Crucial 2012 Annual Report Download - page 75

74
Currency Derivatives with Cash Flow Hedge Accounting Designation
We utilize currency forward contracts that generally mature within 12 months and currency options that generally mature
from 12 to 18 months to hedge the exposure of changes in cash flows from changes in currency exchange rates for certain
capital expenditures and forecasted operating cash flows. Currency forward contracts are valued at their fair values based on
market-based observable inputs including currency exchange spot and forward rates, interest rate and credit risk spread
(referred to as Level 2). Currency options are valued at their fair value using a modified Black-Scholes option valuation model
using inputs of the current spot rate, strike price, risk-free interest rate, time to maturity, volatility and credit-risk spread
(referred to as Level 2). For derivatives designated as cash flow hedges, the effective portion of the realized and unrealized
gain or loss on the derivatives was included as a component of accumulated other comprehensive income (loss). For
derivatives hedging capital expenditures, the amounts in accumulated other comprehensive income (loss) for these cash flow
hedges are reclassified into earnings in the same line items of the consolidated statements of operation and in the same periods
in which the underlying transactions affect earnings. Amounts in accumulated other comprehensive income (loss) for inventory
purchases are reclassified to earnings when inventory is sold. The ineffective or excluded portion of the realized and unrealized
gain or loss is included in other operating (income) expense. Total gross notional amounts and fair values for currency
derivatives with cash flow hedge accounting designation were as follows:
Notional
Amount
(in U.S.
Dollars)
Fair Value of
Currency Asset (1) (Liability) (2)
As of August 30, 2012
Forward contracts:
Yen $ 108 $ 2 $ —
Euro 35 — —
Currency options:
Yen 32 — —
$ 175 $ 2 $ —
As of September 1, 2011
Forward contracts:
Yen $ 19 $ 1 $ —
Euro 232 8 —
$ 251 $ 9 $ —
(1) Included in receivables – other.
(2) Included in accounts payable and accrued expenses – other.
For 2012 and 2011, we recognized $9 million of net derivative losses and $49 million of net derivative gains, respectively,
in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges. The ineffective and
excluded portions of cash flow hedges recognized in other operating (income) expense were not significant in 2012 and
2011. In 2012, $9 million of net gains were reclassified from accumulated other comprehensive income (loss) to earnings. As
of August 30, 2012, the amount of net derivative gains included in accumulated other accumulated comprehensive income
(loss) expected to be reclassified into earnings in the next 12 months was $10 million.
Fair Value Measurements
Accounting standards establish three levels of inputs that may be used to measure fair value: quoted prices in active
markets for identical assets or liabilities (referred to as Level 1), inputs other than Level 1 that are observable for the asset or
liability either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are
significant to the measurement of fair value of assets or liabilities (referred to as Level 3).