Hasbro 2014 Annual Report Download - page 79

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HASBRO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Risk Management Contracts
Hasbro uses foreign currency forward contracts to mitigate the impact of currency rate fluctuations on
firmly committed and projected future foreign currency transactions. These over-the-counter contracts, which
hedge future purchases of inventory and other cross-border currency requirements not denominated in the
functional currency of the business unit, are primarily denominated in United States and Hong Kong dollars as
well as Euros. Further, the Company also used forward-starting interest rate swap agreements to hedge the
interest payments related to the refinancing of the Company’s long-term debt which came due in 2014. All
contracts are entered into with a number of counterparties, all of which are major financial institutions. The
Company believes that a default by a counterparty would not have a material adverse effect on the financial
condition of the Company. Hasbro does not enter into derivative financial instruments for speculative purposes.
At the inception of the contracts, Hasbro designates its derivatives as either cash flow or fair value hedges.
The Company formally documents all relationships between hedging instruments and hedged items as well as its
risk management objectives and strategies for undertaking various hedge transactions. All hedges designated as
cash flow hedges are linked to forecasted transactions and the Company assesses, both at the inception of the
hedge and on an on-going basis, the effectiveness of the derivatives used in hedging transactions in offsetting
changes in the cash flows of the forecasted transaction. The ineffective portion of a hedging derivative, if any, is
immediately recognized in the consolidated statements of operations.
The Company records all derivatives, such as foreign currency exchange contracts and forward-starting
interest rate swap contracts, on the consolidated balance sheets at fair value. Changes in the derivative fair values
that are designated as cash flow hedges and are effective are deferred and recorded as a component of
Accumulated Other Comprehensive (Loss) Earnings (“AOCE”) until the hedged transactions occur and are then
recognized in the consolidated statements of operations. The Company’s foreign currency and forward-starting
interest rate swap contracts hedging anticipated cash flows are designated as cash flow hedges. When it is
determined that a derivative is not highly effective as a hedge, the Company discontinues hedge accounting
prospectively. Any gain or loss deferred through that date remains in AOCE until the forecasted transaction
occurs, at which time it is reclassified to the consolidated statements of operations. To the extent the transaction
is no longer deemed probable of occurring, hedge accounting treatment is discontinued and amounts deferred
would be reclassified to the consolidated statements of operations. In the event hedge accounting requirements
are not met, gains and losses on such instruments are included currently in the consolidated statements of
operations. The Company uses derivatives to economically hedge intercompany loans denominated in foreign
currencies. The Company does not use hedge accounting for these contracts as changes in the fair value of these
contracts are substantially offset by changes in the fair value of the intercompany loans.
The Company also used interest rate swap agreements to adjust the amount of long-term debt subject to
fixed interest rates. The interest rate swaps were matched with long-term debt due in 2014 and designated as fair
value hedges of the change in fair value of the related debt obligations. These agreements were recorded at their
fair value as an asset or liability. Gains and losses on these contracts were included in the consolidated statements
of operations and wholly offset by changes in the fair value of the related long-term debt. In November 2012,
these interest rate swap agreements were terminated. The realized gain on the interest rate swaps was recorded as
an adjustment to long-term debt and was amortized through the consolidated statements of operations over the
term of the related long-term debt using a straight-line method.
Net Earnings Per Common Share
Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares
outstanding for the year. Diluted net earnings per share is similar except that the weighted average number of
shares outstanding is increased by dilutive securities, and net earnings are adjusted, if necessary, for certain
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