Avon 2008 Annual Report Download - page 69

related to the net assets of certain of our foreign subsidiaries. At
December 31, 2008, we had a Japanese yen-denominated note
payable to hedge our net investment in our Japanese subsidiary
(see Note 4, Debt and Other Financing). For the years ended
December 31, 2008, 2007 and 2006, $33.6, $9.7 and $6.1,
respectively, related to the effective portions of these hedges
were included in foreign currency translation adjustments within
AOCI on the Consolidated Balance Sheets.
At December 31, 2008 and 2007, we held foreign currency for-
ward contracts with fair values of $18.8 and $2.8, respectively,
recorded in accounts payable and $8.1 and $0, respectively,
recorded in prepaid expenses and other.
Credit and Market Risk
We attempt to minimize our credit exposure to counterparties by
entering into interest rate swap and foreign currency forward
rate and option agreements only with major international finan-
cial institutions with “A” or higher credit ratings as issued by
Standard & Poor’s Corporation. Our foreign currency and
interest rate derivatives are comprised of over-the-counter
forward contracts, swaps or options with major international
financial institutions. Although our theoretical credit risk is the
replacement cost at the then estimated fair value of these
instruments, we believe that the risk of incurring credit risk losses
is remote and that such losses, if any, would not be material.
Non-performance of the counterparties on the balance of all the
foreign exchange and interest rate agreements would result in a
write-off of $111.8 at December 31, 2008. In addition, in the
event of non-performance by such counterparties, we would be
exposed to market risk on the underlying items being hedged as
a result of changes in foreign exchange and interest rates.
NOTE 8. Fair Value
Assets and Liabilities Measured at Fair
Value
We adopted SFAS 157 as of January 1, 2008, with the exception
of the application of the statement to non-recurring, non-
financial assets and liabilities which becomes effective January 1,
2009. The adoption of SFAS 157 did not have a material impact
on our fair value measurements. SFAS 157 defines fair value as
the price that would be received to sell an asset or paid to
transfer a liability in the principal or most advantageous market
for the asset or liability in an orderly transaction between market
participants at the measurement date. SFAS 157 establishes a
fair value hierarchy, which prioritizes the inputs used in
measuring fair value into three broad levels as follows:
• Level 1 - Quoted prices in active markets for identical assets or
liabilities.
• Level 2 - Inputs, other than the quoted prices in active
markets, that are observable either directly or indirectly.
• Level 3 - Unobservable inputs based on our own assumptions.
The following table presents the fair value hierarchy for those
assets and liabilities measured at fair value on a recurring basis as
of December 31, 2008:
Level 1 Level 2 Level 3 Total
Assets:
Available-for-sale securities $17.7 $ – $– $ 17.7
Interest-rate swap
agreements – 103.7 – 103.7
Foreign exchange forward
contracts – 8.1 – 8.1
Total $17.7 $111.8 $– $129.5
Liabilities:
Interest-rate swap
agreements $ – $ 16.1 $– $ 16.1
Foreign exchange forward
contracts – 18.8 – 18.8
Total $ – $ 34.9 $– $ 34.9
The available-for-sale securities are held in a trust in order to
fund future benefit payments for non-qualified retirement plans
(see Note 11, Employee Benefit Plans). As of December 31,
2008, we have recorded a net unrealized loss of $.3 in accumu-
lated other comprehensive loss, within shareholders’ equity,
associated with the available-for-sale securities (see Note 5,
Accumulated Other Comprehensive Loss). The foreign exchange
forward contracts and interest rate swap agreements are hedges
of either recorded assets or liabilities or anticipated transactions.
Changes in values of the underlying hedged assets and liabilities
or anticipated transactions are not reflected in the table above.
A V O N 2008 F-17