HP 2006 Annual Report Download - page 108

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
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, 2006, amounts related to derivatives qualifying as cash flow hedges
amounted to an accumulated other comprehensive loss of $46 million, net of taxes, of which
$45 million is 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 2006 and 2005 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
derivative instrument together with changes in the hedged items in cumulative translation adjustment as
a separate component of stockholders’ equity. Cumulative translation adjustment decreased as result of
an unrecognized net loss on net investment hedges of $31 million and $56 million for the fiscal years
ended October 31, 2006 and 2005, respectively.
Other Derivatives
Other derivatives not designated as hedging instruments under SFAS 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 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 net foreign currency exchange gains of approximately $54 million in
fiscal 2006, and gains of approximately $70 million in fiscal 2005 and losses of approximately
$142 million in fiscal 2004.
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