Sony 2003 Annual Report Download - page 193

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Consolidated Financial Information 2003
- 107 -
forecasted intercompany transactions in line with changes of hedging scheme regarding Sony’s derivative
activities, under which such derivative transactions meet the requirements for hedge accounting, including
correlation, as stipulated under FAS No. 133 and 138.
Sony also enters into foreign exchange forward contracts, which effectively fix the cash flows from
foreign currency denominated debt. Accordingly, these derivatives have been designated as cash flow
hedges in accordance with FAS No. 133.
Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges
are marked-to-market with changes in value recognized in other income and expense.
These derivatives generally mature or expire within five months after the balance sheet date.
Interest rate and currency swap agreements
Sony enters into interest rate and currency swap agreements, which are used for reducing the risk arising
from the changes in the fair value of fixed rate debt and available-for-sale debt securities. For example,
Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency
denominated fixed rate debt for functional currency denominated variable rate debt. These derivatives are
considered to be a hedge against changes in the fair value of Sony’s foreign denominated fixed-rate
obligations. Accordingly, these derivatives have been designated as fair value hedges in accordance with
FAS No. 133.
Sony also enters into interest rate and currency swap agreements that are used for reducing the risk
arising from the changes in anticipated cash flow of variable rate debt and foreign currency denominated
debt. For example, Sony enters into interest rate and currency swap agreements, which effectively swap
foreign currency denominated variable rate debt for functional currency denominated fixed rate debt.
These derivatives are considered to be a hedge against changes in the anticipated cash flow of Sony’s
foreign denominated variable rate obligations. Accordingly, these derivatives have been designated as
cash flow hedges in accordance with FAS No. 133.
Any other interest rate and currency swap agreements that do not qualify as hedges, which are used for
reducing the risk arising from changes of variable rate and foreign currency dominated intercompany debt,
are marked-to-market with changes in value recognized in other income and expense.
Embedded derivatives
The embedded derivatives that must be separated from the host contracts and accounted for as derivative
instruments under FAS No. 133 are recognized in income currently. For example, the convertible rights
included in convertible bonds held by Sony’s life insurance subsidiary, which are classified as
available-for-sale debt securities, are considered embedded derivatives and are marked-to-market with
changes in value recognized in financial service revenue.