Nike 2009 Annual Report Download - page 86

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NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
When the Company discontinues hedge accounting because it is no longer probable that the forecasted
transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated
other comprehensive income and is reclassified to net income when the forecasted transaction affects net income.
However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time
period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in
other comprehensive income will be recognized immediately in net income. In all situations in which hedge
accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its
fair value on the balance sheet, recognizing future changes in the fair value in other (income) expense, net. For
the years ended May 31, 2009, 2008 and 2007, the Company recorded in other (income) expense an immaterial
amount of ineffectiveness from cash flow hedges.
Fair Value Hedges
The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to
changes in interest rates. Derivatives currently used by the Company to hedge this risk are receive-fixed,
pay-variable interest rate swaps. As of May 31, 2009, all interest rate swap agreements are designated as fair
value hedges of the related long-term debt and meet the shortcut method requirements under FAS 133.
Accordingly, changes in the fair values of the interest rate swap agreements are exactly offset by changes in the
fair value of the underlying long-term debt. No ineffectiveness has been recorded to net income related to interest
rate swaps designated as fair value hedges for the years ended May 31, 2009, 2008 and 2007.
In fiscal 2003, the Company entered into a receive-floating, pay-fixed interest rate swap agreement related
to a Japanese yen denominated intercompany loan with one of the Company’s Japanese subsidiaries. This interest
rate swap was not designated as a hedge under FAS 133. Accordingly, changes in the fair value of the swap were
recorded to net income each period through maturity as a component of interest (income) expense, net. Both the
intercompany loan and the related interest rate swap matured during fiscal 2009.
Net Investment Hedges
The Company also hedges the risk of variability in foreign-currency-denominated net investments in
wholly-owned international subsidiaries. All changes in fair value of the derivatives designated as net investment
hedges, except ineffective portions, are reported in the cumulative translation adjustment component of other
comprehensive income along with the foreign currency translation adjustments on those investments. The
Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no
ineffectiveness from its net investment hedges for the years ended May 31, 2009 and 2008.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by counterparties to
hedging instruments. This credit risk is limited to the unrealized gains in such instruments should any of these
counterparties fail to perform as contracted. The counterparties to all derivative transactions are major financial
institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to
credit risk with these institutions. To manage this risk, the Company has established strict counterparty credit
guidelines that are continually monitored and reported to senior management according to prescribed guidelines.
The Company utilizes a portfolio of financial institutions either headquartered or operating in the same countries
the Company conducts its business. As a result of the above considerations, the Company considers the risk of
counterparty default to be immaterial.
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