AT&T Wireless 2012 Annual Report Download - page 78

Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
76 | AT&T Inc.
Collateral and Credit-Risk Contingency We have entered
into agreements with our derivative counterparties establishing
collateral thresholds based on respective credit ratings and
netting agreements. At December 31, 2012, we had posted
collateral of $22 (a deposit asset) and held collateral of $543
(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 $120.
At December 31, 2011, we had posted collateral of $98 and
had no held 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:
2012 2011
Interest rate swaps $ 3,000 $ 8,800
Cross-currency swaps 12,071 7,502
Interest rate locks — 800
Foreign exchange contracts 51 207
Total $15,122 $17,309
Following is the related hedged items affecting our financial
position and performance:
Effect of Derivatives on the
Consolidated Statements of Income
Fair Value Hedging Relationships
For the years ended December 31, 2012 2011 2010
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $(179) $ 10 $ 125
Gain (Loss) on long-term debt 179 (10) (125)
In addition, the net swap settlements that accrued and
settled in the periods above were offset against interest
expense.
Cash Flow Hedging Relationships
For the year ended December 31, 2012 2011 2010
Cross-currency swaps:
Gain (Loss) recognized in
accumulated OCI $432 $(219) $(201)
Interest rate locks:
Gain (Loss) recognized
in accumulated OCI — (167) (320)
Interest income (expense) reclassified
from accumulated OCI into income (43) (23) (19)
Foreign exchange contracts:
Gain (Loss) recognized in
accumulated OCI 5 (10) 5
The balance of the unrealized derivative gain (loss) in
accumulated OCI was $(110) at December 31, 2012, $(421)
at December 31, 2011, and $(180) at December 31, 2010.
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 as other income or expense
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, 2012,
and December 31, 2011, 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
consolidated other income/expense. Over the next 12 months,
we expect to reclassify $45 from accumulated OCI to interest
expense due to the amortization of net losses on historical
interest rate locks. In February 2012, we utilized $800 notional
value of interest rate locks related to our February 2012
debt issuance.
We hedge a 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 nondesignated, largely
based on size and duration. Gains and losses at the time we
settle or take delivery on our designated foreign exchange
contracts are amortized into income in the same period the
hedged transaction affects earnings, except where an amount
is deemed to be ineffective, which would be immediately
reclassified to other income (expense) on the consolidated
income statement. In the years ended December 31, 2012,
and December 31, 2011, no ineffectiveness was measured.