Sony 2006 Annual Report Download - page 113

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111
exchange forward contracts, foreign currency option contracts
and interest rate and currency swap agreements.
Changes in the fair value of derivatives designated as cash
flow hedges are initially recorded in other comprehensive income
and reclassified into earnings when the hedged transaction
affects earnings. For the fiscal years ended March 31, 2004 and
2006, these cash flow hedges were fully effective. For the fiscal
year ended March 31, 2005, the amount of ineffectiveness of
these cash flow hedges that was reflected in earnings was not
material. In addition, there were no amounts excluded from the
assessment of hedge effectiveness of cash flow hedges. At
March 31, 2006, amounts related to derivatives qualifying as
cash flow hedges amounted to a net reduction of equity of
¥2,049 million ($18 million). Within the next twelve months,
¥1,453 million ($12 million) is expected to be reclassified from
equity into earnings as loss. For the fiscal year ended March 31,
2006, there were no forecasted transactions that failed to occur
which resulted in the discontinuance of cash flow hedges.
Derivatives not designated as hedges
The derivatives not designated as hedges under FAS No. 133
include foreign exchange forward contracts, foreign currency
option contracts, interest rate and currency swap agreements,
interest rate and bond future contracts, stock price index option
contracts, convertible rights included in convertible bonds and
other derivatives.
Changes in the fair value of derivatives not designated as
hedges are recognized in income.
A description of the purpose and classification of the
derivative financial instruments held by Sony is as follows:
Foreign exchange forward contracts and foreign currency option
contracts
Sony enters into foreign exchange forward contracts and pur-
chased and written foreign currency option contracts primarily to
fix the cash flows from intercompany accounts receivable and
payable and forecasted transactions denominated in functional
currencies (Japanese yen, U.S. dollars and euros) of Sony’s
major operating units. The majority of written foreign currency
option contracts are a part of range forward contract arrange-
ments and expire in the same month with the corresponding
purchased foreign currency option contracts.
Sony also enters into foreign exchange forward contracts,
which effectively fix the cash flows from foreign currency denomi-
nated 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 expenses.
Foreign exchange forward contracts and foreign currency
option contracts held by certain subsidiaries in the Financial
Services segment are marked-to-market with changes in value
recognized in financial service revenue.
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 consid-
ered 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 effec-
tively swap foreign currency denominated variable rate debt for
functional currency denominated fixed rate debt. These deriva-
tives 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.
Certain subsidiaries in the Financial Services segment have
interest rate swap agreements as part of their portfolio invest-
ments, which are marked-to-market with changes in value
recognized in financial service revenue. Interest rate and cur-
rency swap agreements held by certain subsidiaries in the
Financial Services segment are also marked-to-market with
changes in value recognized in financial service revenue.
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 debt, are marked-to-market
with changes in value recognized in other income and expenses.
Interest rate and bond future contracts
Certain subsidiaries in the Financial Services segment have
interest rate and bond future contracts as part of their portfolio
investments, which are marked-to-market with changes in value
recognized in financial service revenue.
Stock price index option contracts
Certain subsidiaries in the Financial Services segment have
stock price index option contracts as part of their portfolio
investments, which are marked-to-market with changes in value
recognized in financial service revenue.