HP 2010 Annual Report Download - page 119

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
interest rate swaps to mitigate the market risk exposures in connection with the debt to achieve
primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve
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. 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.
Cash Flow Hedges
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, operating expense, and intercompany lease loan denominated in currencies other
than the U.S. dollar. HP’s foreign currency cash flow hedges mature generally within six to twelve
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 portion of the gain or loss on the derivative instrument in accumulated other comprehensive
income or 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. During fiscal years 2010, 2009 and 2008, HP did not discontinue
any cash flow hedge 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. These derivative instruments are
designated as net investment hedges and, as such, 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.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts HP
uses to hedge foreign currency balance sheet exposures. HP also uses total return swaps and, to a lesser
extent, interest rate swaps, based on the equity and fixed income indices, to hedge its executive
deferred compensation plan liability. For derivative instruments not designated as hedging instruments,
HP recognizes changes in the fair values in earnings in the period of change. HP recognizes the gain or
loss 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. HP recognizes the gain or loss on the total return swaps and interest
rate swaps in Interest and other, net in the same period as the gain or loss from the change in market
value of the executive deferred compensation plan liability.
111