Cisco 2014 Annual Report Download - page 113

(c) Foreign Currency Exchange Risk
The Company conducts business globally in numerous currencies. Therefore, it is exposed to adverse movements in foreign
currency exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency
contracts. The Company does not enter into such contracts for trading purposes.
The Company hedges forecasted foreign currency transactions related to certain operating expenses and service cost of sales
with currency options and forward contracts. These currency options and forward contracts, designated as cash flow hedges,
generally have maturities of less than 18 months. The Company assesses effectiveness based on changes in total fair value of
the derivatives. The effective portion of the derivative instrument’s gain or loss is initially reported as a component of AOCI
and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the
gain or loss is reported in earnings immediately. During the fiscal years presented, the Company did not discontinue any cash
flow hedges for which it was probable that a forecasted transaction would not occur.
The Company enters into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency
fluctuations on assets and liabilities such as foreign currency receivables, including long-term customer financings,
investments, and payables. These derivatives are not designated as hedging instruments. Gains and losses on the contracts are
included in other income (loss), net, and substantially offset foreign exchange gains and losses from the remeasurement of
intercompany balances or other current assets, investments, or liabilities denominated in currencies other than the functional
currency of the reporting entity.
The Company hedges certain net investments in its foreign operations with forward contracts to reduce the effects of foreign
currency fluctuations on the Company’s net investment in those foreign subsidiaries. These derivative instruments generally
have maturities of up to six months.
(d) Interest Rate Risk
Interest Rate Derivatives, Investments The Company’s primary objective for holding fixed income securities is to achieve an
appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, the
Company may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges. As of July 26, 2014
and July 27, 2013, the Company did not have any outstanding interest rate derivatives related to its fixed income securities.
Interest Rate Derivatives Designated as Fair Value Hedge, Long-Term Debt In fiscal 2014 and 2013, the Company entered
into interest rate swaps designated as fair value hedges related to fixed-rate senior notes that are due on various dates from
2017 through 2024. In the previous periods, the Company entered into interest rate swaps designated as fair value hedges
related to fixed-rate senior notes that are due in 2016 and 2017. Under these interest rate swaps, the Company receives fixed-
rate interest payments and makes interest payments based on LIBOR plus a fixed number of basis points. The effect of such
swaps is to convert the fixed interest rates of the senior fixed-rate notes to floating interest rates based on LIBOR. The gains
and losses related to changes in the fair value of the interest rate swaps are included in interest expense and substantially offset
changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market interest
rates. The fair value of the interest rate swaps was reflected in other assets and other long-term liabilities.
(e) Equity Price Risk
The Company may hold equity securities for strategic purposes or to diversify its overall investment portfolio. The publicly
traded equity securities in the Company’s portfolio are subject to price risk. To manage its exposure to changes in the fair
value of certain equity securities, the Company has entered into equity derivatives that are designated as fair value hedges. The
changes in the value of the hedging instruments are included in other income (loss), net, and offset the change in the fair value
of the underlying hedged investment. In addition, the Company periodically enters into equity derivatives that are not
designated as accounting hedges. The changes in the fair value of these derivatives are also included in other income (loss),
net.
The Company is also exposed to variability in compensation charges related to certain deferred compensation obligations to
employees. Although not designated as accounting hedges, the Company utilizes derivatives such as total return swaps to
economically hedge this exposure.
(f) Hedge Effectiveness
For the fiscal years presented, amounts excluded from the assessment of hedge effectiveness were not material for fair value,
cash flow, and net investment hedges. In addition, hedge ineffectiveness for fair value, cash flow, and net investment hedges
was not material for any of the fiscal years presented.
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