Callaway 2014 Annual Report Download - page 106

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F-38
In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign
currency exchange rates relating to transactions of its international subsidiaries, including certain balance sheet exposures
(payables and receivables denominated in foreign currencies). In addition, the Company is exposed to gains and losses resulting
from the translation of the operating results of the Company’s international subsidiaries into U.S. dollars for financial reporting
purposes. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates,
the Company uses derivative financial instruments in the form of foreign currency forward contracts and put and call option
contracts (“foreign currency exchange contracts”) to mitigate the impact of foreign currency translation on transactions that
are denominated primarily in Japanese Yen, British Pounds, Euros, Canadian Dollars, Australian Dollars and Korean Won.
Foreign currency exchange contracts 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 currency
exchange contracts for speculative purposes. Foreign currency exchange contracts usually mature within 12 months from their
inception.
During the years ended December 31, 2014, 2013 and 2012, the Company did not designate any foreign currency
exchange contracts as derivatives that qualify for hedge accounting under ASC 815. Beginning in January 2015, the Company
entered into certain foreign currency exchange contracts designated as derivatives that qualify for hedge accounting.
At December 31, 2014, 2013 and 2012, the notional amounts of the Company’s foreign currency exchange contracts
used to mitigate the exposures discussed above were approximately $62,866,000, $42,264,000 and $137,125,000, respectively.
The increase in foreign currency exchange contracts reflects the general timing of when the Company enters into these contracts.
The Company estimates the fair values of foreign currency exchange contracts based on pricing models using current market
rates, and records all derivatives on the balance sheet at fair value with changes in fair value recorded in the statement of
operations. The foreign currency contracts are classified under Level 2 of the fair value hierarchy (see Note 17).
The following table summarizes the fair value of derivative instruments by contract type as well as the location of the
asset and/or liability on the consolidated balance sheets at December 31, 2014 and 2013 (in thousands):
Asset Derivatives
December 31, 2014 December 31, 2013
Derivatives not designated as hedging instruments Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Foreign currency exchange contracts............... Other current assets $ 40 Other current assets $ 557
Liability Derivatives
December 31, 2014 December 31, 2013
Derivatives not designated as hedging instruments Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Foreign currency exchange contracts............... Accounts payable and
accrued expenses $ 246 Accounts payable and
accrued expenses $ 823
The following table summarizes the location of gains and losses on the consolidated statements of operations that were
recognized during the years ended December 31, 2014, 2013 and 2012, respectively, in addition to the derivative contract
type (in thousands):
Amount of Gain Recognized in
Income on Derivative Instruments
Derivatives not designated as hedging instruments
Location of gain recognized in
income on derivative instruments
Years Ended December 31,
2014 2013 2012
Foreign currency exchange contracts.............................. Other income (expense), net $ 6,356 $ 6,764 $ 6,591
The amounts shown in the table above represent the net realized and unrealized gains and losses that were recognized
by the Company on its foreign currency exchange contracts for the years ended December 31, 2014, 2013 and 2012. Unrealized
gains and losses represent the remeasurement of foreign currency exchange contracts that will mature in future periods. In
addition, during the years ended December 31, 2014, 2013 and 2012, the Company recognized net foreign currency losses
of $6,198,000, $821,000 and $3,343,000, respectively, related to transactions with foreign subsidiaries.