Proctor and Gamble 2005 Annual Report Download - page 43

Management’s฀Discussion฀and฀Analysis The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries 39
Our฀impairment฀testing฀for฀goodwill฀is฀performed฀separately฀from฀our฀
impairment฀testing฀of฀indefinite-lived฀intangibles.฀We฀test฀goodwill฀฀
for฀impairment,฀at฀least฀annually,฀by฀reviewing฀the฀book฀value฀
compared฀to฀the฀fair฀value฀at฀the฀reporting฀unit฀level.฀We฀test฀individual฀
indefinite-lived฀intangibles฀at฀least฀annually฀by฀reviewing฀the฀individual฀
book฀values฀compared฀to฀the฀fair฀value.฀Considerable฀management฀
judgment฀is฀necessary฀to฀evaluate฀the฀impact฀of฀operating฀and฀
macroeconomic฀changes฀and฀ to฀estimate฀future฀cash฀flows฀ to฀
measure฀fair฀value.฀Assumptions฀used฀in฀the฀Company’s฀impairment฀
evaluations,฀such฀as฀forecasted฀growth฀rates฀and฀cost฀of฀capital,฀
are฀consistent฀with฀internal฀projections฀and฀operating฀plans.฀When฀
certain฀events฀or฀changes฀in฀operating฀conditions฀occur,฀we฀review฀
the฀life฀of฀intangible฀assets.฀The฀value฀of฀goodwill฀and฀intangible฀
assets฀from฀recently-acquired฀businesses฀are฀derived฀from฀the฀current฀
macroeconomic฀environment฀and฀therefore,฀are฀more฀susceptible฀
to฀a฀short-term฀adverse฀economic฀change฀that฀could฀require฀an฀
impairment฀charge.฀฀We฀did฀not฀recognize฀any฀material฀impairment฀
charges฀for฀goodwill฀or฀intangible฀assets฀during฀the฀years฀presented.
Other฀Information
Hedging฀and฀Derivative฀Financial฀Instruments฀
As฀a฀multinational฀company฀with฀diverse฀product฀offerings,฀we฀are฀
exposed฀to฀market฀risks฀such฀as฀changes฀in฀interest฀rates,฀currency฀
exchange฀rates฀and฀commodity฀prices.฀To฀manage฀the฀volatility฀related฀
to฀these฀exposures,฀we฀evaluate฀our฀exposures฀on฀a฀global฀basis฀to฀take฀
advantage฀of฀the฀direct฀netting฀opportunities฀and฀currency,฀interest฀
rate฀and฀commodity฀correlations฀that฀exist฀within฀the฀portfolio.฀For฀the฀
remaining฀exposures,฀we฀enter฀into฀various฀derivative฀transactions฀in฀
accordance฀with฀the฀Company’s฀hedging฀policies฀that฀are฀designed฀to฀
offset,฀in-part฀or฀in-whole,฀changes฀in฀the฀underlying฀exposures฀being฀
hedged.฀We฀do฀not฀hold฀or฀issue฀derivative฀financial฀instruments฀for฀
speculative฀trading฀purposes.฀Note฀6฀to฀the฀Consolidated฀Financial฀
Statements฀includes฀a฀detailed฀discussion฀of฀our฀accounting฀policies฀for฀
financial฀instruments.
Derivative฀positions฀are฀monitored฀using฀techniques฀including฀market฀
valuation,฀sensitivity฀analysis฀and฀value-at-risk฀modeling.฀The฀tests฀for฀
interest฀rate฀and฀currency฀rate฀exposures฀discussed฀below฀are฀based฀
on฀a฀Monte฀Carlo฀simulation฀value-at-risk฀model฀using฀a฀one฀year฀
horizon฀and฀a฀95%฀confidence฀level.฀The฀model฀incorporates฀the฀impact฀
of฀correlation฀(the฀degree฀to฀which฀exposures฀move฀together฀over฀
time)฀and฀diversification฀(from฀holding฀multiple฀currency,฀commodity฀
and฀interest฀rate฀instruments)฀and฀assumes฀that฀financial฀returns฀are฀
normally฀distributed.฀Estimates฀of฀volatility฀and฀correlations฀of฀market฀
factors฀are฀drawn฀from฀the฀RiskMetrics™฀dataset฀as฀of฀June฀30,฀2005.฀
In฀cases฀where฀data฀is฀unavailable฀in฀RiskMetrics™,฀a฀reasonable฀proxy฀
is฀included.
