Pfizer 2006 Annual Report Download - page 55

2006 Financial Report 53
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
All derivative contracts used to manage foreign currency risk are
measured at fair value and reported as assets or liabilities on the
balance sheet. Changes in fair value are reported in earnings or
deferred, depending on the nature and effectiveness of the
offset or hedging relationship, as follows:
•
We recognize the earnings impact of foreign currency swaps
and foreign currency forward-exchange contracts designated
as cash flow hedges in Other (income)/deductions—net upon
the recognition of the foreign exchange gain or loss on the
translation to U.S. dollars of the hedged items.
•
We recognize the earnings impact of foreign currency forward-
exchange contracts that are used to offset foreign currency
assets or liabilities in Other (income)/deductions—net during the
terms of the contracts, along with the earnings impact of the
items they generally offset.
•
We recognize the earnings impact of foreign currency swaps
designated as a hedge of our net investments in Other
(income)/deductions—net in three ways: over time—for the
periodic net swap payments; immediately—to the extent of any
change in the difference between the foreign exchange spot
rate and forward rate; and upon sale or substantial liquidation
of our net investments—to the extent of change in the foreign
exchange spot rates.
Any ineffectiveness in a hedging relationship is recognized
immediately into earnings. There was no significant ineffectiveness
in 2006, 2005 or 2004.
Interest Rate Risk—Our interest-bearing investments, loans and
borrowings are subject to interest rate risk. We invest, loan and
borrow primarily on a short-term or variable-rate basis. From
time to time, depending on market conditions, we will fix interest
rates either through entering into fixed-rate investments and
borrowings or through the use of derivative financial instruments.
We entered into derivative financial instruments to hedge or
offset the fixed or variable interest rates on the hedged item,
matching the amount and timing of the hedged item. As of
December 31, 2006 and 2005, the more significant derivative
financial instruments employed to manage interest rate risk
follow:
PRIMARY
NOTIONAL AMOUNT
FINANCIAL BALANCE SHEET HEDGE
(MILLIONS OF DOLLARS)
MATURITY
_________________________________
INSTRUMENT CAPTION
(a)
TYPE
(b)
HEDGED ITEM 2006 2005 DATE
Swaps ONCL FV U.S. dollar fixed rate debt
(c)
$2,400 $2,400 2008-2018
Swaps OCL/ONCL FV U.S. dollar fixed rate debt
(c)
700 700 2007
Swaps OCL FV U.S. dollar fixed rate debt
(c)
— 750 2006
Swaps ONCL — U.S. dollar fixed rate debt 1,285 1,291 2018-2028
Swaps ONCL CF Yen LIBOR interest rate related to forecasted
issuances of short-term debt
(d)
1,196 179 2009-2013
Swaps OCL CF Yen LIBOR interest rate related to forecasted
issuances of short-term debt
(d)
— 1,182 2006
(a)
The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial
instrument used to hedge interest rate risk. The abbreviations used are defined as follows: OCL = Other current liabilities and ONCL = Other
noncurrent liabilities.
(b)
CF = Cash flow hedge; FV = Fair value hedge.
(c)
Serve to reduce exposure to long-term U.S. dollar interest rates by effectively converting fixed rates associated with long-term debt obligations
to floating rates (see also Note 9C. Financial Instruments: Long-Term Debt).
(d)
Serve to reduce variability by effectively fixing the maximum rates on short-term debt for the swaps maturing in 2006 at 0.8%, for the swaps
maturing in 2009 at a weighted average of 1.30% and for the swaps maturing in 2013 at 1.95%.
All derivative contracts used to manage interest rate risk are
measured at fair value and reported as assets or liabilities on the
balance sheet. Changes in fair value are reported in earnings or
deferred, depending on the nature and effectiveness of the
offset or hedging relationship, as follows:
•
We recognize the earnings impact of interest rate swaps
designated as fair value hedges or offsets in Other
(income)/deductions—net upon the recognition of the change
in fair value for interest rate risk related to the hedged or
offset items.
•
We recognize the earnings impact of interest rate swaps
designated as cash flow hedges in Other (income)/deductions—
net upon the recognition of the interest related to the hedged
items.
Any ineffectiveness in a hedging relationship is recognized
immediately in earnings. There was no significant ineffectiveness
in 2006, 2005 or 2004.
E. Fair Value
The following methods and assumptions were used to estimate
the fair value of derivative and other financial instruments at the
balance sheet date:
•
short-term financial instruments (cash equivalents, accounts
receivable and payable, held-to-maturity debt securities and
debt)—we use cost or contract value because of the short
maturity period.
•
available-for-sale debt securities—we use a valuation model that
uses observable market quotes and credit ratings of the securities.
•
available-for-sale equity securities—we use observable market
quotes.
•
derivative contracts—we use valuation models that use
observable market quotes and our view of the creditworthiness
of the derivative counterparty.
•
loans—we use cost because of the short interest-reset period.