Callaway 2004 Annual Report Download - page 86

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
payments due on intercompany transactions from certain wholly-owned foreign subsidiaries, and anticipated
sales by the Company's wholly-owned European subsidiary for certain Euro-denominated transactions.
Hedged transactions are denominated primarily in British Pounds, Euros, Japanese Yen, Korean Won,
Canadian Dollars and Australian Dollars. To achieve hedge accounting, contracts must reduce the foreign
currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposures and
comply with established risk management policies. Pursuant to its foreign exchange hedging policy, the
Company may hedge anticipated transactions and the related receivables and payables denominated in foreign
currencies using forward foreign currency exchange rate contracts and put or call options. Foreign currency
derivatives are used only to meet the Company's objectives of minimizing variability in the Company's
operating results arising from foreign exchange rate movements. The Company does not enter into foreign
exchange contracts for speculative purposes. Hedging contracts mature within twelve months from their
inception.
At December 31, 2004, 2003 and 2002, the notional amounts of the Company's foreign exchange
contracts were approximately $52,736,000, $91,222,000 and $134,782,000, respectively. The Company
estimates the fair values of derivatives based on quoted market prices or pricing models using current market
rates, and records all derivatives on the balance sheet at fair value. At December 31, 2004, current liabilities
related to the fair value of foreign currency-related derivatives were $2,981,000. There were no current assets
related to the fair values of foreign currency-related derivatives. At December 31, 2003, the fair values of
foreign currency-related derivatives were recorded as current assets of $50,000 and current liabilities of
$799,000.
At December 31, 2004, 2003 and 2002, the notional amounts of the Company's foreign exchange
contracts designated as cash Öow hedges were approximately $0, $44,443,000 and $84,843,000, respectively.
For derivative instruments that are designated and qualify as cash Öow hedges, the eÅective portion of the gain
or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (""OCI'')
as a separate component of shareholders' equity and subsequently reclassiÑed into earnings in the period
during which the hedged transaction is recognized.
During the years ended December 31, 2004 and 2003, no gains or losses were reclassiÑed into earnings as
a result of the discontinuance of cash Öow hedges. During the year ended December 30, 2002, gains of
$171,000 were reclassiÑed into earnings as a result of the discontinuance of cash Öow hedges.
The ineÅective portion of the gain or loss for derivative instruments that are designated and qualify as
cash Öow hedges is immediately reported as a component of interest and other income. For foreign currency
contracts designated as cash Öow hedges, hedge eÅectiveness is measured using the spot rate. Changes in the
spot-forward diÅerential are excluded from the test of hedging eÅectiveness and are recorded currently in
earnings as a component of interest and other income. During the years ended December 31, 2004, 2003 and
2002, the Company recorded net gains/losses of $103,000 loss, $38,000 gain and $376,000 gain, respectively,
as a result of changes in the spot-forward diÅerential. Assessments of hedge eÅectiveness are performed using
the dollar oÅset method and applying a hedge eÅectiveness ratio between 80% and 125%. Given that both the
hedged item and the hedging instrument are evaluated using the same spot rate, the Company anticipates the
hedges to be highly eÅective. The eÅectiveness of each derivative is assessed quarterly.
At December 31, 2004, 2003 and 2002, the notional amounts of the Company's foreign exchange
contracts used to hedge outstanding balance sheet exposures were approximately $52,736,000, $46,779,000
and $49,939,000, respectively. The gains and losses on foreign currency contracts used to hedge balance sheet
exposures are recognized as a component of interest and other income in the same period as the
remeasurement gain and loss of the related foreign currency denominated assets and liabilities and thus oÅset
these gains and losses. During the years ended December 31, 2004, 2003 and 2002, the Company recorded net
losses of $4,577,000, $6,838,000 and $8,148,000, respectively, due to net realized and unrealized gains and
losses on contracts used to hedge balance sheet exposures.
F-21