DELPHI 2013 Annual Report Download - page 126

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104
The pre-tax effect of derivative financial instruments in the consolidated statement of operations and consolidated
statement of comprehensive income for the year ended December 31, 2012 is as follows:
Year Ended December 31, 2012
Gain
Recognized in
OCI (Effective
Portion)
(Loss) Gain
Reclassified
from OCI
into Income
(Effective
Portion)
Gain Recognized
in Income
(Ineffective
Portion Excluded
from Effectiveness
Testing)
(in millions)
Designated derivatives instruments:
Commodity derivatives......................................................................... $ 11 $ (12) $ —
Foreign currency derivatives................................................................. 79 10 1
Total............................................................................................... $ 90 $ (2) $ 1
Loss
Recognized in
Income
Derivatives not designated:
Commodity derivatives........................................................................................................................................ $ —
Foreign currency derivatives................................................................................................................................ (5)
Total.............................................................................................................................................................. $ (5)
The gain or loss reclassified from OCI into income for the effective portion of designated derivative instruments and the
gain or loss recognized in income for the ineffective portion of designated derivative instruments excluded from effectiveness
testing were recorded to cost of sales in the consolidated statements of operations for the years ended December 31, 2013 and
2012. The gain or loss recognized in income for non-designated derivative instruments was recorded in other income, net and
cost of goods sold for the years ended December 31, 2013 and 2012.
Gains and losses on derivatives qualifying as cash flow hedges are recorded in OCI, to the extent that hedges are
effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated OCI will fluctuate
based on changes in the fair value of hedge derivative contracts at each reporting period. Losses included in accumulated OCI
as of December 31, 2013 were $4 million ($2 million net of tax). Of this income, approximately $1 million is expected to be
included in cost of sales within the next 12 months, $2 million is expected to be included in other income within the next 12
months and $1 million is expected to be included in cost of sales in subsequent periods. Cash flow hedges are discontinued
when Delphi determines it is no longer probable that the originally forecasted transactions will occur. The amount included in
cost of sales related to hedge ineffectiveness was approximately $0 million and $1 million for the years ended December 31,
2013 and 2012, respectively.
As more fully disclosed in Note 20. Acquisitions and Divestitures, Delphi completed the acquisition of MVL on October
26, 2012. In conjunction with that transaction, in June 2012, the Company entered into option contracts with notional amounts
totaling €250 million to hedge portions of the currency risk associated with the cash payment for the planned acquisition at a
cost of $9 million. Pursuant to the requirements of ASC 815, Derivatives and Hedging, the options are unable to qualify as
hedges for accounting purposes, and therefore, changes in the fair value of the options are recognized in other income
(expense), net. The options were sold in October 2012 in conjunction with the closing of the transaction. In the year ended
December 31, 2012, the change in fair value resulted in a $3 million loss.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements
Fair Value Measurements on a Recurring Basis
All derivative instruments are required to be reported on the balance sheet at fair value unless the transactions qualify and
are designated as normal purchases or sales. Changes in fair value are reported currently through earnings unless they meet
hedge accounting criteria. Delphi’s derivative exposures are with counterparties with long-term investment grade credit ratings.
Delphi estimates the fair value of its derivative contracts using an income approach based on valuation techniques to convert
future amounts to a single, discounted amount. Estimates of the fair value of foreign currency and commodity derivative
instruments are determined using exchange traded prices and rates. Delphi also considers the risk of non-performance in the
estimation of fair value, and includes an adjustment for non-performance risk in the measure of fair value of derivative
instruments. The non-performance risk adjustment reflects the credit default spread (“CDS”) applied to the net commodity by