Starbucks 2015 Annual Report Download - page 70

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Foreign Currency
To reduce cash flow volatility from foreign currency fluctuations, we enter into forward and swap contracts to hedge portions
of cash flows of anticipated revenue streams and inventory purchases in currencies other than the entity's functional currency.
The effective portion of the derivative's gain or loss is recorded in AOCI and is subsequently reclassified to revenue or cost of
sales including occupancy costs when the hedged exposure affects net earnings.
In connection with the acquisition of Starbucks Japan that is discussed in Note 2, Acquisitions and Divestitures, we entered into
cross-currency swap contracts during the first and third quarters of fiscal 2015 to hedge the foreign currency transaction risk of
certain yen-denominated intercompany loans with a total notional value of ¥86.5 billion, or approximately $717 million as of
September 27, 2015. Gains and losses from these swaps offset the changes in value of interest and principal payments as a
result of changes in foreign exchange rates, which are also recorded in net interest income and other on the consolidated
statements of earnings. We recognize the difference between the U.S. dollar interest payments received from the swap
counterparty and the U.S. dollar equivalent of the Japanese yen interest payments made to the swap counterparty in interest
income and other, net or interest expense on our consolidated statements of earnings. This difference varies over time and is
driven by a number of market factors, including relevant interest rate differentials and foreign exchange rates. These swaps
have been designated as cash flow hedges and mature in September 2016 and November 2024 at the same time as the related
loans. There are no credit-risk-related contingent features associated with these swaps, although we may hold or post collateral
depending upon the gain or loss position of the swap agreements.
We also enter into forward contracts to hedge the foreign currency exposure of our net investment in certain foreign operations.
The effective portion of the derivative's gain or loss is recorded in AOCI and will be subsequently reclassified to net earnings
when the hedged net investment is either sold or substantially liquidated.
As a result of our acquisition of Starbucks Japan, we reclassified the pretax cumulative net gains in AOCI of $7.2 million
related to our net investment derivative instruments used to hedge our preexisting 39.5% equity method investment in
Starbucks Japan into earnings, which was included in the gain resulting from acquisition of joint venture line item on the
consolidated statements of earnings. These gains offset the cumulative translation adjustment loss balance associated with our
preexisting investment included in the calculation of the remeasurement gain, which is described further in Note 2, Acquisitions
and Divestitures.
To mitigate the translation risk of certain balance sheet items, we enter into foreign currency swap contracts that are not
designated as hedging instruments. Gains and losses from these derivatives are largely offset by the financial impact of
translating foreign currency denominated payables and receivables; both are recorded in net interest income and other on our
consolidated statements of earnings.
Commodities
Depending on market conditions, we enter into coffee futures contracts and collars (the combination of a purchased call option
and a sold put option) to hedge a portion of anticipated cash flows under our price-to-be-fixed green coffee contracts, which are
described further in Note 5, Inventories. The effective portion of the derivative's gain or loss is recorded in AOCI and is
subsequently reclassified to cost of sales including occupancy costs when the hedged exposure affects net earnings.
To mitigate the price uncertainty of a portion of our future purchases of dairy products and diesel fuel, we enter into swaps,
futures and collars that are not designated as hedging instruments. Gains and losses from these derivatives are recorded in net
interest income and other and help offset price fluctuations on our dairy purchases and the financial impact of diesel fuel
fluctuations on our shipping costs, which are included in cost of sales including occupancy costs on our consolidated statements
of earnings.
66 Starbucks Corporation 2015 Form 10-K