ADT 2007 Annual Report Download - page 225

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Financial Instruments (Continued)
Foreign Currency Exposures
The Company uses forward agreements to hedge its exposure to foreign currency exchange rates
on raw material purchases. These forward agreements are designated as cash flow hedges. Gains and
losses resulting from these hedges, the amounts of which are not material in any period presented, are
recorded in other comprehensive income. Amounts are reclassified from other comprehensive income
to earnings and recorded as an adjustment to cost of sales when the underlying transaction impacts
earnings.
Tyco uses various options, swaps, and forwards not designated as hedging instruments, to manage
foreign currency exposures on accounts and notes receivable, accounts payable, intercompany loans and
forecasted transactions denominated in certain foreign currencies. For derivatives not designated as
hedging instruments, the Company records changes in fair value in selling, general and administrative
expenses in the income statement in the period of change. The fair value of these instruments totaled
$95 million at September 28, 2007.
In December 2006, due to required changes to the legal entity structure to facilitate the
Separation, the Company determined that it would no longer consider certain intercompany foreign
currency transactions to be long-term investments. As a result, the related foreign currency transaction
gains and losses on such investments were recorded in the income statement subsequent to this
determination rather than to the currency translation component of shareholders’ equity. Forward
contracts that were previously designated as hedges of these net investments, continued to be used to
manage this exposure but were no longer designated as net investment hedges. The remaining forward
and option contracts are marked to market with changes in the derivatives’ fair value recognized in the
income statement.
Previously, the Company hedged its net investment in certain foreign operations. Changes in the
fair value of forward contracts qualifying as net investment hedges are reported in the cumulative
translation adjustment component of accumulated other comprehensive income to the extent the
hedges are effective. The cumulative translation adjustment component of other comprehensive income
includes a net loss of $299 million and $91 million during 2007 and 2006, respectively, for hedges of the
foreign currency exposure of the Company’s net investment in certain foreign operations. In connection
with the Separation and the debt tender, the Company de-designated its 6.125% Euro denominated
public notes due 2007 on March 29, 2007, its 5.5% Euro denominated public notes due 2008 and its
6.5% British Pound denominated public notes due 2031 on May 21, 2007, that had previously been
considered as hedges of net investments in certain foreign operations. At September 28, 2007, the
Company did not hedge its net investments in foreign operations, and all of its outstanding borrowings
were denominated in U.S. dollars.
Convertible Debentures
Given the potential requirement to convert the Company’s 3.125% convertible senior debentures
into shares of Covidien and Tyco Electronics, the Separation and Distribution Agreement provides for
Covidien and Tyco Electronics to deliver such shares as needed. Tyco recorded an asset for the fair
value of the Covidien and Tyco Electronics shares required to satisfy the obligation to the debenture
holders. Tyco also recorded the related conversion option as a liability at fair value. These amounts
were established with an offset to shareholders’ equity in connection with the Separation. During the
fourth quarter of 2007, Tyco recorded a $3 million credit to other expense, net for the changes in fair
2007 Financials 133