Walmart 2012 Annual Report Download - page 48
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9 Derivative Financial Instruments
The Company uses derivative fi nancial instruments for hedging and
non-trading purposes to manage its exposure to changes in interest and
currency exchange rates, as well as to maintain an appropriate mix of
fi xed- and fl oating-rate debt. 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 off set 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) from the counterparty
when appropriate. The Company’s transactions are with counterparties
rated “A-” or better by nationally recognized credit rating agencies. In
connection with various derivative agreements with counterparties, the
Company held cash collateral from these counterparties of $387 million
and $344 million at January 31, 2012 and 2011, respectively. The Company’s
policy is to record cash collateral exclusive of any derivative asset, and
any collateral holdings are refl ected in the Company’s accrued liabilities
as amounts due to the counterparties. Furthermore, as part of the master
netting arrangements with these counterparties, the Company is also
required to post collateral if the derivative liability position exceeds
$150 million. The Company has no outstanding collateral postings; and
in the event of providing cash collateral, the Company would record
the posting as a receivable exclusive of any derivative liability.
When the Company uses derivative fi nancial instruments for the purpose
of hedging its exposure to interest and currency exchange rates, the
contract terms of a hedged instrument closely mirror those of the
hedged item, providing a high degree of risk reduction and correlation.
Contracts that are eff ective at meeting the risk reduction and correlation
criteria are recorded using hedge accounting. If a derivative instrument
is a hedge, depending on the nature of the hedge, changes in the fair
value of the instrument are either off set against the change in fair value
of the hedged assets, liabilities or fi rm commitments through earnings
or recognized in accumulated other comprehensive income (loss) until
the hedged item is recognized in earnings. The ineff ective portion of an
instrument’s change in fair value is immediately recognized in earnings
during the period. Instruments that do not meet the criteria for hedge
accounting, or contracts for which the Company has not elected hedge
accounting, are valued at fair value with unrealized gains or losses
reported in earnings during the period of change.
Fair Value Instruments
The Company is party to receive fi xed-rate, pay fl oating-rate interest rate
swaps to hedge the fair value of fi xed-rate debt. The notional amounts
are used to measure interest to be paid or received and do not represent
the exposure due to credit loss. The Company’s interest rate swaps that
receive fi xed-interest rate payments and pay fl oating-interest rate pay-
ments are designated as fair value hedges. As the specifi c terms and
notional amounts of the derivative instruments match those of the
instruments being hedged, the derivative instruments were assumed to
be perfectly eff ective hedges and all changes in fair value of the hedges
were recorded in long-term debt and accumulated other comprehensive
income (loss) in the Company’s Consolidated Balance Sheets with no net
impact in the Company’s Consolidated Statements of Income. These fair
value instruments will mature on various dates ranging from April 2012
to May 2014.
Net Investment Instruments
The Company is party to cross-currency interest rate swaps that hedge
its net investments, as well as its currency exchange rate fl uctuation
exposure associated with the forecasted payments of principal and
interest of non-U.S. denominated debt. The agreements are contracts to
exchange fi xed-rate payments in one currency for fi xed-rate payments
in another currency. All changes in the fair value of these instruments are
recorded in accumulated other comprehensive income (loss), off setting
the currency translation adjustment that is also recorded in accumulated
other comprehensive income (loss). These instruments will mature on
dates ranging from October 2023 to February 2030.
The Company has outstanding debt of approximately £3.0 billion as of
January 31, 2012 and 2011 that is designated as a hedge of the Company’s
net investment in the United Kingdom. The Company also has outstanding
debt of approximately ¥275.0 billion and ¥437.0 billion as of January 31,
2012 and 2011, respectively, that is designated as a hedge of the Company’s
net investment in Japan. Any translation of non-U.S.-denominated debt
is recorded in accumulated other comprehensive income (loss), off setting
the currency translation adjustment that is also recorded in accumulated
other comprehensive income (loss). These instruments will mature on
dates ranging from January 2013 to January 2039.
Cash Flow Instruments
The Company is party to receive fl oating-rate, pay fi xed-rate interest rate
swaps to hedge the interest rate risk of certain non-U.S.-denominated
debt. The swaps are designated as cash fl ow hedges of interest rate risk.
Amounts reported in accumulated other comprehensive income (loss)
related to derivatives are reclassifi ed from accumulated other comprehensive
income (loss) to earnings as interest payments are made on the Company’s
variable-rate debt, converting the fl oating-rate interest expense into
fi xed-rate interest expense. These cash fl ow instruments will mature on
dates ranging from August 2013 to July 2015.
The Company is also party to receive fi xed-rate, pay fi xed-rate cross-currency
interest rate swaps to hedge the currency exposure associated with the
forecasted payments of principal and interest of non-U.S.-denominated
debt. The swaps are designated as cash fl ow hedges of the currency risk
related to payments on the non-U.S.-denominated debt. The eff ective
portion of changes in the fair value of derivatives designated as cash fl ow
hedges of foreign exchange risk is recorded in other comprehensive
income (loss) and is subsequently reclassifi ed into earnings in the period
that the hedged forecasted transaction aff ects earnings. The hedged
items are recognized foreign-currency denominated liabilities that are
remeasured at spot exchange rates each period, and the assessment of
eff ectiveness (and measurement of any ineff ectiveness) is based on total
changes in the derivative’s cash fl ows. As a result, the amount reclassifi ed
into earnings each period includes an amount that off sets the related
transaction gain or loss arising from that remeasurement and the adjustment
to earnings for the period’s allocable portion of the initial spot-forward
difference associated with the hedging instrument. These cash flow
instruments will mature on dates ranging from September 2029 to
March 2034. Any ineffectiveness with these instruments has been
and is expected to be immaterial.
Notes to Consolidated Financial Statements