Walmart 2006 Annual Report Download - page 40

Notes to Consolidated Financial Statements
WAL-MART
38
The Company had trade letters of credit outstanding totaling
$2.6 billion at January 31, 2006 and 2005. At January 31, 2006
and 2005, the Company had standby letters of credit outstand-
ing totaling $2.3 billion and $2.0 billion, respectively. These let-
ters of credit were issued primarily for the purchase of inventory
and insurance.
3 FINANCIAL INSTRUMENTS
The Company uses derivative fi nancial instruments for hedging
and non-trading purposes to manage its exposure to interest and
foreign exchange rates. Use of derivative fi nancial instruments in
hedging programs subjects the Company to certain risks, such as
market and credit risks. Market risk represents the possibility that
the value of the derivative instrument will change. In a hedging
relationship, the change in the value of the derivative is offset to a
great extent by the change in the value of the underlying hedged
item. Credit risk related to derivatives represents the possibility
that the counterparty will not fulfi ll the terms of the contract. The
notional, or contractual, amount of the Company’s derivative
fi nancial instruments is used to measure interest to be paid or
received and does not represent the Company’s exposure due to
credit risk. Credit risk is monitored through established approval
procedures, including setting concentration limits by counterparty,
reviewing credit ratings and requiring collateral (generally cash)
when appropriate. The majority of the Company’s transactions are
with counterparties rated “AA-” or better by nationally recognized
credit rating agencies.
Fair Value Instruments
The Company enters into interest rate swaps to minimize the risks
and costs associated with its fi nancing activities. Under the swap
agreements, the Company pays variable-rate interest and receives
fi xed-rate interest payments periodically over the life of the instru-
ments. 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 fi xed
interest rate payments and pay variable interest rate payments are
designated as fair value hedges. As the specifi c terms and notional
amounts of the derivative instruments exactly match those of the
instruments being hedged, 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, 2006, the Company is party to cross-currency
interest rate swaps that hedge its net investments in the United
Kingdom and Japan. The agreements are contracts to exchange
fi xed-rate payments in one currency for fi xed-rate payments in
another currency. The Company also has outstanding approxi-
mately £2.0 billion of debt that is designated as a hedge of the
Company’s net investment in the United Kingdom and ¥87.1 bil-
lion of debt that is designated as a hedge of the Company’s net
investment in Japan. All changes in the fair value of these instru-
ments are recorded in other comprehensive income, offsetting the
foreign currency translation adjustment that is also recorded in
other comprehensive income.
Cash Flow Instruments
The Company is party to a cross-currency interest rate swap to
hedge the foreign currency risk of certain foreign-denominated
debt. The swap is designated as a cash fl ow hedge of foreign cur-
rency exchange risk. The agreement is a contract to exchange
fi xed-rate payments in one currency for fi xed-rate payments in
another currency. Changes in the foreign currency spot exchange
rate result in reclassifi cation of amounts from other accumulated
comprehensive income to earnings to offset transaction gains or
losses on foreign-denominated debt. The instrument matures in
fi scal 2007.
The Company expects that the amount of gain or loss existing in
other accumulated comprehensive income to be reclassifi ed into
earnings within the next 12 months will not be signifi cant.
Fair Value of Financial Instruments
Instrument Notional Amount Fair Value
Fiscal Year Ended January 31, (in millions) 2006 2005 2006 2005
Derivative fi nancial instruments designated for hedging:
Receive fi xed-rate, pay fl oating rate interest rate swaps designated as fair value hedges $ 6,945 $ 8,042 $ 133 $ 477
Receive fi xed-rate, pay fi xed-rate cross-currency interest rate swaps designated
as net investment hedges (Cross-currency notional amount: GBP 795 at
1/31/2006 and 1/31/2005) 1,250 1,250 (107) (14)
Receive fi xed-rate, pay fi xed-rate cross-currency interest rate swap designated
as a cash fl ow hedge (Cross-currency notional amount: CAD 503 at
1/31/2006 and 1/31/2005) 325 325 (120) (87)
Receive fi xed-rate, pay fi xed-rate cross-currency interest rate swap designated
as a net investment hedge (Cross-currency notional amount: ¥52,056 at
1/31/2006 and 1/31/2005) 432 432 (17) (68)
Receive fl oating rate, pay fi xed-rate interest rate swap designated
as a cash fl ow hedge – 1,500 – (5)
Total $ 8,952 $11,549 $ (111) $ 303
Non-derivative fi nancial instruments:
Long-term debt $31,024 $23,846 $31,580 $25,016