Emerson 2013 Annual Report Download - page 40

38 Emerson > 2013 Annual Report
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 may be 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 derivatives 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 recognized 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 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 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 statement immediately.
Counterparties to derivative arrangements are companies with high credit ratings and the Company has bilateral collateral
arrangements with them for which credit rating-based posting thresholds vary depending on the arrangement. If credit
ratings on the Company’s debt fall below preestablished levels, counterparties can require immediate full collateralization
on all instruments in net liability positions. Similarly, Emerson can demand full collateralization of instruments in net
asset positions should any of the Company’s counterparties’ credit ratings fall below certain thresholds. Risk from credit
loss when derivatives are in asset positions is not considered material. 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 contracts are reported in other current assets or accrued expenses as appropriate depending on positions
with counterparties 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 tax
rates currently enacted in 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
$7.1 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2013, as these earnings are considered
permanently invested or otherwise indefinitely retained for continuing international operations. Recognition of U.S. taxes
on undistributed non-U.S. 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. Accumulated other
comprehensive income, net of tax (a component of equity), consists of foreign currency translation credits of $504 and
$466, deferred pension and postretirement charges of $692 and $1,213 and cash flow hedges and other charges of $1 and
credits of $16, respectively, at September 30, 2013 and 2012. Accumulated other comprehensive income attributable to
noncontrolling interests in subsidiaries consists primarily of earnings, and changes in foreign currency translation.