IBM 2011 Annual Report Download - page 100

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies98
Foreign Currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign
currency denominated debt. To manage this risk, the company
employs cross-currency swaps to convert fixed-rate foreign currency
denominated debt to fixed-rate debt denominated in the functional
currency of the borrowing entity. These swaps are accounted for
as cash flow hedges. The maximum length of time over which
the company hedges its exposure to the variability in future cash
flows is approximately three years. At December 31, 2011, no
instruments relating to this program remained outstanding. At
December 31, 2010, the total notional amount of cross-currency
swaps designated as cash flow hedges of foreign currency
denominated debt was $0.2 billion.
At December 31, 2010, net losses of approximately $1 million
(before taxes) were recorded in other comprehensive income/(loss)
in connection with cash flow hedges of the company’s borrowings.
No amount remains in accumulated other comprehensive income
at December 31, 2011.
Subsidiary Cash and Foreign Currency
Asset/Liability Management
The company uses its Global Treasury Centers to manage the cash
of its subsidiaries. These centers principally use currency swaps to
convert cash flows in a cost-effective manner. In addition, the
company uses foreign exchange forward contracts to economically
hedge, on a net basis, the foreign currency exposure of a portion of
the company’s nonfunctional currency assets and liabilities. The
terms of these forward and swap contracts are generally less than
one year. The changes in the fair values of these contracts and of
the underlying hedged exposures are generally offsetting and are
recorded in other (income) and expense in the Consolidated Statement
of Earnings. At December 31, 2011 and 2010, the total notional amount
of derivative instruments in economic hedges of foreign currency
exposure was $13.6 billion and $13.0 billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad
market indices and in the company’s own stock primarily related to
certain obligations to employees. Changes in the overall value of
these employee compensation obligations are recorded in SG&A
expense in the Consolidated Statement of Earnings. Although not
designated as accounting hedges, the company utilizes derivatives,
including equity swaps and futures, to economically hedge the
exposures related to its employee compensation obligations. The
derivatives are linked to the total return on certain broad market
indices or the total return on the company’s common stock. They
are recorded at fair value with gains or losses also reported
in SG&A expense in the Consolidated Statement of Earnings.
At December 31, 2011 and 2010, the total notional amount of derivative
instruments in economic hedges of these compensation obligations
was $1.0 billion for each year.
Other Risks
The company may hold warrants to purchase shares of common
stock in connection with various investments that are deemed
derivatives because they contain net share or net cash settlement
provisions. The company records the changes in the fair value of
these warrants in other (income) and expense in the Consolidated
Statement of Earnings. The company did not have any warrants
qualifying as derivatives outstanding at December 31, 2011 and 2010.
The company is exposed to a potential loss if a client fails to pay
amounts due under contractual terms. The company utilizes credit
default swaps to economically hedge its credit exposures. These
derivatives have terms of one year or less. The swaps are recorded
at fair value with gains and losses reported in other (income) and
expense in the Consolidated Statement of Earnings. The company
did not have any derivative instruments relating to this program
outstanding at December 31, 2011 and 2010.