Walmart 2013 Annual Report Download - page 48

46 || Walmart 2013 Annual Report
8 Derivative Financial Instruments
The Company uses derivative  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
 xed- and variable-rate debt. Use of derivative  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  nancial instrument will change. In a hedging relationship, the
change in the value of the derivative  nancial instrument is o set to a
great extent by the change in the value of the underlying hedged item.
Credit risk related to a derivative  nancial instrument represents the
possibility that the counterparty will not ful ll the terms of the contract. The
notional, or contractual, amount of the Company’s derivative  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 requir-
ing collateral (generally cash) from the counterparty when appropriate.
The Company only enters into derivative transactions with counterparties
rated “A-” or better by nationally recognized credit rating agencies.
Subsequent to entering into derivative transactions, the Company
regularly monitors the credit ratings of its counterparties. In connection
with various derivative agreements, including master netting arrangements,
the Company held cash collateral from counterparties of $413 million
and $387 million at January 31, 2013 and January 31, 2012, respectively.
The Company records cash collateral received as amounts due to the
counterparties exclusive of any derivative asset. Furthermore, as part of the
master netting arrangements with these counterparties, the Company
is also required to post collateral if the Company’s net derivative liability
position exceeds $150 million with any counterparty. The Company did not
have any cash collateral posted with counterparties at January 31, 2013 or
January 31, 2012. The Company records cash collateral paid as amounts
receivable from the counterparties exclusive of any derivative liability.
The Company uses derivative  nancial instruments for the purpose of
hedging its exposure to interest and currency exchange rate risks and,
accordingly, the contractual terms of a hedged instrument closely mirror
those of the hedged item, providing a high degree of risk reduction and
correlation. Contracts that are e ective at meeting the risk reduction and
correlation criteria are recorded using hedge accounting. If a derivative
 nancial instrument is recorded using hedge accounting, depending on
the nature of the hedge, changes in the fair value of the instrument will
either be o set against the change in fair value of the hedged assets,
liabilities or  rm commitments through earnings or be recognized in
accumulated other comprehensive income (loss) until the hedged item
is recognized in earnings. Any hedge ine ectiveness is immediately
recognized in earnings. The Company’s net investment and cash  ow
instruments are highly e ective hedges and the ine ective portion has
not been, and is not expected to be, signi cant. Instruments that do not
meet the criteria for hedge accounting, or contracts for which the
Company has not elected hedge accounting, are recorded at fair value
with unrealized gains or losses reported in earnings during the period
of the change.
Fair Value Instruments
The Company is a party to receive  xed-rate, pay variable-rate interest
rate swaps that the Company uses to hedge the fair value of  xed-rate
debt. The notional amounts are used to measure interest to be paid or
received and do not represent the Company’s exposure due to credit
loss. The Company’s interest rate swaps that receive  xed-interest rate
payments and pay variable-interest rate payments are designated as
fair value hedges. As the speci c terms and notional amounts of the
derivative instruments match those of the  xed-rate debt being hedged,
the derivative instruments are assumed to be perfectly e ective hedges.
Changes in the fair values of these derivative instruments are recorded
in earnings, but are o set by corresponding changes in the fair values of
the hedged items and, accordingly, do not impact the Company’s
Consolidated Statements of Income. These fair value instruments will
mature on dates ranging from April 2013 to May 2014.
Net Investment Instruments
The Company is a party to cross-currency interest rate swaps that
the Company uses to hedge its net investments, as well as its currency
exchange rate  uctuation exposure associated with the forecasted
payments of principal and interest of non-U.S. denominated debt. The
agreements are contracts to exchange  xed-rate payments in one
currency for  xed-rate payments in another currency. All changes in
the fair value of these instruments are recorded in accumulated other
comprehensive income (loss), o setting the currency translation adjust-
ment of the related investment 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 issued foreign-currency-denominated long-term debt
as hedges of net investments of certain of its foreign operations. These
foreign-currency-denominated long-term debt issuances are designated
and qualify as nonderivative hedging instruments. Accordingly, the
foreign currency translation of these debt instruments is recorded in
accumulated other comprehensive income (loss), o setting the foreign
currency translation adjustment of the related net investments that is
also recorded in accumulated other comprehensive income (loss). At
January 31, 2013 and January 31, 2012, the Company had £2.5 billion and
£3.0 billion, respectively, of outstanding long-term debt designated as a
hedge of its net investment in the United Kingdom, as well as outstand-
ing long-term debt of ¥275 billion at January 31, 2013 and January 31,
2012, that was designated as a hedge of its net investment in Japan.
These nonderivative hedging instruments will mature on dates ranging
from August 2013 to January 2039.
Cash Flow Instruments
The Company is a party to receive variable-rate, pay  xed-rate interest
rate swaps that the Company uses to hedge the interest rate risk of certain
non-U.S. denominated debt. The swaps are designated as cash  ow
hedges of interest expense risk. Amounts reported in accumulated other
comprehensive income (loss) related to these derivatives are reclassi ed
from accumulated other comprehensive income (loss) to earnings as
interest payments are made on the Company’s variable-rate debt,
converting the variable-rate interest expense into  xed-rate interest
expense. These cash  ow instruments will mature on dates ranging from
August 2013 to July 2015.
The Company is also a party to receive  xed-rate, pay  xed-rate cross-
currency interest rate swaps to hedge the currency exposure associated
with the forecasted payments of principal and interest of certain non-
U.S. denominated debt. The swaps are designated as cash  ow hedges
of the currency risk related to payments on the non-U.S. denominated
debt. The e ective portion of changes in the fair value of derivatives
designated as cash  ow hedges of foreign exchange risk is recorded in
Notes to Consolidated Financial Statements