Nike 2009 Annual Report Download - page 85

NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash Flow Hedges
The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk
that the eventual cash flows resulting from transactions in foreign currencies, including revenues, product costs,
selling and administrative expenses, investments in U.S. dollar-denominated available-for-sale debt securities
and payments related to intercompany transactions, will be adversely affected by changes in exchange rates. It is
the Company’s policy to utilize derivatives to reduce foreign exchange risks where internal netting strategies
cannot be effectively employed. Hedged transactions are denominated primarily in Euro, Japanese yen and
British pound. The Company hedges up to 100% of anticipated exposures typically twelve to eighteen months in
advance, but has hedged as much as 34 months in advance.
All changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are
recorded in other comprehensive income, until net income is affected by the variability of cash flows of the
hedged transaction. In most cases, amounts recorded in other comprehensive income will be released to net
income some time after the maturity of the related derivative. The consolidated statement of income
classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of
revenue and product costs are recorded in revenue and cost of sales, respectively, when the underlying hedged
transaction affects net income. Results of hedges of selling and administrative expense are recorded together with
those costs when the related expense is recorded. Results of hedges of anticipated purchases and sales of U.S.
dollar-denominated available-for-sale securities are recorded in other (income) expense, net when the securities
are sold. Results of hedges of anticipated intercompany transactions are recorded in other (income) expense, net
when the transaction occurs.
Premiums paid on options are initially recorded as deferred charges. The Company assesses the
effectiveness of options based on the total cash flows method and records total changes in the options’ fair value
to other comprehensive income to the degree they are effective.
As of May 31, 2009, $132.0 million of deferred net gains (net of tax) on both outstanding and matured
derivatives accumulated in other comprehensive income are expected to be reclassified to net income during the
next twelve months as a result of underlying hedged transactions also being recorded in net income. Actual
amounts ultimately reclassified to net income are dependent on the exchange rates in effect when derivative
contracts that are currently outstanding mature. As of May 31, 2009, the maximum term over which the
Company is hedging exposures to the variability of cash flows for its forecasted and recorded transactions is 23
months.
The Company formally assesses both at a hedge’s inception and on an ongoing basis, whether the
derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash
flows of hedged items and whether those derivatives may be expected to remain highly effective in future
periods. Effectiveness for cash flow hedges is assessed based on forward rates. When it is determined that a
derivative is not, or has ceased to be, highly effective as a hedge, the Company discontinues hedge accounting
prospectively.
The Company discontinues hedge accounting prospectively when (i) it determines the derivative is no
longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as
firm commitments or forecasted transactions); (ii) the derivative expires or is sold, terminated, or exercised;
(iii) it is no longer probable that the forecasted transaction will occur; or (iv) management determines that
designating the derivative as a hedging instrument is no longer appropriate.
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