Nike 2014 Annual Report Download - page 67

PART II
The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of May 31, 2014 and 2013:
Asset Derivatives Liability Derivatives
(In millions)
Balance Sheet
Location 2014 2013
Balance Sheet
Location 2014 2013
Derivatives formally designated
as hedging instruments:
Foreign exchange forwards
and options Prepaid expenses and other
current assets $ 76 $ 141 Accrued liabilities $ 57 $ 12
Foreign exchange forwards
and options Deferred income taxes and other assets 26 79 Deferred income taxes and other liabilities 1 —
Interest rate swap contracts Deferred income taxes
and other assets 6 11 Deferred income taxes and other liabilities — —
Total derivatives formally
designated as hedging
instruments 108 231 58 12
Derivatives not designated as
hedging instruments:
Foreign exchange forwards
and options Prepaid expenses and other current assets 25 58 Accrued liabilities 27 22
Total derivatives not designated
as hedging instruments 25 58 27 22
TOTAL DERIVATIVES $ 133 $ 289 $ 85 $ 34
The following tables present the amounts affecting the Consolidated Statements of Income for years ended May 31, 2014, 2013 and 2012:
(In millions)
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
on Derivatives(1)
Amount of Gain (Loss)
Reclassified From Accumulated
Other Comprehensive Income into Income(1)
Year Ended May 31, Location of Gain (Loss)
Reclassified From Accumulated Other
Comprehensive Income Into Income(1)
Year Ended May 31,
2014 2013 2012 2014 2013 2012
Derivatives designated as cash flow hedges:
Foreign exchange forwards and options $ (48) $ 42 $ (29) Revenues $ 14 $ (19) $ 5
Foreign exchange forwards and options (78) 67 253 Cost of sales 12 113 (57)
Foreign exchange forwards and options 4 (3) 3 Total selling and administrative expense — 2 (2)
Foreign exchange forwards and options (21) 33 36 Other expense (income), net 10 9 (9)
Total designated cash flow hedges $ (143) $ 139 $ 263 $ 36 $ 105 $ (63)
Derivatives designated as net investment hedges:
Foreign exchange forwards and options $ — $ — $ 45 Other expense (income), net $ — $ — $ —
(1) For the years ended May 31, 2014, 2013, and 2012, the amounts recorded in Other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges
because the forecasted transactions were no longer probable of occurring were immaterial.
Amount of Gain (Loss) Recognized in
Income on Derivatives
Location of Gain (Loss) Recognized
in Income on Derivatives
Year Ended May 31,
(In millions) 2014 2013 2012
Derivatives designated as fair value hedges:
Interest rate swaps(1) $ 5 $ 5 $ 6 Interest expense (income), net
Derivatives not designated as hedging instruments:
Foreign exchange forwards and options $ (75) $ 51 $ 64 Other expense (income), net
Embedded derivatives $ (1) $ (4) $ 1 Other expense (income), net
(1) All interest rate swap agreements meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the
interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail.
Refer to Note 5 — Accrued Liabilities for derivative instruments recorded in
Accrued liabilities, Note 6 — Fair Value Measurements for a description of
how the above financial instruments are valued, Note 14 — Accumulated
Other Comprehensive Income and the Consolidated Statements of
Shareholders’ Equity for additional information on changes in Other
comprehensive income for the years ended May 31, 2014, 2013 and 2012.
Cash Flow Hedges
The purpose of the Company’s foreign currency hedging activities is to
reduce the volatility of the Company’s cash flows resulting from changes in
currency exchange rates. Foreign currency exposures that the Company may
elect to hedge in this manner include product cost exposures, non-functional
currency denominated external and intercompany revenues, selling and
administrative expenses, investments in U.S. Dollar-denominated available-
for-sale debt securities and certain intercompany transactions.
Product cost exposures are primarily generated through non-functional
currency denominated product purchases and the foreign currency
adjustment program described below. NIKE entities primarily purchase
products in two ways: (1) Some NIKE entities purchase product from the
NIKE Trading Company (“NTC”), a wholly-owned sourcing hub that buys
NIKE branded products from third-party factories, predominantly in U.S.
Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the
products to NIKE entities in their respective functional currencies. When the
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