Burger King 2006 Annual Report Download - page 96

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements Ì (Continued)
Note 11. Derivative Instruments
Interest rate swaps
During the year ended June 30, 2006, the Company entered into interest rate swap contracts with a
notional value of $750 million that qualify as cash flow hedges under SFAS No. 133, as amended. These
interest rate swaps are used to convert the floating interest-rate component of certain debt obligations to fixed
rates.
The fair value of the interest rate swaps was $26 million as of June 30, 2006 and is recorded within other
assets, net in the accompanying consolidated balance sheet. At June 30, 2006, a $16 million, net of tax,
unrealized gain on hedging activity is included in accumulated other comprehensive income (loss) included in
the consolidated statement of stockholder's equity and other comprehensive income (loss), resulting from the
increase in fair value of the interest rate swaps. Unrealized gains and losses in other comprehensive income
related to these hedges are expected to be recorded to the Company's statement of operations in the future and
will offset interest expense on certain variable rate debt. The actual amounts that will be recorded to the
Company's consolidated statement of operations could vary from this estimated amount as a result of changes
in interest rates in the future. No ineffectiveness was recognized in fiscal 2006 for those interest rate swaps
designated as cash flow hedges.
Forward Contracts
The Company enters into foreign currency forward contracts with the objective of reducing its exposure
to foreign currency fluctuations associated with foreign-denominated assets. As part of the realignment of the
European and Asian businesses, the Company recorded Euro-denominated intercompany receivables with a
principal amount equivalent to $340 million as consideration for intellectual property and other assets
transferred to certain foreign subsidiaries. Concurrently, the Company entered into foreign currency forward
contracts that mature in October 2006 to sell Euros and buy approximately $346 million U.S. Dollars in order
to reduce the Company's cash flow and income statement exposure to changes in the U.S. and Euro exchange
rates associated with the principal and interest amounts of such receivables. The notional amount of the
contracts associated with the principal portion of the intercompany receivables totaling $342 million is
recorded at fair value on the consolidated balance sheet with the corresponding amount recorded in other
income (expense). The change in fair value of these contracts through June 30, 2006 resulted in a $5 million
loss, and is included in other income (expense), net in the consolidated statement of operations, which is
offset by a corresponding gain recorded upon the remeasurement of the principal portion of intercompany
receivables for the same period.
The Company also entered into and designated the notional amount of the contracts associated with the
interest portion of the receivables totaling $4 million as cash flow hedges. As the notional amount, maturity
date and currency of these contracts match those of the underlying receivable, these foreign currency forward
contracts are considered to be effective cash flow hedges according to the criteria specified in SFAS No. 133.
Accordingly, the gains and losses for these foreign currency forward contracts are reported in accumulated
other comprehensive income and will be reclassified into earnings when the impact of the hedged transaction
(i.e., receipt of the interest payment) occurs. For those foreign currency exchange forward contracts that the
Company has designated as cash flow hedges, the Company measures ineffectiveness by comparing the
cumulative change in the foreign currency forward contract with the cumulative change in the hedged item.
The Company excludes the difference between the spot rate and the forward rate of the contracts entered into
from the assessment of hedge ineffectiveness for its cash flow hedges. No ineffectiveness was recognized in
fiscal 2006 for those foreign currency forward contracts designated as cash flow hedges.
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