Proctor and Gamble 2013 Annual Report Download - page 44

42 The Procter & Gamble Company
The Appliances business was acquired as part of the Gillette
acquisition in 2005 and the Salon Professional business
consists primarily of operations acquired in the Wella
acquisition in 2004. Both businesses are stand-alone
reporting units. These businesses represent some of our
more discretionary consumer spending categories. Because
of this, their operations and underlying fair values were
disproportionately impacted by the economic downturn that
began in fiscal 2009, which led to a reduction in home and
personal grooming appliance purchases and in visits to hair
salons that drove the fiscal 2012 impairment. The additional
impairment of the Appliances business in fiscal 2013 was
due to the devaluation of currency in Japan, a key country
that generates a significant portion of the earnings of the
Appliances business, relative to the currencies in which the
underlying net assets are recorded. As of June 30, 2013, the
Appliances business has remaining goodwill of $313
million, while the Salon Professional business has remaining
goodwill of $424 million. As a result of the impairments,
the estimated fair value of our Appliances business
approximates its carrying value, while the estimated fair
value of the Salon Professional business now slightly
exceeds its carrying value. Our fiscal 2013 valuations of the
Appliances and Salon Professional businesses has them
returning to sales and earnings growth rates consistent with
our long-term business plans. Failure to achieve these
business plans or a further deterioration of the
macroeconomic conditions could result in a valuation that
would trigger an additional impairment of the goodwill and
intangible assets of these businesses.
New Accounting Pronouncements
During fiscal 2013, the Company adopted ASU 2011-05,
"Comprehensive Income (Topic 220) - Presentation of
Comprehensive Income" (ASU 2011-05), and ASU 2013-02,
“Comprehensive Income (Topic 220) - Reporting of
Amounts Reclassified out of Accumulated Other
Comprehensive Income” (ASU 2013-02). This guidance
eliminates the option to present the components of other
comprehensive income as part of the statement of
shareholders' equity and requires entities to present the
components of net earnings and other comprehensive
income in either a single continuous statement of
comprehensive income or in two separate but consecutive
statements. We chose to present net earnings and other
comprehensive income in two separate but consecutive
statements. This guidance also requires entities to provide
information about the amounts reclassified out of
accumulated other comprehensive income by component
and to present, either on the face of the statement where net
income is presented or in the notes, significant amounts
reclassified out of accumulated other comprehensive income
by the respective line items of net income. We chose to
present the requirements in the notes to the financial
statements (see Note 6 to the Consolidated Financial
Statements). The adoption of this guidance had no impact
on our consolidated financial position, results of operations
or cash flows.
No other new accounting pronouncement issued or effective
during the fiscal year had or is expected to have a material
impact on the Consolidated Financial Statements.
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. We
evaluate exposures on a centralized basis to take advantage
of natural exposure correlation and netting. Except within
financing operations, we leverage the Company's broadly
diversified portfolio of exposures as a natural hedge and
prioritize operational hedging activities over financial
market instruments. To the extent we choose to further
manage volatility associated with the net exposures, we enter
into various financial transactions which we account for
using the applicable accounting guidance for derivative
instruments and hedging activities. These financial
transactions are governed by our policies covering
acceptable counterparty exposure, instrument types and
other hedging practices. Note 5 to the Consolidated
Financial Statements includes a detailed discussion of our
accounting policies for financial instruments.
Derivative positions can be monitored using techniques
including market valuation, sensitivity analysis and value-at-
risk modeling. The tests for interest rate, currency rate and
commodity derivative positions discussed below are based
on the CorporateManager™ 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, 2013. 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 significantly 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 interest rate exposure as of and during the year
ended June 30, 2013, including derivative and other
instruments sensitive to interest rates, we believe a near-term
change in interest rates, at a 95% confidence level based on