Emerson 2011 Annual Report Download - page 34

32 | 2011 Emerson
DERIVATIVES AND HEDGING
In the normal course of business, the Company is exposed to changes in interest rates, foreign currency exchange
rates and commodity prices due to its worldwide presence and diverse business profile. Emerson’s foreign currency
exposures primarily relate to transactions denominated in euros, Mexican pesos, Canadian dollars and Chinese
renminbi. Primary commodity exposures are price fluctuations on forecasted purchases of copper and aluminum and
related products. As part of the Company’s risk management strategy, derivative instruments are selectively used
in an effort to minimize the impact of these exposures. Foreign exchange forwards and options are utilized to hedge
foreign currency exposures impacting sales or cost of sales transactions, firm commitments and the fair value of assets
and liabilities, while swap and option contracts are used to minimize the effect of commodity price fluctuations on the
cost of sales. All derivatives are associated with specific underlying exposures and the Company does not hold deriva-
tives for trading or speculative purposes. The duration of hedge positions is generally two years or less and amounts
currently hedged beyond 18 months are not significant.
All derivatives are accounted for under ASC 815, Derivatives and Hedging, and are recognized on the balance sheet at
fair value. For derivatives hedging variability in future cash flows, the effective portion of any gain or loss is deferred
in stockholders’ equity and recognized in earnings when the underlying hedged transaction impacts earnings. The
majority of the Company’s derivatives that are designated as hedges and qualify for deferral accounting are cash flow
hedges. For derivatives hedging the fair value of existing assets or liabilities, both the gain or loss on the derivative
and the offsetting loss or gain on the hedged item are recognized in earnings each period. Currency fluctuations on
non-U.S. dollar obligations that have been designated as hedges of non-U.S. dollar net asset exposures are reported in
equity. To the extent that any hedge is not fully effective at offsetting cash flow or fair value changes in the underlying
hedged item, there could be a net earnings impact. The Company also uses derivatives to hedge economic exposures
that do not receive deferral accounting under ASC 815. The underlying exposures for these hedges relate primarily to
purchases of commodity-based components used in the Company’s manufacturing processes, and the revaluation of
certain foreign-currency-denominated assets and liabilities. Gains or losses from the ineffective portion of any hedge,
as well as any gains or losses on derivative instruments not designated as hedges, are recognized in the income state-
ment immediately.
If credit ratings on the Company’s debt fall below pre-established levels, derivatives counterparties can require imme-
diate full collateralization on instruments in net liability positions. Similarly, Emerson can demand full collateralization
should any of the Company’s counterparties’ credit rating fall below certain thresholds. Counterparties to derivative
arrangements are companies with high credit ratings. Risk from credit loss when derivatives are in asset positions is
considered immaterial. The Company has master netting arrangements in place with its counterparties that allow the
offsetting of certain derivative-related amounts receivable and payable when settlement occurs in the same period.
Accordingly, counterparty balances are netted in the consolidated balance sheet. Net values of commodity contracts
and foreign currency contracts are reported in current assets or accrued expenses depending on the position as of the
balance sheet date. See Note 7.
INCOME TAXES
The provision for income taxes is based on pretax income reported in the consolidated statements of earnings and
currently enacted tax rates for each jurisdiction. Certain income and expense items are recognized in different time
periods for financial reporting and income tax filing purposes, and deferred income taxes are provided for the effect of
temporary differences. The Company also provides for U.S. federal income taxes, net of available foreign tax credits,
on earnings intended to be repatriated from non-U.S. locations. No provision has been made for U.S. income taxes on
approximately $5.9 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2011, as these earn-
ings are considered permanently invested or otherwise indefinitely retained for continuing international operations.
Recognition of U.S. taxes on undistributed earnings would be triggered by a management decision to repatriate those
earnings, although there is no current intention to do so. Determination of the amount of taxes that might be paid on
these undistributed earnings if eventually remitted is not practicable. See Note 13.
COMPREHENSIVE INCOME
Comprehensive income is primarily composed of net earnings plus changes in foreign currency translation, pension
and postretirement adjustments, and the effective portion of changes in the fair value of cash flow hedges. Accumu-
lated other comprehensive income, net of tax (a component of equity), consists of foreign currency translation credits
of $671 and of $649, pension and postretirement charges of $1,164 and $1,108 and cash flow hedges and other
charges of $69 and credits of $33, respectively, at September 30, 2011 and 2010. Accumulated other comprehensive
income attributable to noncontrolling interests in subsidiaries consists primarily of earnings and foreign currency
translation.
RETIREMENT PLANS
Effective September 30, 2010, the Company adopted updates to ASC 715, Compensation - Retirement Benefits. These
updates expand disclosure about an entity’s investment policies and strategies for assets held by defined benefit
pension or postretirement plans, including information regarding major classes of plan assets, inputs and valuation
techniques used to measure the fair value of assets, and concentrations of risk within the plans. See Note 10.