Ford 2003 Annual Report Download - page 91

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2003 ANNUAL REPORT 89
NOTES TO FINANCIAL STATEMENTS
NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
We adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, on
January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires that all
derivatives be recorded at fair value on our balance sheet, including embedded derivatives.
Our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates, certain
commodity prices and interest rates. The objective of our risk management program is to manage the financial and operational
exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on derivatives
used to hedge them. We have comprehensive hedge documentation that defines the hedging objectives, practices, procedures,
and accounting treatment. Our hedging program and our derivative positions and strategy are reviewed on a regular basis by our
management. In addition, we have entered into agreements that allow us to settle positive and negative positions with the same
counterparty on a net basis.
Derivative positions are used only to manage identified exposures. We have elected to apply hedge accounting to a portion of
our derivatives. Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the time they are
designated as well as throughout the hedge period. Some derivatives do not qualify for hedge accounting under SFAS No. 133;
for others, we elect not to apply hedge accounting treatment. For both of these, the mark to fair value is reported currently
through earnings.
AUTOMOTIVE SECTOR
Adjustments to pre-tax income as a result of the ineffectiveness in our SFAS No. 133 designated hedges and our non-desig-
nated hedges, for the years ended December 31, were a gain of $237 million in 2003 and a loss of $437 million in 2002.
Cash Flow Hedges
We use forwards and options contracts, which qualify as cash flow hedges to manage our exposure to foreign currency
exchange and commodity price risks. The effective portion of changes in the fair value of cash flow hedges is deferred in
Accumulated Other Comprehensive Income (“OCI”) and is recognized in Cost of sales when the hedged item affects earnings.
We have excluded a time value component of derivatives on certain commodity hedges from the measurement of effectiveness.
The amount of the excluded component was not significant in 2003 and 2002.
Derivatives used to manage financial exposures for foreign exchange and commodity price risks generally mature within three
years or less, with a maximum maturity of five years. Cash flow hedges are discontinued when it is probable that the original
forecasted transaction will not occur. Due to the change in contractual commitments and the discontinuation of hedges on
certain foreign currency related debt, we recognized a net gain of $38 million in Cost of sales during 2003. The impact to earn-
ings associated with hedge ineffectiveness from cash flow hedges was recorded in Cost of sales as a loss of $2 million in 2003
and a gain of $7 million in 2002.
Net Investment Hedges
We use designated foreign currency forward exchange contracts to hedge the net assets of certain foreign entities to offset the
translation and economic exposures related to our investment in these entities. The change in the value of these derivatives is
recorded in OCI as a foreign currency translation adjustment. The ineffectiveness related to net investment hedges is recorded
in Cost of sales. Gains of $95 million and of $97 million were recorded in 2003 and 2002, respectively.
Other Derivative Instruments
In accordance with corporate risk management policies, we use derivatives, such as forward contracts and options that
economically hedge certain exposures. As previously stated, in certain instances we elect not to apply hedge accounting, which
results in recording in income on a quarterly basis, the change in fair value of the derivative. Both the unrealized and realized
gains and losses on derivatives that economically hedge commodity and foreign exchange exposures are reported in Cost of
Sales. The impact to earnings associated with non-designated hedges was a gain of $106 million in 2003 and a loss of
$541 million in 2002.
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