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94 Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
94
Based on an evaluation of available evidence as of December 31,
2012, the company believes that unrealized losses on debt and
available-for-sale equity securities are temporary and do not repre-
sent an other-than-temporary impairment.
Sales of debt and available-for-sale equity securities were as
follows:
($ in millions)
For the year ended December 31: 2012 2011 2010
Proceeds $112 $405 $16
Gross realized gains (before taxes) 45 232 6
Gross realized losses (before taxes) (1) (0) (0)
The after-tax net unrealized gains/(losses) on available-for-sale debt
and equity securities that have been included in other comprehen-
sive income/(loss) and the after-tax net (gains)/losses reclassified
from accumulated other comprehensive income/(loss) to net income
were as follows:
($ in millions)
For the year ended December 31: 2012 2011
Net unrealized gains/(losses)
arising during the period $ 17 $ (7)
Net unrealized (gains)/losses
reclassified to net income* (25) (143)
* Includes writedowns of $2.0 million and $0.3 million in 2012 and 2011, respectively.
The contractual maturities of substantially all available-for-sale debt
securities were less than one year at December 31 , 2012.
Derivative Financial Instruments
The company operates in multiple functional currencies and is
a significant lender and borrower in the global markets. In the
normal course of business, the company is exposed to the impact
of interest rate changes and foreign currency fluctuations, and to a
lesser extent equity and commodity price changes and client
credit risk. The company limits these risks by following established
risk management policies and procedures, including the use of
derivatives, and, where cost effective, financing with debt in the
currencies in which assets are denominated. For interest rate expo-
sures, derivatives are used to better align rate movements between
the interest rates associated with the company’s lease and other
financial assets and the interest rates associated with its financing
debt. Derivatives are also used to manage the related cost of debt.
For foreign currency exposures, derivatives are used to better
manage the cash flow volatility arising from foreign exchange rate
fluctuations.
As a result of the use of derivative instruments, the company is
exposed to the risk that counterparties to derivative contracts will
fail to meet their contractual obligations. To mitigate the counter-
party credit risk, the company has a policy of only entering into
contracts with carefully selected major financial institutions based
upon their overall credit profile. The company’s established policies
and procedures for mitigating credit risk on principal transactions
include reviewing and establishing limits for credit exposure and
continually assessing the creditworthiness of counterparties. The
right of set-off that exists under certain of these arrangements
enables the legal entities of the company subject to the arrange-
ment to net amounts due to and from the counterparty reducing
the maximum loss from credit risk in the event of counterparty default.
Debt and Marketable Equity Securities
The company’s cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially
different from carrying value, in the Consolidated Statement of Financial Position. The following tables summarize the company’s noncurrent
debt and marketable equity securities which are also considered available-for-sale and re cord ed at fair value in the Consolidated Statement
of Finan cial Position.
($ in millions)
At December 31, 2012:
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Debt securities—noncurrent (1) $ 8 $2 $— $10
Available-for-sale equity investments (1) $31 $4 $ (1 ) $34
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
($ in millions)
At December 31, 2011:
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Debt securities—noncurrent (1) $ 7 $ 1 $— $ 8
Available-for-sale equity investments (1) $58 $27 $ (2 ) $83
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.