DuPont 2005 Annual Report Download - page 108

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E. I. du Pont de Nemours and Company
Notes to Consolidated Financial Statements (continued)
(Dollars in millions, except per share)
would be expected from such nonperformance. Market and counterparty credit risks associated with these instruments are
regularly reported to management.
The company hedges certain business-specific foreign currency exposures as well as foreign currency denominated monetary
assets and liabilities. In addition, the company enters into exchange traded agricultural commodity derivatives to hedge
exposures relevant to agricultural feedstock purchases.
In January 2004, the company terminated its broad-based foreign currency revenue hedging program, as well as its programs
to hedge natural gas purchases. All outstanding foreign currency and natural gas hedging positions related to these contracts
expired during 2004. In October 2005, the company re-approved the use of financial derivatives to hedge exposure to price
fluctuations for certain energy feedstock purchases. However, at December 31, 2005, the company had not entered into any
derivative instruments with respect to this program.
Fair Value Hedges
During the year ended December 31, 2005, the company has maintained a number of interest rate swaps that involve the
exchange of fixed for floating rate interest payments that allow the company to maintain a target range of floating rate debt.
All interest rate swaps qualify for the shortcut method of hedge accounting, thus there is no ineffectiveness related to these
hedges. Changes in the fair value of derivatives that hedge interest rate risk are recorded in Interest expense each period. The
offsetting changes in the fair values of the related debt are also recorded in Interest expense. The company maintains no
other fair value hedges.
Cash Flow Hedges
The company maintains a number of cash flow hedging programs to reduce risks related to foreign currency and commodity
price risk. Foreign currency programs involve hedging a portion of certain foreign currency-denominated raw material
purchases from vendors outside of the United States. Commodity price risk management programs serve to reduce exposure to
price fluctuations on purchases of inventory such as corn, soybeans, and soybean meal. While each risk management program
has a different time horizon, most programs currently do not extend beyond the next two-year period.
Hedges of foreign currency-denominated revenues are reported on the Net sales line of the Consolidated Income Statement,
and the effects of hedges of inventory purchases are reported as a component of Cost of goods sold and other operating
charges.
Cash flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings.
Reclassifications are made sooner if it appears that a forecasted transaction will not materialize. Cash flow hedge ineffective-
ness reported in earnings for 2005 is a pretax gain of $3. During 2005, there were no pretax gains (losses) excluded from the
assessment of hedge effectiveness. The amount reclassified to earnings for forecasted transactions that did not occur was a
loss of approximately $32 in 2005 and is recorded in Other income. The following table summarizes the effect of cash flow
hedges on Accumulated other comprehensive income (loss) for 2005:
Pretax Tax After-tax
Beginning balance $6 $(2) $4
Additions and revaluations of derivatives designated as cash flow hedges 8 (3) 5
Clearance of hedge results to earnings (11) 4 (7)
Ending balance $3 $(1) $2
Portion of ending balance expected to be reclassified into earnings over the next twelve months $ 3 $ (1) $ 2
F-49