HP 2005 Annual Report Download - page 100

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Financial Instruments (Continued)
U.S. dollar LIBOR-based floating interest expense and to manage exposure to changes in foreign
currency exchange rates. The swap transactions generally involve the exchange of fixed for floating
interest payments and, when the underlying debt is denominated in a foreign currency, exchange of the
foreign currency principal and interest obligations for U.S. dollar-denominated amounts. Alternatively,
HP may choose not to swap fixed for floating interest payments or may terminate a previously executed
swap if the fixed rate liability is offset with fixed rate assets. Similarly, HP may choose not to hedge the
foreign currency risk associated with its foreign currency-denominated debt if this debt acts as a natural
foreign currency hedge for assets denominated in the same currency. When investing in fixed rate
instruments, HP may enter into interest rate swaps that convert the fixed interest returns into variable
interest returns and would classify these swaps as fair value hedges. For derivative instruments that are
designated and qualify as fair value hedges, HP recognizes the gain or loss on the derivative
instrument, as well as the offsetting loss or gain on the hedged item in interest and other, net, in the
Consolidated Statements of Earnings in the current period. When HP terminates an interest rate swap
before maturity, the resulting gain or loss from the termination is amortized over the remaining life of
the underlying hedged item.
Cash Flow Hedges
HP may use cash flow hedges to hedge the variability of LIBOR-based interest income HP receives
on certain variable-rate investments. HP may enter into interest rate swaps that convert variable rate
interest returns into fixed-rate interest returns. For interest rate swaps that HP designates and that
qualify as cash flow hedges, HP records changes in the fair values in accumulated other comprehensive
income as a separate component of stockholders’ equity and subsequently reclassifies such changes into
earnings in the period during which the hedged transaction is recognized in earnings.
HP uses a combination of forward contracts and options designated as cash flow hedges to protect
against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser
extent, cost of sales denominated in currencies other than the U.S. dollar. HP’s foreign currency cash
flow hedges mature generally within six months. However, certain leasing revenue-related forward
contracts extend for the duration of the lease term, which can be up to five years. For derivative
instruments that are designated and qualify as cash flow hedges, HP initially records the effective
portions of the gain or loss on the derivative instrument in accumulated other comprehensive loss as a
separate component of stockholders’ equity and subsequently reclassifies these amounts into earnings in
the period during which the hedged transaction is recognized in earnings. HP reports the effective
portion of cash flow hedges in the same financial statement line item as the changes in value of the
hedged item. As of October 31, 2005, amounts related to derivatives qualifying as cash flow hedges
amounted to a reduction of accumulated other comprehensive loss of $46 million, net of tax, of which
$44 million was expected to be reclassified to earnings in the next 12 months along with the earnings
effects of the related forecasted transactions. In addition, during fiscal 2005 and 2004 HP did not
discontinue any cash flow hedges for which it was probable that a forecasted transaction would not
occur.
Net Investment Hedges
HP uses forward contracts designated as net investment hedges to hedge net investments in certain
foreign subsidiaries whose functional currency is the local currency. For derivative instruments that are
designated as net investment hedges, HP records the effective portion of the gain or loss on the
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