Hertz 2008 Annual Report Download - page 152

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$217.9 million, respectively. Foreign currency gains and losses resulting from transactions are included
in earnings.
Derivative Instruments
We are exposed to a variety of market risks, including the effects of changes in interest rates and foreign
currency exchange rates. We manage our exposure to these market risks through our regular operating
and financing activities and, when deemed appropriate, through the use of derivative financial
instruments. Derivative financial instruments are viewed as risk management tools and historically have
not been used for speculative or trading purposes. In addition, derivative financial instruments are
entered into with a diversified group of major financial institutions in order to manage our exposure to
counterparty nonperformance on such instruments. We use Statement of Financial Accounting
Standards, or ‘‘SFAS,’’ No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ as
amended, or ‘‘SFAS No. 133,’’ which requires that all derivatives be recorded on the balance sheet as
either assets or liabilities measured at their fair value. The effective portion of changes in fair value of
derivatives designated as cash flow hedging instruments is recorded as a component of other
comprehensive income. The ineffective portion is recognized currently in earnings within the same line
item as the hedged item, based upon the nature of the hedged item. For derivative instruments that are
not part of a qualified hedging relationship, the changes in their fair value are recognized currently in
earnings. See Note 13—Financial Instruments.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates is recognized in the statement of operations in
the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized. Subsequent changes to
enacted tax rates and changes to the global mix of earnings will result in changes to the tax rates used to
calculate deferred taxes and any related valuation allowances. Provisions are not made for income taxes
on undistributed earnings of international subsidiaries that are intended to be indefinitely reinvested
outside the United States or are expected to be remitted free of taxes. Future distributions, if any, from
these international subsidiaries to the United States or changes in U.S. tax rules may require a change to
reflect tax on these amounts.
Sales tax amounts collected from customers have been recorded on a net basis.
Prior to the Acquisition, Hertz and its domestic subsidiaries filed a consolidated federal income tax return
with Ford. Pursuant to a tax sharing agreement, with Ford, current and deferred taxes were reported and
paid to Ford, as if Hertz had filed its own consolidated tax returns with its domestic subsidiaries. The tax
sharing agreement provided that Hertz was reimbursed for foreign tax credits in accordance with the
utilization of those credits by the Ford consolidated tax group.
On December 21, 2005, in connection with the Acquisition, the tax sharing agreement with Ford was
terminated. Upon termination, all tax payables and receivables with Ford were cancelled and neither
Hertz nor Ford has any future rights or obligations under the tax sharing agreement. Hertz may be
exposed to tax liabilities attributable to periods it was a consolidated subsidiary of Ford. While Ford has
agreed to indemnify Hertz for certain tax liabilities pursuant to the arrangements relating to our
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