Our฀market฀risk฀exposures฀relative฀to฀interest฀and฀currency฀rates,฀as฀
discussed฀below,฀have฀not฀changed฀materially฀versus฀the฀previous฀
reporting฀period.฀In฀addition,฀we฀are฀not฀aware฀of฀any฀facts฀or฀
circumstances฀that฀would฀significantly฀impact฀such฀exposures฀in฀฀
the฀near-term.
Interest฀Rate฀Exposure.฀Interest฀rate฀swaps฀are฀used฀to฀hedge฀exposures฀
to฀interest฀rate฀movement฀on฀underlying฀debt฀obligations.฀Certain฀
interest฀rate฀swaps฀denominated฀in฀foreign฀currencies฀are฀designated฀
to฀hedge฀exposures฀to฀currency฀exchange฀rate฀movements฀on฀our฀
investments฀in฀foreign฀operations.฀These฀currency฀interest฀rate฀swaps฀
are฀designated฀as฀hedges฀of฀the฀Company’s฀foreign฀net฀investments.
Based฀on฀our฀overall฀interest฀rate฀exposure฀as฀of฀and฀during฀the฀year฀
ended฀June฀30,฀2005,฀including฀derivative฀and฀other฀instruments฀
sensitive฀to฀interest฀rates,฀we฀do฀not฀believe฀a฀near-term฀change฀in฀
interest฀rates,฀at฀a฀95%฀confidence฀level฀based฀on฀historical฀interest฀
rate฀movements,฀would฀materially฀affect฀our฀financial฀statements.
Currency฀Rate฀Exposure.฀Because฀we฀manufacture฀and฀sell฀products฀in฀
a฀number฀of฀countries฀throughout฀the฀world,฀we฀are฀exposed฀to฀the฀
impact฀on฀revenue฀and฀expenses฀of฀movements฀in฀currency฀exchange฀
rates.฀The฀primary฀purpose฀of฀our฀currency฀hedging฀activities฀is฀to฀
reduce฀the฀risk฀that฀our฀financial฀position฀will฀be฀adversely฀affected฀by฀
short-term฀changes฀in฀exchange฀rates.฀Corporate฀policy฀prescribes฀the฀
range฀of฀allowable฀hedging฀activity.฀We฀primarily฀use฀forward฀contracts฀
and฀options฀with฀maturities฀of฀less฀than฀18฀months.
In฀addition,฀we฀enter฀into฀certain฀currency฀swaps฀with฀maturities฀of฀up฀
to฀five฀years฀to฀hedge฀our฀exposure฀to฀exchange฀rate฀movements฀on฀
intercompany฀financing฀transactions.฀We฀also฀use฀purchased฀currency฀
options฀with฀maturities฀of฀generally฀less฀than฀18฀months฀and฀forward฀
contracts฀to฀hedge฀against฀the฀effect฀of฀exchange฀rate฀fluctuations฀on฀
intercompany฀royalties฀and฀to฀offset฀a฀portion฀of฀the฀effect฀of฀exchange฀
rate฀fluctuations฀on฀income฀from฀international฀operations.
Based฀on฀our฀overall฀currency฀rate฀exposure฀as฀of฀and฀during฀the฀
year฀ended฀June฀30,฀2005,฀including฀derivative฀and฀other฀instruments฀
sensitive฀to฀currency฀movements,฀we฀do฀not฀believe฀a฀near-term฀change฀
in฀currency฀rates,฀at฀a฀95%฀confidence฀level฀based฀on฀historical฀currency฀
rate฀movements,฀would฀materially฀affect฀our฀financial฀statements.
Commodity฀Price฀Exposure.฀We฀use฀raw฀materials฀that฀are฀subject฀to฀
price฀volatility฀caused฀by฀weather,฀supply฀conditions,฀political฀and฀
economic฀variables฀and฀other฀unpredictable฀factors.฀In฀addition฀to฀fixed฀
price฀contracts,฀we฀use฀futures,฀options฀and฀swap฀contracts฀to฀manage฀
the฀volatility฀related฀to฀the฀above฀exposures.฀Commodity฀hedging฀
activity฀is฀not฀considered฀material฀to฀our฀financial฀statements.