Proctor and Gamble 2008 Annual Report Download - page 56

54 TheProcter&GambleCompany Management’sDiscussionandAnalysis
InDecember2007,theFASBissuedSFASNo.141(Revised),“Business
Combinations”(SFAS141(R))andSFASNo.160,“Noncontrolling
InterestsinConsolidatedFinancialStatements—anamendmentof
ARBNo.51”(SFAS160).SFAS141(R)andSFAS160revisethemethod
ofaccountingforanumberofaspectsofbusinesscombinationsand
noncontrollinginterests,includingacquisitioncosts,contingencies
(includingcontingentassets,contingentliabilitiesandcontingent
purchaseprice),theimpactsofpartialandstep-acquisitions(including
thevaluationofnetassetsattributabletonon-acquiredminority
interests),andpostacquisitionexitactivitiesofacquiredbusinesses.
SFAS141(R)andSFAS160willbeeffectivefortheCompanyduring
ourscalyearbeginningJuly1,2009.
InMarch2008,theFASBissuedSFASNo.161,“Disclosuresabout
DerivativeInstrumentsandHedgingActivities—anamendmentof
FASBStatementNo.133“(SFAS161).SFAS161impactsdisclosures
onlyandwillprovideadditionalqualitativeandquantitativeinformation
ontheuseofderivativesandtheirimpactonanentity’snancial
position,nancialperformance,andcashows.SFAS161willbe
effectivefortheCompanybeginningJanuary1,2009.
Noothernewaccountingpronouncementissuedoreffectiveduring
thescalyearhashadorisexpectedtohaveamaterialimpactonthe
ConsolidatedFinancialStatements.


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of
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partially,orentirely,offsetchangesin
theunderlyingexposuresbeinghedged.Wedonotholdorissue
derivativenancialinstrumentsforspeculativetradingpurposes.
Note6totheConsolidatedFinancialStatementsincludesadetailed
discussionofouraccountingpoliciesfornancialinstruments.
Derivativepositionsaremonitoredusingtechniquesincludingmarket
valuation,sensitivityanalysisandvalue-at-riskmodeling.Thetestsfor
interestrate,currencyrateandcommoditypriceexposuresdiscussed
belowarebasedontheCorporateManager™value-at-riskmodel
usingaone-yearhorizonanda95%condencelevel.Themodel
incorporatestheimpactofcorrelation(thedegreetowhichexposures
movetogetherovertime)anddiversication(fromholdingmultiple
currency,commodityandinterestrateinstruments)andassumesthat
nancialreturnsarenormallydistributed.Estimatesofvolatilityand
correlationsofmarketfactorsaredrawnfromtheRiskMetrics™dataset
asofJune30,2008.IncaseswheredataisunavailableinRiskMetrics™
,
areasonableproxyisincluded.
Ourmarketriskexposuresrelativetointerestrates,currencyratesand
commodityprices,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signicantlyimpactsuch
exposuresinthenearterm.
Interest Rate Exposure on Financial Instruments. 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,2008,includingderivativeandotherinstruments
sensitivetointerestrates,webelieveanear-termchangeininterest
rates,ata95%condencelevelbasedonhistoricalinterestrate
movements,wouldnotmateriallyaffectournancialstatements.
Currency Rate Exposure on Financial Instruments. 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nancial
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veyearstohedgeourexposuretoexchangeratemovementson
intercompanynancing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uctuations
onintercompanyroyaltiesandtooffsetaportionoftheeffectof
exchangerateuctuationsonincomefrominternationaloperations.
Basedonouroverallcurrencyrateexposureasofandduringtheyear
endedJune30,2008,webelieve,ata95%condencelevelbased
onhistoricalcurrencyratemovements,theimpactofanear-term
changeincurrencyratesonderivativeandotherinstrumentswould
notmateriallyaffectournancialstatements.
Commodity Price Exposure on Financial Instruments. 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xedpricecontracts,weusefutures,options
andswapcontractstomanagethevolatilityrelatedtotheabove
exposures.
Basedonouroverallcommoditypriceexposureasofandduringthe
yearendedJune30,2008,webelieve,ata95%condencelevelbased
onhistoricalcommoditypricemovements,theimpactofanear-term
changeincommoditypricesonderivativeandotherinstruments
wouldnotmateriallyaffectournancialstatements.