Harman Kardon 2007 Annual Report Download - page 61

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items and assess the effectiveness of our hedges at inception and on an ongoing basis.
For each derivative instrument that is designated and qualifies as a fair value hedge, the gain or loss on
the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk are recognized in current earnings during the period of the change in fair values. For each
derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the
gain or loss on the derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings in the period during which the hedged transaction affects earnings. For
derivatives that are designated and qualify as hedges of net investments in subsidiaries located outside the
United States, the gain or loss is reported in other comprehensive income as a part of the cumulative
translation adjustment if the derivative is effective. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current earnings during the period of change. For additional
information regarding derivatives, see Note 15, Derivatives.
Interest Rate Management. In prior years, we had in place interest rate swaps, which were designated as
fair value hedges of the underlying fixed rate obligations. The fair value of the interest rate swaps were
recorded in other assets or other long-term liabilities with a corresponding increase or decrease in the
fixed rate obligations. The changes in the fair value of the interest rate swaps and the underlying fixed
rate obligations were recorded as equal and offsetting unrealized gains and losses in interest expense. As
of June 30, 2006 all interest rates swaps were terminated in connection with the repurchase of the
majority of our senior debt. For additional information, see Note 6, Long-Term Debt and Current Portion
of Long-Term Debt.
We also have an interest rate swap to effectively convert the interest on an operating lease from a variable
to a fixed rate. At the end of each reporting period, the discounted fair value of the interest rate swap is
calculated. The fair value is recorded as an asset or liability. The effective gain or loss is recorded as a
debit or credit to accumulated other comprehensive income and any ineffectiveness is recorded
immediately to rent expense. For additional information, see Note 15, Derivatives.
Foreign Currency Management. The fair value of foreign currency related derivatives is included in the
Consolidated Balance Sheet in other current assets and accrued liabilities. The earnings impact of cash
flow hedges relating to forecasted purchases of inventory is generally reported in cost of sales to match
the underlying transaction being hedged. Unrealized gains and losses on these instruments are deferred in
other comprehensive income until the underlying transaction is recognized in earnings. The earnings
impact of cash flow hedges relating to the variability in cash flows associated with foreign currency
denominated assets and liabilities is reported in cost of sales or other expense depending on the nature of
the assets or liabilities being hedged. The amounts deferred in other comprehensive income associated
with these instruments generally relate to spot-to-spot differentials from the date of designation until the
hedged transaction takes place.
Stock-Based Compensation. Effective July 1, 2005, we adopted SFAS No. 123R, Accounting for Stock-
Based Compensation (“SFAS No. 123R”), using the modified prospective method. Under SFAS No.
123R, our compensation expense is recognized based on the estimated fair value of stock options and
similar equity instruments awarded to employees. Prior to fiscal 2006, we accounted for stock-based
compensation according to the fair-value method of stock-based compensation per SFAS No. 123,