AT&T Wireless 2013 Annual Report Download - page 58

Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
56 | AT&T Inc.
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) in
the consolidated income statement. In the years ended
December 31, 2013, and December 31, 2012, no
ineffectiveness was measured.
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,
2013, we had posted collateral of $8 (a deposit asset)
and held collateral of $1,600 (a receipt liability). Under the
agreements, if our credit rating had been downgraded one
rating level by Moody’s Investor Service and Standards &
Poor’s and two rating levels by Fitch, Inc. before the
final collateral exchange in December, we would have
been required to post additional collateral of $54.
At December 31, 2012, we had posted collateral of $22
(a deposit asset) and held collateral of $543 (a receipt
liability). 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:
2013 2012
Interest rate swaps $ 4,750 $ 3,000
Cross-currency swaps 17,787 12,071
Foreign exchange contracts — 51
Total $22,537 $15,122
Following is the related hedged items affecting our financial
position and performance:
Effect of Derivatives in the
Consolidated Statements of Income
Fair Value Hedging Relationships
For the years ended December 31, 2013 2012 2011
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $(113) $(179) $ 10
Gain (Loss) on long-term debt 113 179 (10)
exchange of the underlying principal amount. Accrued and
realized gains or losses from interest rate swaps impact
interest expense in 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 values of the interest rate swaps are
exactly offset by changes in the fair value of the underlying
debt. Gains or losses realized upon early termination of our
fair value hedges are recognized in interest expense. In the
years ended December 31, 2013, and December 31, 2012,
no ineffectiveness was measured on interest rate swaps
designated as fair value hedges.
Cash Flow Hedging 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, British pound sterling and Canadian dollar
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.
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 evaluate the effectiveness
of our cross-currency swaps each quarter. In the years
ended December 31, 2013, and December 31, 2012,
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 “Other
income (expense) – net” in the consolidated statements of
income. Over the next 12 months, we expect to reclassify
$44 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.