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Table of Contents 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 intercompany transactions, including intercompany borrowings, 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 Euros, British Pounds and Japanese Yen. The Company hedges up to 100% of anticipated exposures
typically 12 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. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the
same category as the cash flows from the related hedged items, generally within the cash provided by operations component of the cash flow statement.
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, 2010, $187.2 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 12 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, 2010, the maximum term over which the Company is hedging exposures to the variability of cash flows for
its forecasted and recorded transactions is 18 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 (1) it determines that 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); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
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