AT&T Wireless 2010 Annual Report Download - page 80

Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
78 AT&T Inc.
settle or take delivery on our designated foreign exchange
contracts are amortized into income over the next few months
as the hedged funds are spent by our foreign subsidiaries,
except where a material amount is deemed to be ineffective,
which would be immediately reclassified to income. In the
year ended December 31, 2010, no ineffectiveness was
measured. No transactions were designated in the year ended
December 31, 2009.
Collateral and Credit-Risk Contingency We have entered
into agreements with most of our derivative counterparties,
establishing collateral thresholds based on respective credit
ratings and netting agreements. Collateral is exchanged on a
weekly basis. At December 31, 2010, we had posted collateral
of $82 (a deposit asset) and held collateral of $26 (a receipt
liability). Under the agreements, if our credit rating had been
downgraded one rating level by Moody’s and Fitch before
the final collateral exchange in December, we would
have been required to post additional collateral of $115.
At December 31, 2009, we held $222 of counterparty
collateral. We do not offset the fair value of collateral,
whether the right to reclaim cash collateral (a receivable)
or the obligation to return cash collateral (a payable),
against the fair value of the derivative instruments.
Following is the notional amount of our outstanding derivative
positions at December 31:
2010 2009
Interest rate swaps $11,050 $ 9,000
Cross-currency swaps 7,502 7,502
Interest rate locks 3,400 3,600
Foreign exchange contracts 221 293
Total $22,173 $20,395
Following are our derivative instruments and their related
hedged items affecting our financial position and performance:
Fair Value of Derivatives on the Consolidated Balance Sheets
Derivatives designated as hedging instruments are reflected
as other assets, other liabilities and, for a portion of interest
rate swaps, accounts receivable at December 31.
Asset Derivatives 2010 2009
Interest rate swaps $ 537 $ 399
Cross-currency swaps 327 635
Interest rate locks 11 150
Foreign exchange contracts 6 2
Total $ 881 $1,186
Liability Derivatives 2010 2009
Cross-currency swaps $(675) $ (390)
Interest rate locks (187) (6)
Foreign exchange contracts (2) (7)
Total $(864) $ (403)
Cash Flow Hedging Unrealized gains on derivatives
designated as cash flow hedges are recorded at fair value
as assets, and unrealized losses on derivatives designated
as cash flow hedges are recorded at fair value as liabilities,
both for the period they are outstanding. For derivative
instruments designated as cash flow hedges, the effective
portion is reported as a component of accumulated OCI
until reclassified into interest expense in the same period
the hedged transaction affects earnings. The gain or loss
on the ineffective portion is recognized in other income
(expense) – net in each period.
We designate our cross-currency swaps as cash flow hedges.
We have entered into multiple cross-currency swaps to hedge
our exposure to variability in expected future cash flows that
are attributable to foreign currency risk generated from the
issuance of our Euro and British pound sterling denominated
debt. These agreements include initial and final exchanges
of principal from fixed foreign denominations to fixed U.S.
denominated amounts, to be exchanged at a specified rate,
which was determined by the market spot rate upon issuance.
They also include an interest rate swap of a fixed foreign-
denominated rate to a fixed U.S. denominated interest rate.
We evaluate the effectiveness of our cross-currency swaps
each quarter. In the years ended December 31, 2010, and
December 31, 2009, no ineffectiveness was measured.
Periodically, we enter into and designate interest rate locks
to partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during
the period leading up to the probable issuance of fixed-rate
debt. We designate our interest rate locks as cash flow
hedges. Gains and losses when we settle our interest rate
locks are amortized into income over the life of the related
debt, except where a material amount is deemed to be
ineffective, which would be immediately reclassified to
income. In the second quarter of 2010, we settled $200 of
notional rate locks without utilizing them in a debt issuance.
The total impact to interest expense was $(5). We are
confident our remaining rate locks will be utilized given
our probable refinancing needs over the next two years.
No other ineffectiveness was measured in the year ended
December 31, 2010. Over the next 12 months, we expect to
reclassify $15 from accumulated OCI to interest expense due
to the amortization of net losses on historical interest rate
locks. Our unutilized interest rate locks carry mandatory
early terminations, the latest occurring in April 2012.
We hedge a large portion of the exchange risk involved in
anticipation of highly probable foreign currency-denominated
transactions. In anticipation of these transactions, we often
enter into foreign exchange contracts to provide currency at
a fixed rate. Some of these instruments are designated as
cash flow hedges while others remain non-designated, largely
based on size and duration. Gains and losses at the time we