HP 2007 Annual Report Download - page 122

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
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 it believes a larger proportion of fixed-
rate debt would be beneficial. HP may choose not to hedge the foreign currency risk associated with its foreign currency
denominated debt if this debt acts as a natural hedge for foreign currency 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, 2007, amounts related to derivatives qualifying as cash flow hedges
amounted to an accumulated other comprehensive loss of $64 million, net of taxes, of which $63 million HP expects to
reclassify to earnings in the next 12 months along with the earnings effects of the related forecasted transactions. In addition,
during fiscal 2007 and 2006 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
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