HP 2008 Annual Report Download - page 124

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 and intercompany lease loan 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 and intercompany lease loan 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, 2008, amounts related to derivatives qualifying as cash flow hedges amounted to an
accumulated other comprehensive gain of $840 million, net of taxes and an accumulated other
comprehensive loss of $38 million, net of taxes. HP expects to reclassify net accumulated other
comprehensive gain of $807 million to earnings in the next 12 months along with the earnings effects of
the related forecasted transactions. In addition, during fiscal 2008 and 2007 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 increased as result of
an unrecognized net gain on net investment hedges of $218 million and decreased as result of an
unrecognized net loss on net investment hedges of $109 million for the fiscal years ended October 31,
2008 and 2007, 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 losses of approximately $166 million in
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