Pfizer 2013 Annual Report Download - page 88

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Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
2013 Financial Report
87
All derivative contracts used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the
consolidated balance sheet. Changes in fair value are reported in earnings or in Other comprehensive income/(loss), depending on the nature
and purpose of the financial instrument (offset or hedge relationship) and the effectiveness of the hedge relationships, as follows:
• We record in Other comprehensive income/(loss) the effective portion of the gains or losses on foreign currency forward-exchange
contracts and foreign currency swaps that are designated as cash flow hedges and reclassify those amounts, as appropriate, into
earnings in the same period or periods during which the hedged transaction affects earnings.
• We recognize the gains and losses on forward-exchange contracts and foreign currency swaps that are used to offset the same foreign
currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts
essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any
currency movement.
• We recognize the gain and loss impact on foreign currency swaps designated as hedges of our net investments in earnings 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.
• We record in Other comprehensive income/(loss) the foreign exchange gains and losses related to foreign exchange-denominated debt
designated as a hedge of our net investments in foreign subsidiaries and reclassify those amounts into earnings upon the sale or
substantial liquidation of our net investments.
Any ineffectiveness is recognized immediately into earnings. There was no significant ineffectiveness for any period presented.
Interest Rate Risk
Our interest-bearing investments and borrowings are subject to interest rate risk. We strive to invest and borrow primarily on a floating-rate
basis; however, in light of current market conditions, we currently borrow primarily on a long-term, fixed-rate basis. From time to time,
depending on market conditions, we will change the profile of our outstanding debt by entering into derivative financial instruments like interest
rate swaps.
We entered into derivative financial instruments to hedge or offset the fixed interest rates on the hedged item, matching the amount and timing
of the hedged item. As of December 31, 2013, the aggregate notional amount of interest rate derivative financial instruments is $18.3 billion.
The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.
All derivative contracts used to manage interest rate risk are measured at fair value and reported as assets or liabilities on the consolidated
balance sheet. Changes in fair value are reported in earnings, as follows:
• We recognize the gains and losses on interest rate swaps that are designated as fair value hedges in earnings upon the recognition of the
change in fair value of the hedged risk. We recognize the offsetting earnings impact of fixed-rate debt attributable to the hedged risk also in
earnings.
Any ineffectiveness is recognized immediately into earnings. There was no significant ineffectiveness for any period presented.