Avon 2009 Annual Report Download - page 80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Changes in the fair value of aderivative that is designated as a
cash flow hedge are recorded in AOCI to the extent effective
and reclassified into earnings in the same period or periods
during which the transaction hedged by that derivative also
affects earnings.
•Changes in the fair value of aderivative that is designated as a
hedge of anet investment in aforeign operation are recorded
in foreign currency translation adjustments within AOCI to the
extent effective as ahedge.
•Changes in the fair value of aderivative not designated as a
hedging instrument are recognized in earnings in other
expense, net on the Consolidated Statements of Income.
Realized gains and losses on aderivative are reported on the
Consolidated Statements of Cash Flows consistent with the
underlying hedged item.
We assess, both at the hedge’s inception and on an ongoing
basis, whether the derivatives that are used in hedging trans-
actions are highly effective in offsetting changes in fair values or
cash flows of hedged items. Highly effective means that cumu-
lative changes in the fair value of the derivative are between
80% -125% of the cumulative changes in the fair value of the
hedged item. The ineffective portion of aderivative’s gain or
loss, if any, is recorded in earnings in other expense, net on the
Consolidated Statements of Income. We include the change in
the time value of options in our assessment of hedge effective-
ness. When we determine that aderivative is not highly effective
as ahedge, hedge accounting is discontinued. When it is prob-
able that ahedged forecasted transaction will not occur, we
discontinue hedge accounting for the affected portion of the
forecasted transaction, and reclassify gains or losses that were
accumulated in AOCI to earnings in other expense, net on the
Consolidated Statements of Income.
Interest Rate Risk
Our long-term, fixed-rate borrowings are subject to interest rate
risk. We use interest-rate swap agreements, which effectively
convert the fixed rate on long-term debt to afloating interest
rate, to manage our interest rate exposure. The agreements are
designated as fair value hedges. We held interest-rate swap
agreements that effectively converted approximately 82% at
December 31, 2009, and 50% at December 31, 2008, of our
outstanding long-term, fixed-rate borrowings to avariable inter-
est rate based on LIBOR. Our total exposure to floating interest
rates was approximately 83% at December 31, 2009, and 65%
at December 31, 2008.
We had interest-rate swap agreements designated as fair value
hedges of fixed-rate debt, with notional amounts totaling
$1,875 at December 31, 2009. Unrealized gains were $43.9 at
December 31, 2009, and $83.7 at December 31, 2008. During
2009, we recorded anet loss of $52.4 in interest expense for
these interest-rate swap agreements designated as fair value
hedges. The impact on interest expense of these interest-rate
swap agreements was offset by an equal and offsetting impact
in interest expense on our fixed-rate debt.
At times, we may de-designate the hedging relationship of a
receive-fixed/pay-variable interest-rate swap agreement. In these
cases, we enter into receive-variable/pay-fixed interest-rate swap
agreements that are designed to offset the gain or loss on the
de-designated contract. At December 31, 2009, we had interest-
rate swap agreements that are not designated as hedges with
notional amounts totaling $250. Unrealized gains on these
agreements were $0 at December 31, 2009, and $3.9 at Decem-
ber 31, 2008. During 2009, we recorded anet loss of $3.2 in
other expense, net associated with these undesignated interest-
rate swap agreements.
Long-term debt included net unrealized gains of $27.6 at Decem-
ber 31, 2009, and $80.0 at December 31, 2008, on interest rate
swaps designated as fair value hedges. Long-term debt also
included remaining unamortized gains of $0 at December 31,
2009, and $3.9 at December 31, 2008, resulting from termi-
nated swap agreements and swap agreements no longer desig-
nated as fair value hedges, which are being amortized to interest
expense over the remaining terms of the underlying debt. There
was no hedge ineffectiveness for the years ended December 31,
2009, 2008 and 2007, related to these interest rate swaps.
During 2007, we entered into treasury lock agreements (the
“locks”) with notional amounts totaling $500.0 that expired on
July 31, 2008. The locks were designated as cash flow hedges of
the anticipated interest payments on $250.0 principal amount of
the 2013 Notes and $250.0 principal amount of the 2018 Notes.
The losses on the locks of $38.0 were recorded in AOCI. $19.2
of the losses are being amortized to interest expense over five
years and $18.8 are being amortized over ten years.
During 2005, we entered into treasury lock agreements that we
designated as cash flow hedges and used to hedge exposure to
apossible rise in interest rates prior to the anticipated issuance
of ten- and 30-year bonds. In December 2005, we decided that
amore appropriate strategy was to issue five-year bonds given
our strong cash flow and high level of cash and cash equivalents.
As aresult of the change in strategy, in December 2005, we
de-designated the locks as hedges and reclassified the gain of
$2.5 on the locks from AOCI to other expense, net. Upon the
change in strategy in December 2005, we entered into atreasury
lock agreement with anotional amount of $250.0 designated as
acash flow hedge of the $500.0 principal amount of five-year
notes payable issued in January 2006. The loss on the 2005 lock