HP 2014 Annual Report Download - page 153
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11: Financial Instruments (Continued)
For derivative instruments that are designated and qualify as cash flow hedges, HP initially records
changes in fair value for the effective portion of 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 its cash flow hedges in the
same financial statement line item as changes in the fair value of the hedged item.
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. HP records the effective portion of
such derivative instruments together with changes in the fair value of 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 used
to hedge foreign currency-denominated balance sheet exposures. HP also uses total return swaps and,
to a lesser extent, interest rate swaps, based on equity or fixed income indices, to hedge its executive
deferred compensation plan liability.
For derivative instruments not designated as hedging instruments, HP recognizes changes in fair
value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item,
in Interest and other net in the Consolidated Statements of Earnings in the period of change.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures hedge 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 hedge effectiveness by comparing the cumulative change in fair value
of the hedge contract with the cumulative change in fair value of the hedged item, both of which are
based on forward rates. HP recognizes any ineffective portion of the hedge in the Consolidated
Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the
assessment of effectiveness are recognized in the Consolidated Statements of Earnings in the period
they arise.
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