AT&T Wireless 2014 Annual Report Download - page 62

Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
60 | AT&T INC.
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. In the years ended
December 31, 2014, and December 31, 2013, no
ineffectiveness was measured on interest rate locks.
Over the next 12 months, we expect to reclassify $39
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 the first half of 2015.
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) – net” in the
consolidated statements of income. In the years ended
December 31, 2014, and December 31, 2013, no
ineffectiveness was measured on foreign exchange
contracts designated as cash flow hedges.
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, 2014, we
had posted collateral of $530 (a deposit asset) and held
collateral of $599 (a receipt liability). Under the agreements,
if our credit rating had been downgraded one rating level
by Moody’s Investor Service and Standard & Poor’s Rating
Services and two rating levels by Fitch Ratings, before the
final collateral exchange in December, we would have
been required to post additional collateral of $91.
At December 31, 2013, we had posted collateral of $8
(a deposit asset) and held collateral of $1,600 (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:
2014 2013
Interest rate swaps $ 6,550 $ 4,750
Cross-currency swaps 26,505 17,787
Interest rate locks 6,750 —
Total $39,805 $22,537
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 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, 2014, and December 31, 2013, 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, Canadian dollar and Swiss Franc
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 or floating 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 (expense) – net” in the
consolidated statements of income in each period.
We evaluate the effectiveness of our cross-currency swaps
each quarter. In the years ended December 31, 2014, and
December 31, 2013, no ineffectiveness was measured on
cross-currency swaps designated as cash flow hedges.
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