HP 2013 Annual Report Download - page 126

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
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 loss as a separate component of stockholders’ equity in the Consolidated Balance Sheets
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 2013 and 2012
there was no significant impact to results of operations as a result of discontinued cash flow hedges.
During fiscal 2011, 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 in the Consolidated Balance Sheets.
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 Consolidated
Statements of Earnings 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.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the
change in fair value of the hedged instrument with the change in fair value of the derivative. For
foreign currency options 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
Consolidated Statements of Earnings.
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