Walmart 2004 Annual Report Download - page 45

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Fair Value Instruments
The Company enters into interest rate swaps to minimize the risks and costs associated with its financing activities. Under the swap
agreements, the Company pays variable-rate interest and receives fixed-rate interest payments periodically over the life of the
instruments. The notional amounts are used to measure interest to be paid or received and do not represent the exposure due to credit
loss. All of the Company’s interest rate swaps that receive fixed interest rate payments and pay variable interest rate payments are
designated as fair value hedges. As the specific terms and notional amounts of the derivative instruments exactly match those of the
instruments being hedged, we have applied the “short-cut” method of accounting provided under FAS 133 and FAS 138. As such, the
derivative instruments were assumed to be perfect hedges and all changes in fair value of the hedges were recorded on the balance
sheet with no net impact on the income statement.
Net Investment Instruments
At January 31, 2004, the Company is a party to cross-currency interest rate swaps that hedge its net investment in the United
Kingdom. The agreements are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency.
The Company also holds approximately Great Britain pound (GBP) 1 billion of debt that is designated as a hedge of the net investment
in the United Kingdom. All changes in the fair value of these instruments are recorded to other comprehensive income, offsetting the
foreign currency translation adjustment that is also recorded in other comprehensive income.
Cash Flow Instruments
The Company entered into cross-currency interest rate swaps to hedge the foreign currency risk of certain foreign-denominated debt.
These swaps are designated as cash flow hedges of foreign currency exchange risk. The agreements are contracts to exchange fixed-rate
payments in one currency for fixed-rate payments in another currency. Changes in the foreign currency spot exchange rate result in
reclassification of amounts from other accumulated comprehensive income to earnings to offset transaction gains or losses on foreign-
denominated debt. These instruments mature in fiscal 2007 and 2009.
The Company entered into an interest rate swap to lock in the interest rate on floating debt. Under the swap agreement, the Company
pays a fixed interest rate and receives variable interest payments periodically over the life of the instrument. The notional, or
contractual amount is used to measure interest to be paid or received and does not represent the exposure due to credit loss. As the
specific terms and notional amounts of the derivative instruments exactly match those of the instruments being hedged, we have
applied the “short-cut” method of accounting provided under FAS 133 and FAS 138. As such, the derivative instrument was assumed to
be a perfect hedge and all changes in fair value of the hedges were recorded on the balance sheet in other comprehensive income.
The Company expects that the amount of gain or loss existing in other accumulated comprehensive income to be reclassified into
earnings within the next 12 months will not be significant.
Fair Value of Financial Instruments
Instrument Notional Amount Fair Value
Fiscal Year Ended January 31, (in millions) 2004 2003 2004 2003
Derivative financial instruments designated for hedging:
Receive fixed rate, pay floating rate interest rate swaps
designated as fair value hedges $ 8,292 $ 8,292 $ 697 $ 803
Receive fixed rate, pay fixed rate cross-currency interest
rate swaps designated as net investment hedges
(Cross-currency notional amount: GBP 795 at 1/31/2004
and 2003) 1,250 1,250 29 126
Receive fixed rate, pay fixed rate cross-currency interest
rate swap designated as cash flow hedge (Cross-currency
notional amount: CAD 503 at 1/31/2004 and 2003) 325 325 (54) 8
Receive fixed rate, pay fixed rate cross-currency interest
rate swap designated as cash flow hedge (Cross-currency
notional amount: JPY 52,056 at 1/31/2004 and 2003) 432 432 (46) 2
Receive floating rate, pay fixed rate interest rate swap
designated as a cash flow hedge 1,500 –(16) –
$ 11,799 $ 10,299 $ 610 $ 939
Non-derivative financial instruments:
Long-term debt $ 20,006 $ 21,133 $ 21,349 $ 20,794