HP 2005 Annual Report Download - page 101
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Financial Instruments (Continued)
derivative instrument in cumulative translation adjustment as a separate component of stockholders’
equity. Cumulative translation adjustment increased as result of an unrecognized net loss on net
investment hedges of $56 million and $61 million for the fiscal years ended October 31, 2005 and 2004,
respectively. HP reports the effective portion of net investment hedges in the same financial statement
line item as the changes in value of the hedged item.
Other Derivatives
Other derivatives not designated as hedging instruments under SFAS No. 133 consist primarily of
forward contracts HP uses to hedge foreign currency balance sheet exposures. For derivative
instruments not designated as hedging instruments under SFAS No. 133, HP recognizes changes in the
fair values in earnings in the period of change. HP recognizes the gains or losses on foreign currency
forward contracts used to hedge balance sheet exposures in interest and other, net in the same period
as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities.
Interest and other, net, included foreign currency exchange gains of approximately $70 million in fiscal
2005, and losses of approximately $142 million in fiscal 2004 and $125 million in fiscal 2003.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the
change in fair value of the hedged debt or investment with the change in fair value of the derivative.
For interest rate swaps designated as cash flow hedges, HP measures effectiveness by offsetting the
change in the variable portion of the interest rate swaps with the changes in expected interest income
received due to the fluctuations in the LIBOR based interest rate. For foreign currency option and
forward contracts designated as cash flow or net investment hedges, HP measures effectiveness by
comparing the cumulative change in the hedge contract with the cumulative change in the hedged item,
both of which are based on forward rates. HP recognizes any ineffective portion of the hedge, as well
as amounts not included in the assessment of effectiveness, in the same income statement line item as
the hedged exposure. As of October 31, 2005, the portion of hedging instruments’ gains or losses
excluded from the assessment of effectiveness was not material for fair value, cash flow or net
investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not
material in the fiscal years ended October 31, 2005, 2004 and 2003.
97