Nike 2016 Annual Report Download - page 67

PART II
All changes in fair value of derivatives designated as cash flow hedges,
excluding any ineffective portion, are recorded in Accumulated other
comprehensive income until Net income is affected by the variability of cash
flows of the hedged transaction. In most cases, amounts recorded
in Accumulated other comprehensive income will be released to Net
income in periods following the maturity of the related derivative, rather than at
maturity. Effective hedge results are classified within the Consolidated
Statements of Income in the same manner as the underlying exposure. The
results of hedges of non-functional currency denominated revenues and
product cost exposures, excluding embedded derivatives, are recorded in
Revenues or Cost of sales when the underlying hedged transaction affects
consolidated Net income. Results of hedges of selling and administrative
expense are recorded together with those costs when the related expense is
recorded. Amounts recorded in Accumulated other comprehensive
income related to forward-starting interest rate swaps will be released
through Interest expense (income), net as interest payments are made over
the term of the issued debt. 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 certain 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, primarily within the Cash provided by operations component of the
Consolidated Statements of Cash Flows.
Premiums paid or received on options are initially recorded as deferred
charges or deferred credits, respectively. The Company assesses the
effectiveness of options based on the total cash flows method and records
total changes in the options’ fair value to Accumulated other comprehensive
income to the degree they are effective.
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 changes in forward rates. Ineffectiveness was 0 billion for
the years ended May 31, 2016, 2015 and 2014.
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.
When the Company discontinues hedge accounting because it is no longer
probable that the forecasted transaction will occur in the originally expected
period, but is expected to occur within an additional two-month period of time
thereafter, the gain or loss on the derivative remains in Accumulated other
comprehensive income and is reclassified to Net income when the forecasted
transaction affects consolidated 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 in Accumulated other comprehensive income will be
recognized immediately in Other (income) expense, net. 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
Consolidated Balance Sheets, recognizing future changes in the fair value in
Other (income) expense, net. For the years ended May 31, 2016, 2015 and
2014, the amounts recorded in Other (income) expense, net as a result of the
discontinuance of cash flow hedging because the forecasted transaction was
no longer probable of occurring were immaterial.
As of May 31, 2016, $460 million of deferred net gains (net of tax) on both
outstanding and matured derivatives in Accumulated other comprehensive
income are expected to be reclassified to Net income during the next 12
months concurrent with the 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, 2016, the maximum term
over which the Company is hedging exposures to the variability of cash flows
for its forecasted transactions was 24 months.
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 used by
the Company to hedge this risk are receive-fixed, pay-variable interest rate
swaps. All interest rate swaps designated as fair value hedges of the related
long-term debt meet the shortcut method requirements under the accounting
standards for derivatives and hedging. Accordingly, changes in the fair values
of the interest rate swaps are considered to exactly offset changes in the fair
value of the underlying long-term debt. The cash flows associated with the
Company’s fair value hedges are periodic interest payments while the swaps
are outstanding, which are reflected within the Cash provided by operations
component of the Consolidated Statements of Cash Flows. The Company
recorded no ineffectiveness from its interest rate swaps designated as fair
value hedges for the years ended May 31, 2016, 2015 or 2014. On October
15, 2015, the Company repaid the long-term debt which had previously been
hedged with these interest rate swaps. Accordingly, as of May 31, 2016, the
Company had no interest rate swaps designated as fair value hedges.
Net Investment Hedges
The Company has, in the past, hedged and may, in the future, hedge the risk
of variability in foreign-currency-denominated net investments in wholly-
owned international operations. All changes in fair value of the derivatives
designated as net investment hedges, except ineffective portions, are
reported in Accumulated other comprehensive income along with the foreign
currency translation adjustments on those investments. The Company
classifies the cash flows at settlement of its net investment hedges within the
Cash used by investing activities component of the Consolidated Statements
of Cash Flows. The Company assesses hedge effectiveness based on
changes in forward rates. The Company recorded no ineffectiveness from net
investment hedges for the years ended May 31, 2016, 2015 or 2014. The
Company had no outstanding net investment hedges as of May 31, 2016.
Undesignated Derivative Instruments
The Company may elect to enter into foreign exchange forwards to mitigate
the change in fair value of specific assets and liabilities on the balance sheet
and/or the embedded derivative contracts. These forwards are not
designated as hedging instruments under the accounting standards for
derivatives and hedging. Accordingly, these undesignated instruments are
recorded at fair value as a derivative asset or liability on the Consolidated
Balance Sheets with their corresponding change in fair value recognized
in Other (income) expense, net, together with the re-measurement gain or loss
from the hedged balance sheet position or embedded derivative contract.
The Company classifies the cash flows at settlement from undesignated
instruments in the same category as the cash flows from the related hedged
items, primarily within the Cash provided by operations component of the
Consolidated Statements of Cash Flows. The total notional amount of
outstanding undesignated derivative instruments was $7.1 billion as
of May 31, 2016.
Embedded Derivatives
As part of the foreign currency adjustment program described above, an
embedded derivative contract is created upon the factory’s acceptance of
NIKE’s purchase order for currencies within the factory currency exposure
indices that are neither the U.S. Dollar nor the local or functional currency of
the factory. Embedded derivative contracts are treated as foreign currency
forward contracts that are bifurcated from the related purchase order and
recorded at fair value as a derivative asset or liability on the Consolidated
Balance Sheets with their corresponding change in fair value recognized
in Other (income) expense, net, from the date a purchase order is accepted
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