Arrow Electronics 2010 Annual Report Download - page 40

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38
Financial Instruments
The company uses various financial instruments, including derivative financial instruments, for purposes
other than trading. Derivatives used as part of the company's risk management strategy are designated
at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. The
company enters into interest rate swap transactions that convert certain fixed-rate debt to variable-rate
debt or variable-rate debt to fixed-rate debt in order to manage its targeted mix of fixed- and floating-rate
debt. The effective portion of the change in the fair value of interest rate swaps designated as fair value
hedges is recorded as a change to the carrying value of the related hedged debt, and the effective portion
of the change in fair value of interest rate swaps designated as cash flow hedges is recorded in the
shareholders' equity section in the company's consolidated balance sheets in "Other." The ineffective
portion of the interest rate swaps, if any, is recorded in "Interest and other financing expense, net" in the
company's consolidated statements of operations.
The company occasionally enters into cross-currency swaps to hedge a portion of its net investment in
euro-denominated net assets. The company’s cross-currency swaps are derivatives designated as net
investment hedges. The effective portion of the change in the fair value of derivatives designated as net
investment hedges is recorded in "Foreign currency translation adjustment" included in the company's
consolidated balance sheets and any ineffective portion is recorded in "Interest and other financing
expense, net" in the company's consolidated statements of operations. The company uses the
hypothetical derivative method to assess the effectiveness of its net investment hedge on a quarterly
basis.
Contingencies and Litigation
The company is subject to proceedings, lawsuits, and other claims related to environmental, regulatory,
labor, product, tax, and other matters and assesses the likelihood of an adverse judgment or outcome for
these matters, as well as the range of potential losses. A determination of the reserves required, if any, is
made after careful analysis. The reserves may change in the future due to new developments impacting
the probability of a loss, the estimate of such loss, and the probability of recovery of such loss from third
parties.
Restructuring and Integration
The company recorded charges in connection with restructuring its businesses, and the integration of
acquired businesses. These items primarily include employee separation costs and estimates related to
the consolidation of facilities (net of sub-lease income), contractual obligations, and the impairment of
certain assets. Actual amounts could be different from those estimated.
Stock-Based Compensation
The company records share-based payment awards exchanged for employee services at fair value on the
date of grant and expenses the awards in the consolidated statements of operations over the requisite
employee service period. Stock-based compensation expense includes an estimate for forfeitures and is
generally recognized over the vesting period of the award on a straight-line basis. Stock-based
compensation expense related to awards with a market or performance condition is generally recognized
over the vesting period of the award utilizing the graded vesting method. The fair value of stock options is
determined using the Black-Scholes valuation model and the assumptions shown in Note 12 of the Notes
to Consolidated Financial Statements. The assumptions used in calculating the fair value of share-based
payment awards represent management's best estimates. The company's estimates may be impacted by
certain variables including, but not limited to, stock price volatility, employee stock option exercise
behaviors, additional stock option grants, estimates of forfeitures, the company's performance, and
related tax impacts.