Starbucks 2009 Annual Report Download - page 63

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Note 4: Derivative Financial Instruments
Cash Flow Hedges
The Company and certain subsidiaries enter into cash flow derivative instruments to hedge portions of anticipated
revenue streams and inventory purchases in currencies other than the entity’s functional currency. Outstanding
forward contracts, which comprise the majority of the Company’s derivative instruments, hedge monthly forecasted
revenue transactions denominated in Japanese yen and Canadian dollars, as well as forecasted inventory purchases
denominated in US dollars for foreign operations. From time to time, the Company also uses futures contracts to
hedge the variable price component for a small portion of its price-to-be-fixed green coffee purchase contracts.
The Company had net derivative losses of $3.9 million and $9.2 million, net of taxes, in Accumulated OCI as of
September 27, 2009 and September 28, 2008, respectively, related to cash flow hedges. Of the net derivative losses
accumulated as of September 28, 2009, $0.9 million pertain to hedging instruments that will be dedesignated within
12 months and will also continue to experience fair value changes before affecting earnings. Ineffectiveness from
hedges that were discontinued in fiscal years 2009 and 2008 was insignificant. Outstanding contracts will expire
within 36 months.
Net Investment Hedges
Net investment derivative instruments are used to hedge the Company’s equity method investment in Starbucks
Coffee Japan, Ltd. (“Starbucks Japan”) as well as the Company’s net investments in its Canada, UK and China
subsidiaries, to minimize foreign currency exposure.
The Company had net derivative losses of $19.8 million and $13.0 million, net of taxes, in Accumulated OCI as of
September 27, 2009 and September 28, 2008, respectively, related to net investment derivative hedges. Outstanding
contracts will expire within 18 months.
Other Derivatives
The Company enters into certain foreign currency forward contracts that are not designated as hedging instruments
to mitigate the translation risk of certain balance sheet items. These contracts are recorded at fair value, with the
changes in fair value recognized in Net interest income and other on the consolidated statements of earnings. For the
fiscal years 2009 and 2008, these forward contracts resulted in a net gain of $20.0 million and a net loss $0.1 million,
respectively. These gains and losses were largely offset by the financial impact of translating foreign currency
denominated payables and receivables, which are also recognized in Net interest income and other.
In the third quarter of fiscal 2009, the Company entered into certain swap and futures contracts that are not
designated as hedging instruments to mitigate the price uncertainty of a portion of its future purchases of dairy
products and diesel fuel. These contracts are recorded at fair value, with the changes in fair value recognized in Net
interest income and other on the consolidated statement of earnings. For the fiscal year 2009, these swaps and
futures contracts resulted in a net loss of $0.6 million.
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