Starbucks 2011 Annual Report Download - page 61

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Note 2: Derivative Financial Instruments
Cash Flow Hedges
Starbucks 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 our 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.
Net Investment Hedges
Net investment derivative instruments are used to hedge our equity method investment in Starbucks Coffee Japan,
Ltd. (“Starbucks Japan”) as well as our net investments in our Canada, UK and China subsidiaries, to minimize
foreign currency exposure.
Other Derivatives
To mitigate the translation risk of certain balance sheet items, we enter into certain foreign currency forward
contracts that are not designated as hedging instruments. 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. Gains and losses
from these instruments are largely offset by the financial impact of translating foreign currency denominated
payables and receivables, which are also recognized in net interest income and other.
We also enter into certain swap and futures contracts that are not designated as hedging instruments to mitigate the
price uncertainty of a portion of our 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
statements of earnings.
Fair values of derivative instruments on the consolidated balance sheet (in millions):
Cash Flow Hedges Net Investment Hedges Other Derivatives
Financial Statement Location Oct 2, 2011 Oct 3, 2010 Oct 2, 2011 Oct 3, 2010 Oct 2, 2011 Oct 3, 2010
Prepaid expenses and other current
assets ...................... $ 0.2 $ 0.1 $ 0.0 $ 0.0 $2.8 $0.0
Other accrued liabilities .......... 11.0 10.6 9.0 5.6 1.6 4.0
Other long-term liabilities ........ 3.0 6.4 6.9 8.1 0.0 0.0
Total losses in accumulated OCI, net
of tax(1) .................... 11.1 13.9 34.2 26.7
(1) Amount that will be dedesignated within 12 months for cash flow hedges is $6.6 million as of October 2, 2011.
Ineffectiveness from hedges in fiscal years 2011 and 2010 was insignificant. Outstanding cash flow hedge and net
investment hedge contracts will expire within 24 months and 30 months, respectively.
The following table presents the pretax effect of derivative instruments on earnings and other comprehensive income
for fiscal years ending (in millions):
Cash Flow Hedges Net Investment Hedges Other Derivatives
Oct 2, 2011 Oct 3, 2010 Oct 2, 2011 Oct 3, 2010 Oct 2, 2011 Oct 3, 2010
Gain/(Loss) recognized in
earnings.................... $(15.9) $ (5.9) $ 0.0 $ 0.0 $6.6 $1.0
Gain/(Loss) recognized in OCI .... $(12.1) $(20.9) $(12.0) $(10.8)
The amounts shown as recognized in earnings for cash flow and net investment hedges represent the realized gains/
(losses) transferred out of other comprehensive income (“OCI”) to earnings during the year. The amounts shown as
recognized in OCI are prior to these transfers of realized gains/(losses) to earnings.
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