Sony 2015 Annual Report Download - page 184

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
instruments, such as the majority of government bonds and corporate bonds and are substantially all classified in
level 2. The fair values of housing loans in the banking business, included in securities investments and other in
the consolidated balance sheets, were estimated based on the discounted future cash flows using interest rates
reflecting London InterBank Offered Rate base yield curves with certain risk premiums. The fair values of long-
term debt including the current portion and investment contracts included in policyholders’ account in the life
insurance business were estimated based on either the market value or the discounted future cash flows using
Sony’s current incremental borrowing rates for similar liabilities.
14. Derivative instruments and hedging activities
Sony has certain financial instruments including financial assets and liabilities acquired in the normal course
of business. Such financial instruments are exposed to market risk arising from the changes in foreign currency
exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing
such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign
currency option contracts, and interest rate swap agreements (including interest rate and currency swap
agreements). Certain other derivative financial instruments are entered into in the Financial Services segment for
asset-liability management (“ALM”) purposes. These instruments are executed with creditworthy financial
institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other
currencies of major countries. These derivatives generally mature or expire within six months after the balance
sheet date. Other than derivatives utilized in the Financial Services segment for ALM, Sony does not use
derivative financial instruments for trading or speculative purposes. These derivative transactions utilized for
ALM in the Financial Services segment are executed within certain limits in accordance with an internal risk
management policy.
Derivative financial instruments held by Sony are classified and accounted for as described below.
Fair value hedges
Both the derivatives designated as fair value hedges and the hedged items are reflected at fair value in the
consolidated balance sheets. Changes in the fair value of the derivatives designated as fair value hedges, as well
as offsetting changes in the carrying value of the underlying hedged items, are recognized in income. For the
fiscal years ended March 31, 2014, 2015 and 2016, these fair value hedges were fully effective. In addition, there
were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.
Cash flow hedges
Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other
comprehensive income (“OCI”) and reclassified into earnings when the hedged transaction affects earnings. For
the fiscal years ended March 31, 2014 and 2016, the ineffective portions of the hedging relationships were not
significant. In addition, there were no amounts excluded from the assessment of hedge effectiveness for cash
flow hedges. As of and for the fiscal year ended March 31, 2015, there were no cash flow hedge derivatives.
Derivatives not designated as hedges
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
Foreign exchange forward contracts and purchased and written foreign currency option contracts are utilized
primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated
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