Coach 2014 Annual Report Download - page 67

TABLE OF CONTENTS
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Each derivative instrument entered into by the Company that qualifies for hedge accounting is expected to be highly effective at reducing the risk
associated with the exposure being hedged. For each derivative that is designated as a hedge, the Company documents the related risk management objective
and strategy, including identification of the hedging instrument, the hedged item and the risk exposure, as well as how hedge effectiveness will be assessed
over the term of the instrument. The extent to which a hedging instrument has been and is expected to remain highly effective in achieving offsetting
changes in fair value or cash flows is assessed and documented by the Company on at least a quarterly basis.
To the extent that a derivative designated as a cash flow hedge is not considered to be effective, any change in its fair value related to such
ineffectiveness is immediately recognized in earnings within foreign currency gains (losses). If it is determined that a derivative instrument has not been
highly effective, and will continue not to be highly effective in hedging the designated exposure, hedge accounting is discontinued and further gains (losses)
are recognized in earnings within foreign currency gains (losses). Upon discontinuance of hedge accounting, the cumulative change in fair value of the
derivative previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the original hedging
strategy, unless the forecasted transaction is no longer probable of occurring, in which case the accumulated amount is immediately recognized in earnings
within foreign currency gains (losses).
As a result of the use of derivative instruments, the Company may be exposed to the risk that the counterparties to such contacts will fail to meet their
contractual obligations. To mitigate this counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial
institutions based upon an evaluation of their credit ratings, among other factors.
The fair values of the Company’s derivative instruments are recorded on its consolidated balance sheets on a gross basis. For cash flow reporting
purposes, the Company classifies proceeds received or amounts paid upon the settlement of a derivative instrument in the same manner as the related item
being hedged, primarily within cash from operating activities.
Hedging Portfolio
The Company enters into derivative contracts primarily to reduce its risks related to exchange rate fluctuations on U.S. dollar-denominated inventory
purchases and various cross-currency intercompany and related party loans. To the extent its derivative contracts designated as cash flow hedges are highly
effective in offsetting changes in the value of the hedged items, the related gains (losses) are initially deferred in AOCI and subsequently recognized in the
consolidated statements of income as follows:
•Zero-cost collars - These derivatives are primarily executed by two of the Company’s businesses outside of the United States (Coach Japan
and Coach Canada), and are recognized as part of the cost of the inventory purchases being hedged within cost of sales, when the related
inventory is sold to a third party. Current maturity dates range from July 2014 to June 2015.
• Cross currency swaps - These derivatives relate to intercompany loans, and are recognized within foreign currency gains (losses) generally
in the period in which the related payments being hedged are revalued or settled. Current maturity dates range from August 2014 to
November 2014.
Forward foreign currency exchange contracts, designated as fair value hedges and associated with intercompany and other contractual obligations, are
recognized within foreign currency gains (losses) generally in the period in which the related payments being hedged are revalued. Current maturity dates
range from July 2014 to August 2014.
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The functional currency of the Company's foreign operations is generally the applicable local currency. Assets and liabilities are translated into U.S.
dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted-average exchange rates
for the period. The resulting translation adjustments are included in the consolidated statements of comprehensive income as a component of other
comprehensive income (loss) (“OCI”) and in the consolidated statements of equity within AOCI. Gains and losses on the translation of intercompany loans
made to foreign subsidiaries that are of a long-term investment nature also are included within this component of equity.
The Company also recognizes gains and losses on transactions that are denominated in a currency other than the respective entity's functional currency
in earnings. Foreign currency transaction gains and losses also include amounts realized on the settlement of certain intercompany loans with foreign
subsidiaries.
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Basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net
income per share is calculated similarly but includes potential dilution from the exercise of stock options and vesting of stock awards, or any other
potentially dilutive instruments.
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