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98 Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
98
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
($ in millions)
Gain/(Loss) Recognized in Earnings
Consolidated
Statement of
Earnings
Line Item Recognized on Derivatives(1) Attributable to Risk Being Hedged(2)
For the year ended December 31: 2012 2011 2010 2012 2011 2010
Derivative instruments in fair value hedges
Interest rate contracts Cost of financing $ 65 $271 $241 $ 59 $(117) $ (70)
Interest expense 55 205 160 50 (89) (46)
Derivative instruments not designated
as hedging instruments (1)
Foreign exchange contracts
Other (income)
and expense (311) 352 299 N/A N/A N/A
Equity contracts SG&A expense 110 42 105 N/A N/A N/A
Warrants
Other (income)
and expense —10 — N/A N/A N/A
To t a l $ (81) $880 $805 $108 $(206) $(116)
($ in millions)
Gain/(Loss) Recognized in Earnings and Other Comprehensive Income
Effective Portion Recognized in OCI
Consolidated
Statement of
Earnings
Line Item
Effective Portion
Reclassified from AOCI
Ineffectiveness and Amounts
Excluded from Effectiveness Testing(3)
For the year ended December 31: 2012 2011 2010 2012 2011 2010 2012 2011 2010
Derivative instruments in cash flow hedges
Interest rate contracts $ — $ — $ — Interest expense $ (6) $ (8) $ (8) $ — $ — $ —
Foreign exchange contracts 32 (266) 371
Other (income)
and expense 237 (247) (54) 3(3) (4)
Cost of sales 7(182) (92) —— —
SG&A expense 16 (74) (49) —— —
Instruments in net investment hedges(4)
Foreign exchange contracts (26) 45 178 Interest expense —0 0 11 (9) (3)
To t a l $ 6 $(221) $549 $253 $(511) $(203) $14 $(12) $ (7)
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under
these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated
hedging relationships during the period.
(3) The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships.
(4) Instruments in net investment hedges include derivative and non-derivative instruments.
N/A—Not applicable
For the 12 months ending December 31, 2012, 2011 and 2010, there
were no significant gains or losses recognized in earnings represent-
ing hedge ineffectiveness or excluded from the assessment of
hedge effectiveness (for fair value hedges), or associated with an
underlying exposure that did not or was not expected to occur (for
cash flow hedges); nor are there any anticipated in the normal course
of business.
Refer to note A, “Significant Accounting Policies,” on page 83 for
additional information on the company’s use of derivative financial
instruments.
Note E.
Inventories
($ in millions)
At December 31: 2012 2011
Finished goods $ 475 $ 589
Work in process and raw materials 1,812 2,007
To t a l $2,287 $2,595