Medtronic 2012 Annual Report Download - page 86

Translation adjustments are not adjusted for income taxes as substantially all translation adjustments
relate to permanent investments in non-U.S. subsidiaries. The tax expense/(benefit) on the net unrealized
gain/(loss) on foreign exchange rate derivatives and interest rate derivative instruments in fiscal years 2012,
2011, and 2010 was $105 million, $(183) million, and $(75) million, respectively. The tax expense/(benefit)
related to the net change in retirement obligations was $(130) million, $3 million, and $(112) million in
fiscal years 2012, 2011, and 2010, respectively. The tax expense (benefit) on the unrealized gain/(loss)
on investments in fiscal years 2012, 2011, and 2010 was $(38) million, $130 million, and $35 million,
respectively. During fiscal year 2011, the Company received shares in the form of a dividend related to a
previous cost method investment, and in accordance with authoritative guidance, the Company recorded
these shares as an investment and correspondingly recorded an unrealized gain. Included in cumulative
translation adjustments is translation on certain foreign exchange rate derivatives held by non-U.S.
functional currency entities.
Derivatives U.S. GAAP requires companies to recognize all derivatives as assets and liabilities on
the balance sheet and to measure the instruments at fair value through earnings unless the derivative
qualifies as a hedge. If the derivative is a hedge, depending on the nature of the hedge and hedge
effectiveness, changes in the fair value of the derivative will either be recorded currently through earnings
or recognized in accumulated other comprehensive loss on the consolidated balance sheets until the hedged
item is recognized in earnings upon settlement/termination. The changes in the fair value of the derivative
are intended to offset the change in fair value of the hedged asset, liability, or probable commitment. The
Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer
expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded
in earnings.
The Company uses operational and economic hedges, as well as currency exchange rate derivative
contracts and interest rate derivative instruments, to manage the impact of currency exchange and interest
rate changes on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting from
currency exchange rate changes, the Company enters into derivative instruments, principally forward
currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency
transactions and changes in the value of specific assets, liabilities, and probable commitments. At inception
of the forward contract, the derivative is designated as either a freestanding derivative or cash flow hedge.
The primary currencies of the derivative instruments are the Euro and the Japanese Yen. The Company
does not enter into currency exchange rate derivative contracts for speculative purposes. All derivative
instruments are recorded at fair value on the consolidated balance sheets, as a component of prepaid
expenses and other current assets, other assets, other accrued expenses, or other long-term liabilities depending
upon the gain or loss position of the contract and contract maturity date.
Forward currency exchange rate contracts designated as cash flow hedges are designed to hedge the
variability of cash flows associated with forecasted transactions denominated in a foreign currency that will
take place in the future. Changes in value of derivatives designated as cash flow hedges are recorded in
accumulated other comprehensive loss on the consolidated balance sheets until earnings are affected by the
variability of the underlying cash flows. At that time, the applicable amount of gain or loss from the
derivative instrument that is deferred in shareholders’ equity is reclassified into earnings and is included in
other expense, net or cost of products sold in the consolidated statements of earnings, depending on the
underlying transaction that is being hedged.
The Company uses forward currency exchange rate contracts to offset its exposure to the change in
value of specific foreign currency denominated assets and liabilities. These forward currency exchange rate
contracts are not designated as hedges, and therefore, changes in the value of these freestanding derivatives
are recognized currently in earnings, thereby offsetting the current earnings effect of the related change in
U.S. dollar value of foreign currency denominated assets and liabilities.
The Company uses interest rate derivative instruments to manage its exposure to interest rate
movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. The
objective of the instruments is to more effectively manage the Company’s borrowing costs and interest rate
risk. These derivative instruments are designated as fair value hedges under U.S. GAAP. Changes in the
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Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)