Nike 2006 Annual Report Download - page 43

The fixed interest rate Japanese yen denominated debts were issued by and are accounted for by two of our
Japanese subsidiaries. Accordingly, the monthly remeasurement of these instruments due to changes in foreign
exchange rates is recognized in accumulated other comprehensive income upon the consolidation of these
subsidiaries.
There were no significant changes in debt market risks during fiscal 2006. We did not issue any long-term
fixed-rate corporate bonds during fiscal 2006 or 2005; however, in previous years we issued a total of $490
million in long-term fixed-rate corporate bonds that mature between August 2006 and October 2015. Fixed
interest rates on these bonds range from 4.7% to 5.66%. For each of the bonds issued, we have entered into
interest rate swap agreements whereby we receive fixed interest payments at the same rate as the bonds and pay
variable interest payments based on the three-month or six-month LIBOR plus a spread. As a result of the
interest rate swap agreements the average effective interest rate payable on these bonds was 6.07% at May 31,
2006 and 4.17% at May 31, 2005. For $440 million of the issued bonds, the associated swaps have the same
notional amount and maturity date as the corresponding bond. These interest rate swaps are accounted for as fair
value hedges, so changes in the recorded fair values of the swaps are offset by changes in the recorded fair value
of the related debt. The remaining $50 million bond matures in October 2013 whereas the associated interest rate
swap expires in October 2006. Accordingly, changes in the fair value of this swap are recorded to net income
each period. The recorded fair value of the interest rate swaps accounted for as fair value hedges was a net $5.6
million loss at May 31, 2006 and a $9.0 million gain at May 31, 2005. The change in fair value of the $50 million
interest rate swap expiring October 2006 was not material for the years ended May 31, 2006, 2005 and 2004.
In fiscal 2003 we also entered into an interest rate swap agreement related to a Japanese yen denominated
intercompany loan with one of our Japanese subsidiaries. The Japanese subsidiary pays variable interest on the
intercompany loan based on 3-month LIBOR plus a spread. Under the interest rate swap agreement, the
subsidiary pays fixed interest payments at 0.8% and receives variable interest payments based on 3-month
LIBOR plus a spread based on a notional amount of 8 billion Japanese yen. This interest rate swap is not
accounted for as a hedge, accordingly changes in the fair value of the swap are recorded to net income each
period. The change in fair value of the swap was not material for the years ended May 31, 2006, 2005 and 2004.
Item 8. Financial Statements and Supplemental Data
Management of NIKE, Inc. is responsible for the information and representations contained in this report.
The financial statements have been prepared in conformity with the generally accepted accounting principles we
considered appropriate in the circumstances and include some amounts based on our best estimates and
judgments. Other financial information in this report is consistent with these financial statements.
Our accounting systems include controls designed to reasonably assure that assets are safeguarded from
unauthorized use or disposition and which provide for the preparation of financial statements in conformity with
generally accepted accounting principles. These systems are supplemented by the selection and training of
qualified financial personnel and an organizational structure providing for appropriate segregation of duties.
An Internal Audit department reviews the results of its work with the Audit Committee of the Board of
Directors, presently consisting of three outside directors. The Audit Committee is responsible for the
appointment of the independent registered public accounting firm and reviews with the independent registered
public accounting firm, management and the internal audit staff, the scope and the results of the annual
examination, the effectiveness of the accounting control system and other matters relating to the financial affairs
of NIKE as they deem appropriate. The independent registered public accounting firm and the internal auditors
have full access to the Committee, with and without the presence of management, to discuss any appropriate
matters.
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