Walmart 2015 Annual Report Download - page 53

51
2015 Annual Report
The Company uses derivative financial 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 effective at meeting the risk reduction and
correlation criteria are recorded using hedge accounting. If a derivative
financial instrument is recorded using hedge accounting, depending on
the nature of the hedge, changes in the fair value of the instrument will
either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or be recognized in
accumulated other comprehensive income (loss) until the hedged item
is recognized in earnings. Any hedge ineffectiveness is immediately
recognized in earnings. The Company’s net investment and cash flow
instruments are highly effective hedges and the ineffective portion has
not been, and is not expected to be, significant. 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 fixed-rate, pay variable-rate interest
rate swaps that the Company uses to hedge the fair value of fixed-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 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 match those of the fixed-rate debt being hedged,
the derivative instruments are assumed to be perfectly effective hedges.
Changes in the fair values of these derivative instruments are recorded
in earnings, but are offset by corresponding changes in the fair values
of the hedged items, also recorded in earnings, and, accordingly, do not
impact the Company’s Consolidated Statements of Income. These fair
value instruments will mature in October 2020.
Net Investment Instruments
The Company is a party to cross-currency interest rate swaps that the
Company uses to hedge its net investments. The agreements are con-
tracts to exchange fixed-rate payments in one currency for fixed-rate
payments in another currency. All changes in the fair value of these
instruments are recorded in accumulated other comprehensive income
(loss), offsetting the currency translation adjustment 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), offsetting the foreign
currency translation adjustment of the related net investments that is
also recorded in accumulated other comprehensive income (loss).
At January 31, 2015 and January 31, 2014, the Company had ¥100 billion
and ¥200 billion, respectively, of outstanding long-term debt designated
as a hedge of its net investment in Japan, as well as outstanding long-term
debt of £2.5 billion at January 31, 2015 and 2014 that was designated as a
hedge of its net investment in the United Kingdom. These nonderivative
net investment hedges will mature on dates ranging from July 2015 to
January 2039.
Cash Flow Instruments
The Company is a party to receive variable-rate, pay fixed-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 flow
hedges of interest expense risk. Amounts reported in accumulated other
comprehensive income (loss) related to these derivatives are reclassified
from accumulated other comprehensive income (loss) to earnings as
interest is expensed for the Company’s variable-rate debt, converting
the variable-rate interest expense into fixed-rate interest expense.
These cash flow instruments will mature in July 2015.
The Company is also a party to receive fixed-rate, pay fixed-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
flow hedges of the currency risk related to payments on the non-U.S.
denominated debt. The effective portion of changes in the fair value of
derivatives designated as cash flow hedges of foreign exchange risk is
recorded in accumulated other comprehensive income (loss) and is
subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings. The hedged items are recog-
nized foreign currency-denominated liabilities that are remeasured at
spot exchange rates each period, and the assessment of effectiveness
(and measurement of any ineffectiveness) is based on total changes in
the related derivative’s cash flows. As a result, the amount reclassified
into earnings each period includes an amount that offsets 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 April 2022
to March 2034.
The Company used forward starting receive variable-rate, pay fixed-rate
swaps (“forward starting swaps”) to hedge its exposure to the variability
in future cash flows due to changes in the LIBOR swap rate for debt
issuances forecasted to occur in the future. These forward starting swaps
were terminated in October 2014, April 2014 and April 2013 concurrently
with the issuance of the hedged debt. Upon termination of the forward
starting swaps, the Company received net cash payments from the
related counterparties of $96 million in fiscal 2015 and made net cash
payments to the related counterparties of $74 million in fiscal 2014. The
payments were recorded in accumulated other comprehensive income
(loss) and will be reclassified to earnings over the life of the related debt
through May 2044, effectively adjusting interest expense to reflect the
fixed interest rates entered into by the forward starting swaps.
Notes to Consolidated Financial Statements