Proctor and Gamble 2005 Annual Report Download - page 56
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Please find page 56 of the 2005 Proctor and Gamble annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Management’sDiscussionandAnalysisTheProcter&GambleCompanyandSubsidiaries
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InterestRateManagement
Ourpolicyistomanageinterestcostusingamixtureoffixed-rateand
variable-ratedebt.Tomanagethisriskinacostefficientmanner,we
enterintointerestrateswapsinwhichweagreetoexchangewiththe
counterparty,atspecifiedintervals,thedifferencebetweenfixedand
variableinterestamountscalculatedbyreferencetoanagreed-upon
notionalprincipalamount.
InterestrateswapsthatmeetspecificconditionsunderSFASNo.133are
accountedforasfairvalueandcashflowhedges.Forfairvaluehedges,
thechangesinthefairvalueofboththehedginginstrumentsandthe
underlyingdebtobligationsareimmediatelyrecognizedininterest
expenseasequalandoffsettinggainsandlosses.Thefairvalueofthese
fairvaluehedgeswasanetassetof$17and$45atJune30,2005and
2004,respectively.Allexistingfairvaluehedgesare100%effective.As
aresult,thereisnoimpacttoearningsduetohedgeineffectiveness.
Forcashflowhedges,theeffectiveportionofthechangesinfairvalue
isreportedinothercomprehensiveincomeandreclassifiedintointerest
expenseoverthelifeoftheunderlyingdebt.Thefairvalueofthesecash
flowhedgeswasanassetof$3atJune30,2005.Therewerenosuch
interestratecashflowhedgesatJune30,2004.
ForeignCurrencyManagement
Wemanufactureandsellourproductsinanumberofcountries
throughouttheworldand,asaresult,areexposedtomovementsin
foreigncurrencyexchangerates.Thepurposeofourforeigncurrency
hedgingprogramistoreducetheriskcausedbyshort-termchangesin
exchangerates.
Weprimarilyutilizeforwardcontractsandoptionswithmaturitiesof
lessthan18monthsandcurrencyswapswithmaturitiesupto5years.
Theseinstrumentsareintendedtooffsettheeffectofexchangerate
fluctuationsonforecastedsales,inventorypurchases,intercompany
royaltiesandintercompanyloansdenominatedinforeigncurrencies
andarethereforeaccountedforascashflowhedges.Thefairvalue
oftheseinstrumentsatJune30,2005and2004was$47and$47in
assetsand$131and$140inliabilities,respectively.Theeffectiveportion
ofthechangesinfairvaluefortheseinstrumentsisreportedinother
comprehensiveincomeandreclassifiedintoearningsinthesame
financialstatementlineitemandinthesameperiodorperiodsduring
whichthehedgedtransactionsaffectearnings.Theineffectiveportion,
whichisnotmaterialforanyyearpresented,isimmediatelyrecognized
inearnings.
Certaininstrumentsusedtomanageforeignexchangeriskdonotmeet
therequirementsforhedgeaccountingtreatment.Inthesecases,the
changeinvalueoftheinstrumentsisdesignedtooffsettheforeign
currencyimpactofintercompanyfinancingtransactions,incomefrom
internationaloperationsandotherbalancesheetrevaluations.Thefair
valueoftheseinstrumentsatJune30,2005and2004was$57and
$71inassetsand$108and$26inliabilities,respectively.Thechange
invalueoftheseinstrumentsisimmediatelyrecognizedinearnings.
Thenetimpactofsuchinstruments,includedinselling,generaland
administrativeexpense,was$18,$80and$264ofgainsin2005,
2004and2003,respectively,whichsubstantiallyoffsetforeigncurrency
transactionandtranslationlossesoftheexposuresbeinghedged.
NetInvestmentHedging
Wehedgecertainofournetinvestmentpositionsinmajorforeign
subsidiaries.Toaccomplishthis,weeitherborrowdirectlyinforeign
currencyanddesignateaportionofforeigncurrencydebtasahedge
ofnetinvestmentsinforeignsubsidiariesorenterintoforeigncurrency
swapsthataredesignatedashedgesofourrelatedforeignnet
investments.UnderSFASNo.133,changesinthefairvalueofthese
instrumentsareimmediatelyrecognizedinothercomprehensiveincome,
tooffsetthechangeinthevalueofthenetinvestmentbeinghedged.
Currencyeffectsofthesehedgesreflectedinothercomprehensive
incomewerea$135after-taxgain,a$348after-taxlossanda$418
after-taxlossin2005,2004and2003,respectively.Accumulatednet
balanceswerea$451and$586after-taxlossin2005and2004,
respectively.
CommodityPriceManagement
Rawmaterialsaresubjecttopricevolatilitycausedbyweather,supply
conditions,politicalandeconomicvariablesandotherunpredictable
factors.Tomanagethevolatilityrelatedtocertainanticipatedinventory
purchases,weusefuturesandoptionswithmaturitiesgenerallyless
thanoneyearandswapcontractswithmaturitiesuptofiveyears.These
marketinstrumentsaredesignatedascashflowhedgesunderSFAS
No.133.Accordingly,themark-to-marketgainorlossonqualifying
hedgesisreportedinothercomprehensiveincomeandreclassified
intocostofproductssoldinthesameperiodorperiodsduringwhich
thehedgedtransactionsaffectearnings.Qualifyingcashflowhedges
currentlyrecordedinothercomprehensiveincomearenotconsidered
material.Themark-to-marketgainorlossonnon-qualifying,excluded
andineffectiveportionsofhedgesisimmediatelyrecognizedincost
ofproductssold.Commodityhedgingactivitywasnotmaterialtoour
financialstatementsforanyoftheyearspresented.
Note7EarningsPerShareandStockOptions
NetEarningsPerCommonShare
Netearningslesspreferreddividends(netofrelatedtaxbenefits)are
dividedbytheweightedaveragenumberofcommonsharesoutstanding
duringtheyeartocalculatebasicnetearningspercommonshare.
NotestoConsolidatedFinancialStatementsTheProcter&GambleCompanyandSubsidiaries
Millionsofdollarsexceptpershareamountsorotherwisespecified.