Nike 2009 Annual Report Download - page 40

than the U.S. dollar. A weaker U.S. dollar reduces the inventory cost in the purchasing subsidiary’s
functional currency whereas a stronger U.S. dollar increases the inventory cost.
2. Non-Functional Currency Revenues — A portion of our EMEA Region revenues are earned in
currencies other than the Euro (e.g. British pound), but are recognized at a subsidiary that uses the Euro
as its functional currency, generating foreign currency exposures.
3. Other Revenues and Costs — Non-functional currency revenues and costs, such as endorsement
contracts, intercompany royalties and other payments, generate foreign currency risk to a lesser extent.
4. Non-functional currency asset and liabilities — Our global subsidiaries have various assets and
liabilities, primarily receivables and payables, that are denominated in currencies other than their
functional currency. These balance sheet items are subject to remeasurement under SFAS No. 52,
“Foreign Currency Translation,” (“FAS 52”), which may create fluctuations in other (income) expense
within our consolidated results of operations.
Managing transactional exposures
Transactional exposures are managed on a portfolio basis within our foreign currency risk management
program. We use currency forward contracts and options with maturities up to 23 months to hedge the effect of
exchange rate fluctuations on probable forecasted future cash flows, including non-functional currency revenues
and expenses. These are accounted for as cash flow hedges in accordance with FAS 133. The fair value of these
instruments at May 31, 2009 and 2008 was $248.0 million and $95.3 million in assets and $12.2 million and
$149.8 million in liabilities, respectively. The effective portion of the changes in fair value of these instruments is
reported in other comprehensive income (“OCI”), a component of shareholders’ equity, and reclassified into
earnings in the same financial statement line item and in the same period or periods during which the related
hedged transactions affect earnings. The ineffective portion, which was not material for any year presented, is
immediately recognized in earnings as a component of other (income) expense, net.
Certain currency forward contracts used to manage foreign exchange exposure of non-functional currency
assets and liabilities subject to remeasurement are not designated as hedges under FAS 133. In these cases, the
change in value of the instruments is intended to offset the foreign currency impact of the remeasurement of the
related asset or liability. The fair value of these instruments at May 31, 2009 and 2008, was $13.2 million and
$34.2 million in assets and $34.3 million and $7.3 million in liabilities, respectively. The change in value of these
instruments is immediately recognized in earnings. The impact of such instruments is included in other (income)
expense, net and aims to offset foreign currency remeasurement gains and losses of the exposures being hedged.
Refer to Note 18 — Risk Management and Derivatives in the accompanying notes to the consolidated
financial statements for additional quantitative detail.
Translational exposures
Substantially all of our foreign subsidiaries operate in functional currencies other than the U.S. dollar.
Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the
balance sheets and operational results of these foreign currency denominated subsidiaries into U.S. dollars for
consolidated reporting. The translation of foreign subsidiaries non-U.S. dollar balance sheets into U.S. dollars for
consolidated reporting results in a cumulative translation adjustment to OCI within shareholders’ equity. In
preparing our consolidated statements of income, foreign exchange rate fluctuations impact our operating results as
the revenues and expenses of our foreign operations are translated into U.S. dollars. In translation, a weaker
U.S. dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger
U.S. dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of
our consolidated revenues and pre-tax income was a net translation benefit (detriment) of ($199.4) million and $4.0
million, respectively, for the twelve months ended May 31, 2009.
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