AT&T Wireless 2012 Annual Report Download - page 77

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AT&T Inc. | 75
Following is the fair value leveling for available-for-sale securities and derivatives as of December 31, 2012, and December 31, 2011:
December 31, 2012
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $873 $ — $ — $ 873
International equities 469 — — 469
Fixed income bonds — 837 — 837
Asset Derivatives1
Interest rate swaps — 287 — 287
Cross-currency swaps — 752 — 752
Foreign exchange contracts — 1 — 1
Liability Derivatives1
Cross-currency swaps — (672) — (672)
December 31, 2011
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 947 $ — $ — $ 947
International equities 495 — — 495
Fixed income bonds — 562 — 562
Asset Derivatives1
Interest rate swaps — 521 — 521
Cross-currency swaps — 144 — 144
Foreign exchange contracts — 2 — 2
Liability Derivatives1
Cross-currency swaps — (820) — (820)
Interest rate locks — (173) — (173)
Foreign exchange contracts — (9) — (9)
1
Derivatives designated as hedging instruments are reflected as other assets, other liabilities and, for a portion of interest rate swaps, other current assets.
Fair Value Hedging We designate our fixed-to-floating
interest rate swaps as fair value hedges. The purpose of
these swaps is to manage interest rate risk by managing
our mix of fixed-rate and floating-rate debt. These swaps
involve the receipt of fixed-rate amounts for floating interest
rate payments over the life of the swaps without exchange
of the underlying principal amount. Accrued and realized
gains or losses from interest rate swaps impact interest
expense on the consolidated statements of income.
Unrealized gains on interest rate swaps are recorded at fair
market value as assets, and unrealized losses on interest
rate swaps are recorded at fair market value as liabilities.
Changes in the fair value of the interest rate swaps offset
changes in the fair value of the fixed-rate notes payable
they hedge due to changes in the designated benchmark
interest rate and are recognized in interest expense.
Gains or losses realized upon early termination of our fair
value hedges are recognized in interest expense. In the
years ended December 31, 2012, and December 31, 2011,
no ineffectiveness was measured.
Derivative Financial Instruments
We employ derivatives to manage certain market risks,
primarily interest rate risk and foreign currency exchange risk.
This includes the use of interest rate swaps, interest rate
locks, foreign exchange forward contracts and combined
interest rate foreign exchange contracts (cross-currency
swaps). We do not use derivatives for trading or speculative
purposes. We record derivatives on our consolidated balance
sheets at fair value that is derived from observable market
data, including yield curves and foreign exchange rates (all
of our derivatives are Level 2). Cash flows associated with
derivative instruments are presented in the same category
on the consolidated statements of cash flows as the item
being hedged.
The majority of our derivatives are designated either as a
hedge of the fair value of a recognized asset or liability or
of an unrecognized firm commitment (fair value hedge), or
as a hedge of a forecasted transaction or of the variability
of cash flows to be received or paid related to a recognized
asset or liability (cash flow hedge).