Abercrombie & Fitch 2011 Annual Report Download - page 94

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ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For derivatives that either do not qualify for hedge accounting or are not designated as hedges, all
changes in the fair value of the derivative are recognized in earnings. For qualifying cash flow hedges, the
effective portion of the change in the fair value of the derivative is recorded as a component of Other
Comprehensive Income (“OCI”) and recognized in earnings when the hedged cash flows affect earnings.
The ineffective portion of the derivative gain or loss, as well as changes in the fair value of the derivative’s
time value are recognized in current period earnings. The effectiveness of the hedge is assessed based on
changes in the fair value attributable to changes in spot prices. The changes in the fair value of the
derivative contract related to the changes in the difference between the spot price and the forward price are
excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If
the cash flow hedge relationship is terminated, the derivative gains or losses that are deferred in OCI will
be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are
terminated because the forecasted transaction is not expected to occur in the original specified time period,
or a two-month period thereafter, the derivative gains or losses are immediately recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow
hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated
intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-
denominated inter-company receivable. Fluctuations in exchange rates will either increase or decrease the
Company’s U.S. dollar equivalent cash flows and affect the Company’s U.S. dollar earnings. Gains or
losses on the foreign exchange forward contracts that are used to hedge these exposures are expected to
partially offset this variability. Foreign exchange forward contracts represent agreements to exchange the
currency of one country for the currency of another country at an agreed-upon settlement date. As of
January 28, 2012, the maximum length of time over which forecasted foreign-currency-denominated inter-
company inventory sales were hedged was thirteen months. The sale of the inventory to the Company’s
customers will result in the reclassification of related derivative gains and losses that are reported in
Accumulated Other Comprehensive Income (Loss). Substantially all of the remaining unrealized gains or
losses related to foreign-currency-denominated inter-company inventory sales that have occurred as of
January 28, 2012 will be recognized in costs of goods sold over the following two months at the values at
the date the inventory was sold to the respective subsidiary.
The Company nets derivative assets and liabilities on the Consolidated Balance Sheets to the extent
that master netting arrangements meet the specific accounting requirements set forth by U.S. GAAP.
As of January 28, 2012, the Company had the following outstanding foreign exchange forward
contracts that were entered to hedge either a portion, or all of, forecasted foreign-currency-denominated
inter-company inventory sales, the resulting settlement of the foreign-currency-denominated inter-company
accounts receivable, or both:
Notional Amount(1)
Euro .......................................................... $218,762
British Pound ................................................... $ 53,331
Canadian Dollar ................................................. $ 12,384
(1) Amounts are reported in thousands and in U.S. Dollars equivalent as of January 28, 2012.
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