruments is to manage currency, interest rate and some equity market
risks. The company’s derivative instruments are recorded at fair value and are included in other current assets, other assets, other accrued
liabilities or debt. Derivative instruments recorded as assets totaled $117 million at December 25, 2004 and $134 million at December 27,
2003. Derivative instruments recorded as liabilities totaled $179 million at December 25, 2004 and $178 million at December 27, 2003. The
company’s accounting policies for these instruments are based on whether they meet the company’s criteria for designation as hedging
transactions, either as cash flow or fair value hedges. A hedge of the exposure to variability in the cash flows of an asset or a liability, or of a
forecasted transaction, is referred to as a cash flow hedge. A hedge of the exposure to changes in fair value of an asset or a liability, or of an
unrecognized firm commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge include the instrument’
s
effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction. Gains and
losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized currently in earnings,
and generally offset changes in the values of related assets, liabilities or debt.
As part of its strategic investment program, the company also acquires equity derivative instruments, such as warrants and equity
conversion rights associated with debt instruments, that are not designated as hedging instruments. The gains or losses from changes in fair
values of these equity derivatives are recognized in gains (losses) on equity securities, net.
Currency Risk. The company transacts business in various currencies other than the U.S. dollar, primarily the Euro and certain other
European and Asian currencies. The company has established balance sheet and forecasted transaction risk management programs to protect
against fluctuations in fair value and volatility of future cash flows caused by changes in exchange rates. The forecasted transaction risk
management program includes anticipated transactions such as operating costs and capital purchases. The company may use currency forward
contracts, currency options, currency interest rate swaps, and currency investments and borrowings in these risk management programs. These
programs reduce, but do not always entirely eliminate, the impact of currency exchange movements.
Currency forward contracts and currency options that are used to hedge exposures to variability in anticipated non-U.S.-dollar-
denominated cash flows are designated as cash flow hedges. The maturities of these instruments are generally less than 12 months. For these
derivatives, the gain or loss from the effective portion of the hedge is reported as a component of other comprehensive income in stockholders’
equity and is reclassified into earnings in the same period or periods in which the hedged transaction affects earnings, and within the same
income statement line item as the impact of the hedged transaction. The gain or loss from the ineffective portion of the hedge in excess of the
cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in interest and other, net during the period
of change.
Currency interest rate swaps and currency forward contracts are used to offset the currency risk of non-U.S.-dollar-denominated debt
securities classified as trading assets, as well as other assets and liabilities denominated in various currencies. The maturities of these
instruments are generally less than 12 months, except for derivatives hedging equity investments, which are generally five years or less.
Changes in fair value of the underlying assets and liabilities are generally offset by the changes in fair value of the related derivatives, with the
resulting net gain or loss, if any, recorded in interest and other, net.
Interest Rate Risk. The company’
s primary objective for holding investments in debt securities is to preserve principal while maximizing
yields, without significantly increasing risk. To achieve this objective, the returns on the company
’s investments in fixed-
rate debt securities are
generally swapped to U.S. dollar LIBOR-based returns, using interest rate swaps and currency interest rate swaps in transactions that are not
designated as hedges for accounting purposes. The floating interest rates on the swaps are reset on a monthly, quarterly or semiannual basis.
Changes in fair value of the debt securities classified as trading assets are generally offset by changes in fair value of the related derivatives,
resulting in negligible net impact recorded in interest and other, net.
The company may also enter into interest rate swap agreements to modify the interest characteristics of a portion of its outstanding long-
term debt. These transactions would likely be designated as fair value hedges. The gains or losses from the changes in fair value of the interest
rate swaps, as well as the offsetting change in the hedged fair value of the long-term debt, would be recognized in interest expense.
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